The 10-year UPA/NDA government scorecard

Since the 1991 balance of payments crisis, which was caused by a huge fiscal deficit, and the subsequent IMF bailout, India’s various governments, at least on the face of it, have been obsessing over two things. One is the gross domestic product (GDP) growth rate and the other is the fiscal deficit.

They have sought to increase the former and reduce the latter. But all of them have failed spectacularly because it is impossible to do so, especially for India with its billion poor and welfare programmes.

This much we should have learnt by now. But thanks to the power of old American ideas, we have not. The same gang of economists insists on both.

It takes a massive crisis to get rid of such obsessions — remember industrial de-licensing in 1991? So I hope Modi Mark II will also change its focus. The time has come to jettison, along with the World Bank/IMF economics, the economists who are their pracharaks, usually aligned with the Congress party.

Don’t get me wrong. I am not saying that focusing on the GDP growth rate and the fiscal deficit is a bad thing. Not at all. Both are important. But obsessing over them is stupid. It results in bad macroeconomic as well as microeconomic policy. We have seen this happen repeatedly since 1993.

We make, you believe

Take GDP first. In India, we don’t measure the output of 65 per cent of the economy and make only well-informed guesses about the remaining 35 per cent. And yet, when Bangladesh’s per capita income inches ahead, probably for just a few months by a mere $10, that too in constant prices, we beat ourselves senseless.

Comparing India’s GDP to that of Bangladesh might have been valid about a decade or more ago but the two economies are no longer in the same league. The fact that several poor African countries have higher per capita GDP than either India or Bangladesh should tell you how ludicrous these comparisons are — political, not economic.

As to the fiscal deficit, ask any finance minister, finance secretary, chairman of the Economic Advisory Council to the Prime Minister, or Reserve Bank of India governor since 1981 (privately, of course) and he will confirm India’s fiscal deficit number is what they have made it — just make-believe.

What we should obsess about

So if not the rate of GDP growth and the fiscal deficit, what should the government obsess over?

Only three things: Food inflation, because it has a direct bearing on welfare; foreign exchange reserves, because they serve as a powerful signalling device to foreign investors and sellers of goods; and the revenue deficit. These are the only things the Centre has total control over. In determining all other indicators, the states play a big role.

Or, if I may use some medical analogies, food inflation is like a patient’s temperature. Regardless of how good GDP growth is, it’s always bad if food inflation is high, good if it is low.

The revenue deficit, meanwhile, is like your blood pressure and blood sugar. They indicate how soon you are going to get felled by some major illness. So again the same thing holds: High bad; low good.

And forex reserves are like the body’s resilience or immunity: The more the better. Indeed, India should be aiming for at least a trillion dollars of reserves. It doesn’t matter whether the money is in the capital account or in the current account. 

The sacred trinity

The last 10 years — about half spent under the United Progressive Alliance (UPA) and half under the National Democratic Alliance (NDA) — need to be judged on these three criteria as well, not some mythical GDP growth figure alone because we neither measure it fully nor properly. 

So how have these three variables done since 2010? The numbers are very revealing.

Thus, between 2010 and 2015, food inflation was on average 10 per cent; and in 2015 food prices were 65 per cent higher than in 2008. Since 2015, food inflation has averaged 4 per cent.

The revenue deficit between 2010 and 2015 was 3-4 per cent. Since then it has been 2.3 per cent but will go up very massively this year.  Forex reserves on March 31, 2014, were $304 billion. In mid-September of this year, they were $545 billion. 

Net FDI inflows cumulatively during 2010-15 amounted to $106 billion. Over the next five years they were over $180 billion. 

Likewise, net FPI inflows cumulatively over 2010-15 amounted to $121 billion. But they dropped sharply over the next five years, as growth faltered, to about $33-odd billion.

So the real question is this: What are we going to look at? Just one number or a whole lot of them? The answer depends on whether you are giving a political message or an economic one.