3 years of UPA: A trillion dollar triumph...

MACRO ECONOMY

Last October, when Finance Minister P Chidambaram delivered a lecture at Stanford University, he dealt at length on India's economic situation and the recent policy initiatives of the UPA government.

In the speech, Chidambaram underlined the main objective of the current phase of reforms "" to ensure high growth, in an inclusive manner that generates more employment. He highlighted the National Rural Employment Guarantee Act, which aims to provide one job per family for 100 days every year, as a key achievement of the UPA government. 

THE ECONOMIC TANGLE
Year	GDP	**Fiscal deficit	WPI annual inflation rate
2004-05	$695 billion	4.0	6.40%
2005-06	$805 billion	4.1	4.40%
2006-07	$905 billion	3.8	5.40%
2007-08	May cross $1 trillion*	3.3 BE	5% target
* Assuming 8.5% GDP growth, exchange rate of Rs 41 per US dollar ** % of GDP                                                                            BE - Budget estimate

Chidambaram also highlighted the stupendous growth in the Indian economy "" which has on average grown at a rate of more than 8.5 per cent from 2004 onwards, the year the UPA assumed power, making it one of the fastest-growing economies in the world and in the process exceeding the target set out in the UPA's national common minimum programme.

One of the six basic principles of the programme was to ensure that the economy grew at least 7-8 per cent per year in a sustained manner over a decade and more.

The finance minister's Stanford address also said that India's economic growth had been accompanied by a benign rate of inflation. That statement was made only six months back.

Perhaps the finance minister could not have then foreseen that this 'benign rate' would suddenly morph into a runaway spiral, putting into question the very ability of this coalition government to manage growth.

By January this year, the RBI said it was witnessing early warning signals emanating from rising inflation in an environment of high money and credit growth. The causes are symptomatic with the UPA's failure to get going on the infrastructure front "" a key bottleneck as well as its inability to push agriculture growth, which slowed down from 6 per cent in 2005-06 to 2.7 per cent the year after. These factors coupled with escalating asset prices have raised dangers of the economy overheating.

It is this seemingly innocuous, but completely understandable consequence of high economic growth that has become the proverbial millstone around the UPA's neck as it completes three years in power. A massive effort to contain inflation has resulted "" itself fraught with consequences in the form of rising interest rates for consumers and industry, the threat of an economic hard landing and a decrease in overall competitiveness and productivity.

In the public eye, inflation has also overshadowed other key achievements and progress made by the UPA in the past three years. The two-year 'report to the people', unveiled last May, had waxed eloquent about major development initiatives "" the NREGA, the rural health mission, the urban renewal programme, the expanded universal education programme and mid-day meals.

The third report card, unveiled today, dwelt on the even better performance in the country's economy than the NCMP draftsmen could have envisaged.

For 2006-07, GDP is estimated at 9.2 per cent, way beyond the projections. It also dwelt on the robust industrial production, with the year-on-year growth being led by a massive revival in manufacturing sector.

It also touched upon the rapid increase in the domestic savings rate, which as a percentage of GDP, increased from 31.1 per cent in 2004-05 to 32.4 per cent in 2005-06. The increase in the savings rate has been accompanied by the overall investment rate increasing by 2.3 percentage points of GDP to 33.8 per cent in 2005-06.

What this year's report card does not talk about are the clouds on the horizon. The battle against inflation, which began in earnest with the first of six interest rates hike in December 2006, has since assumed the proportions of an epic battle.

Four different sets of measures including monetary policy interventions, fiscal steps in the form of 11 different reductions and exemptions in Customs duties (including the reduction in the peak rate from 12.5 to 10 per cent in Budget 2007-08) and a reduction in retail fuel prices.

The government has taken other steps including the suspending futures trade in some commodities. All this has come at a cost "" for the exchequer and for the middle-class.