Monday, March 31, 2014

The 7 Myths of UPA's "Economic Disaster"

Economics faculty, Maitreesh Ghatak, Parikshit Ghosh, and Ashok Kotwal, respectively from London School of Economics, Delhi School of Economics and University of British Columbia, have published a paper titled, "Growth in the time of UPA: Myths and Reality". I would those who visit this post to go over the complete paper and get a better grasp of the various (coherent) arguments.

I have tried to glean #7 insights from this academic paper in order to explode some myths on UPA I and II's economic mismanagement and on the new magic mis-mantra of mis-"governance". The caveat here is that there was widespread corruption and lack of transparency, especially in the UPA II regime, which is inexcusable. (There was also slow progress on Human Development perspective but, we will not concentrate on that here.) But, this passage should put things in some perspective.

"Corruption will surely slow down growth, but growth also tends to create corruption by generating new wealth, the claims on which are not properly established. It is, therefore, both a worry and a positive symptom, but the latter aspect gets lost in the excessively moralistic framework within which the problem is often discussed. There are very few thieves in Antarctica, but primarily because there is nothing to steal."

Some shortcomings and actual "disasters" will be documented too as 'Failing Scores' (my pov) but, right wing commentators and blind Modi groupies should tone the rhetoric a bit with a dose of good old data, as we will see below.

Myth #1: India grew faster during NDA regime

*Real GDP grew at nearly 6% per year under NDA, which has increased to 7.6% during UPA’s rule. Growth jumped above 8% in UPA’s first term and has come down to an average of 7% in the second, but is still comfortably above the NDA benchmark.

*In the NDA period, India’s growth lead over the world was 2.5 percentage points, which increased to about 3.5 percentage points under UPA. Even relative to the rest of the world, growth has clearly accelerated.

Myth #2: UPA has put India's Public Finances & Investments in the toilet

*It is true that the volume of subsidies has gone up under UPA, from 1.6% of GDP in the last year of NDA to 2.6% in 2012-13. Under NDA, the debt grew from 50% of GDP to 61%. Since UPA took over, it has come down to 48%.

*It is quite evident from the data that a structural shift happened in the Indian economy around 2004-05 towards greater savings, investment and growth, in both the public and private sector. Whether this shift has anything to do with government policies is certainly a debatable issue but it is difficult to argue in the face of these facts that the UPA government actively suppressed productivity and income growth.

*It is remarkable that UPA has so meekly surrendered to the charge of fiscal indiscipline when the record is so completely in its favour.

Failing Score:

The UPA period is characterized by consistently higher and rising inflation rates compared to the previous régime. When it comes to the inflation question, the incumbent government will find it difficult to get off the hook.

Myth #3: UPA has destroyed the economy with its Welfare Schemes

*There is direct evidence that UPA’s signature welfare schemes have not seriously damaged productive capacity in the economy, at least relative to earlier levels or trends. Government consumption as a fraction of GDP has remained nearly flat through the NDA and UPA years.

Myth #4: UPA did not invest/encourage Infrastructure Development

*Panagariya claims “progress in infrastructure, which had acquired great momentum under NDA slowed down (under UPA).” There is no evidence to support this claim. Indeed, data shows the opposite is true.

*Infrastructural investment even as a fraction of GDP (let alone absolute value) has been substantially higher during the UPA régime, hovering in the range of 7-8% in recent years as opposed to the 5% or so that was invested annually by NDA.

*From US $2.8 billion per year on average during the NDA years, annual FDI inflow ballooned to an average of $ 26.2 billion during UPA’s second term, nearly a tenfold increase. The positive effects of infrastructure funding, achieved to a great extent by mobilising private and foreign capital, are visible in many areas.

Failing Score:

Since 2003, rents earned from extraction activities as a percentage of GDP have nearly doubled. The overwhelming impression in India is that unclear pricing and allocation rules, as well as lax property rights, have created a scramble for these lucrative rents using political connections as leverage. The Economist (March 15, 2014) quotes a recent poll where 92% of respondents thought corruption has gone up in the last five years. In the magazine’s own estimate, $80 billion has been earned through rent seeking in the last decade.

Myth #5: Exports have stagnated under UPA

*Exports have grown from below 15% of GDP in the NDA years to nearly 25% in 2012-13. Imports have more than doubled relative to GDP – starting from 17% in the last year of NDA rule, it now touches 35%.

*Average import duty on goods and services have steadily gone down since the onset of liberalisation and is now in the single digits. The only mild upswing in this declining trend is seen in the early years of the NDA government.

Failing Score:

In just four months, between May 2013 and August, 2013, the rupee fell 20% to the US dollar. From the time UPA took over, the rupee has lost nearly 30% of its value in nominal terms. However, it currently stands 11% below its value in 2004-05 in real terms.

Myth #6: UPA spent a lot of money on Human Development

*Public spending on health has been flat at around 1% of GDP under both governments. Perhaps surprisingly, there was a significant increase in public spending on education in the initial years of NDA, from under 3% to well above 4%, around the time when the Vajpayee government launched the Sarva Shiksha Aviyan [sic].

Failing Score:

On the whole, there is little to choose between the NDA and UPA administrations. Neither government made public health or education a top priority.

Myth #7: UPA report card is a disaster

A period witnessing remarkable gains for the privileged and some for even the not-so-privileged has been confidently declared a disaster zone. The obvious leadership gap has played a role here, but nonetheless, this manufactured reality will no doubt marvel future historians when they look at the actual records.

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