Thursday, April 03, 2014

Has UPA-II messed up the economy?

I address this issue in my post at a newly started current affairs website. I will lay out my main ideas:

  • India's growth slowdown does not look bad compared to China's
  • Domestic factors have contributed but these are not policy-related factors but non-policy related factors: court judgements, the CAG reports, the anti-corruption campaign, delays in environmental and land acquisition clearances etc, all of which have impacted on output and investment
  • The key policy failure is in respect of inflation. Supply-side factors apart, aggregate demand in the form of the fiscal deficit is an important contributor. It appears the UPA government was slow to withdraw the post-fiscal stimulus. But this is strictly hindsight. The strength of the recovery in 2010 and 2011 could not have been foreseen when the budgets were presented. 
  • The key global factor in the last two years has been the Eurozone crisis
  • The UPA government deserves the fullest credit for getting on the top of the currency crisis that was brewing in late 2013. India's CAD position is amongst the best in emerging markets now. Add to that the fiscal deficit coming under control, a debt to GDP ratio of under 70% and a growth rate prospect of 5.5-6% in the coming year- and the Indian economy looks distinctly good in the international setting.
It should be evident that, except in respect of inflation, there was no significant "policy failure" in the sense of managing policy in the short-run. The failure is a larger one and it embraces successive governments, namely, the failure to put in place the necessary institutions for PPPs, land acquisition, environmental clearance etc. This is not something that can be remedied in a short span of time.

It is India's strong fundamentals that explain much of the rally in the stock market in recent weeks. The prospect of a stable government and strong leadership at the centre may be contributing but only at the margin. The notion that the UPA government has messed up the economy through welfarist policies thus has little basis.

An article in today's BS points out how good India looks in relation to other emerging markets. The authors give credit to the UPA government, although it is not necessary to share their fulsome praise.


1 comment:

Kushal Upendra Kothari said...

Sir,

In my opinion, how much a government has messed should not be measured on a absolute basis but on a relative basis, as in, how much has been lost because of non-progressive policies of the government.

I'd wish to evaluate not just the UPA-II government but the UPA regime as a whole. What you say is true, UPA is not to be blamed for not having foresight of withdrawing stimulus earlier or not foreseeing the Euro crisis. But there are so many other factors that the government is certainly to be blamed for. The series of corruption scandals, the dearth of meaningful reforms (land, GST, Tax), the inconsistent policy on FDI that have eroded the investment sentiment are definitely to be traced back to UPA.

The inability to control inflation is not merely a failure point but for most governments across the world it is 'the' failure point that can decide the fate of is sustenance. The only meaningful, and to some extent controversial, policies that have been pushed by UPA have been RTE, NREGA, subsidy waivers etc , see a pattern here? It took a major CAD crisis for the government to seriously start considering oil price deregulation.

Speaking about the recent rally,
1) Global data points have been improving
2) Indian fundamentals have been swinging back in the right direction.
But that still does not explain across the board rally of ~20% is 6mnths. As before any elections, it is the expectation of election outcomes and what implications is has for the economy that determines the position that market participants are taking. I'd bet the market tank 4-5% in a single week, if not a day, if BJP loses even if nothing fundamentally changes in the economy.

All said, I don't think it is wise to assume all good to start taking place when, and if, BJP/AAM comes to power. But UPA certainly had the responsibility and opportunity to prop up the economy in a lot of arenas where it has clearly failed. Perhaps time to pass on the baton?