Shankar Acharya: The UPA's Economic Legacy

A PIECE OF MY MIND

If you were an early migratory bird flying over the nation's capital last month on your way to winter in the Bharatpur sanctuary, you might have looked down and been deeply distressed by the plight of some of your feathered friends, notably the "lame ducks" and "headless chickens" limping/running around Delhi. I will withhold any comment on the latter category lest I trespass on the well recognised authority of my former sarkari colleague, Ronen Sen, who is reported to have expounded on the species in some important committees recently. Actually, I won't have all that much to say about lame ducks either. Numerous publications have already noted the lame duck nature of the Gandhi-Singh led UPA government, ever since each of the duo publicly announced, in mid October, their retreat from a political showdown with the Left on the US nuclear deal. The only issue is whether the life of the limping government will extend to spring 2008 or 2009. Most of the betting seems to be on the former. In which case, it may not be too premature to attempt a preliminary assessment of the economic legacy of four years of the UPA government, from spring 2004 to spring 2008 (while making some assumptions for the remaining few months of the period).

To begin with the obvious, these last four years have witnessed remarkable buoyancy of the economy. Economic growth has averaged an awesome 8.5 per cent, well above the standard 6 per cent being predicted by most analysts (including myself) at the beginning of the period. Aggregate savings and investment have risen from around 27-28 per cent of GDP to about 34-35 per cent. Exports of both goods and services have grown rapidly, at least until mid-2007. Net foreign capital inflows have soared from about $17 billion in 2003-04 to perhaps four times that level in 2007-08. Surging capital inflows and booming corporate profits helped triple stock market valuations between spring 2004 and November 2007. Forex reserves more than doubled during this period to exceed $270 billion by November 2007. Despite record economic growth and booming asset markets, inflation has been mostly contained within a 4 to 6 per cent range. We don't yet know the fallout for poverty and employment, since the most recent large sample NSS surveys were conducted in 2004-05.

This unprecedented economic boom has coincided with the UPA's tenure. But was it caused or strengthened by the government's economic policies? The majority of non-official analysts (including this one) would attribute the remarkable dynamism to other factors, including: the cumulative impact of economic reforms since 1991; the buoyant world economy and burgeoning flows across borders of commerce, finance and technology (globalisation in short); the rising middle class, fuelling higher consumption and savings; the demographic dividend of a young population; the maturing of a strong and efficient private corporate sector; the spread of the IT/telecom revolution; and so forth. In two areas, government policies played important growth-supporting roles: the modest but significant decline in the consolidated fiscal deficit from 8.5 per cent of GDP in 2003-04 to 6.4 per cent in 2006-07; and (until spring 2007) the well calibrated monetary and exchange rate policies conducted by the RBI.

In assessing the UPA's legacy the more pertinent question might be: have the government's policies in these four years strengthened the sustainability of the recent growth spurt and enhanced its "inclusiveness"? The answer is not favourable. Just look at the record. Infrastructure remains a serious bottleneck, especially in electric power (peak deficits are at record levels), urban infrastructure, water supply (both urban and rural) and roads. The promise of the Electricity Act (2003) remains largely unfulfilled. The flagship National Highway Development Programme of the NDA government has quite clearly lost momentum in recent years. And most state roads remain atrocious. Perhaps most worrying has been the government's ostrich-like approach to the massive increase in global oil prices. With domestic oil prices controlled and largely static, subsidies to oil consumers (mostly well off) have soared and domestic oil companies have been severely weakened. Indeed, the worst features of the old administered price mechanism (APM) have been resurrected.

In the financial world, pension reforms remain stalled and the growth of insurance continues to be constrained by stringent limits on foreign ownership. More importantly, banking remains hobbled by the dominance of government-owned banks and the UPA government's proclivity for proliferating interest rate controls.

The UPA's efforts to enhance the inclusiveness of economic growth have been stunted by the government's failure to reform the anti-employment labour laws that have throttled the expansion of formal sector employment in India for decades, especially since the mid-1970s. Decent job opportunities for the burgeoning supply of unskilled and low-skilled labour (the labour force already exceeds 450 million) continue to be limited and discouraged by unreformed labour laws. This leaves many millions trapped in casual jobs or low-productivity agriculture. The government's efforts to improve inclusiveness have focused on higher spending on a wide range of social and anti-poverty programmes. Unfortunately, almost all of them suffer from grievously deficient delivery systems because of inefficiency, corruption and lack of effective accountability. Indeed, there is widespread belief that the problems of misgovernance and corruption have increased in recent years, as have the disparities between regions, urban-rural, formal-informal, and rich-poor. Looking ahead in the medium-term, this legacy is particularly damaging for education, health and rural infrastructure services, rendering the goal of "inclusive growth" rather distant. In the crucial sector of education, the government's preoccupation with caste-based reservation policies and maintenance of control over elite institutions of higher education have detracted from meaningful and urgently required reforms.

Even the government's relatively successful macroeconomic policies are at risk. The modest progress with fiscal consolidation is increasingly threatened by the rapid increase in off-budget subsidies for petroleum products, fertilisers and food, which may amount to nearly 2 per cent of GDP. The Sixth Pay Commission report, due in 2008, is very likely to entail a significant additional fiscal burden (was it really necessary to set it up last year?). Populist spending, already growing fast, is bound to accelerate between now and the general elections. Since spring 2007, the management of the exchange rate has faltered, permitting undue rupee appreciation to take a rising toll on growth in tradable goods and services.

For all these reasons the UPA's legacy for sustaining rapid and inclusive economic growth in future leaves a lot to be desired. It surely could have been far better.

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to Government of India. The views expressed are personal