What do the four years since 2014 mean for 2019?

It is about two weeks since the National Democratic Alliance (NDA) government completed four years. I had written my own evaluation, together with Ajit Ranade for MINT. Many thought that it was a balanced critique. Coalitions involve compromises. So, both of us accommodated each other’s points of view on some aspects. But, predominantly, we converged in our assessment.

Our article had a very brief critical comment on demonetisation. Personally, I have a nuanced take on it. It was motivated for the wrong reasons. However, the verdict on its impact will change depending on the horizon over which we evaluate it. Take bank nationalization for example. It certainly helped the government to take financing to rural areas. The benefits exceeded the costs in the first twenty years (1969-1989) of nationalization, perhaps. In the next twenty-five years, the costs have vastly exceeded the benefits. We are still cleaning up after the biggest saga of non-performing loans. So, the judgement on bank nationalization – over forty-five years is different from the judgement one would have had after the first twenty years. I feel that it would be the reverse with demonetisation.

For now, the judgement is bound to be mixed to negative. The fact that we still have the 2000-Rupee negates the corruption argument. Political funding through anonymous bearer bonds with the identity of the donor known to a very few negates transparency and sets back the cause of integrity in public policy. So, as an anti-corruption and as an anti-terrorism initiative, it has question marks hanging over them because the seriousness of these goals have been diluted by subsequent government actions. But, demonetisation might have set in motion some other big and irreversible trends towards digitization, towards tax compliance and towards formalization whose impact will be felt later and in a big way.

Few days ago, Shekhar Gupta, formerly with the Indian Express, India Today and now the promoter of print.in, had published an interesting piece. I read it in ‘Business Standard’. It was a good piece in the sense that it contains important warnings that the Bharatiya Janata Party (BJP) leadership would do well to reflect upon.

One of the better critiques I read on the fourth anniversary of the government was written by Shankkar Aiyar for Bloomberg Quint.

I read the four-part evaluation of the NDA government’s policies on agriculture by Ashok Gulati, the agricultural economist and his co-author. While it is clear that the farmers are unhappy and that the NDA government has been blamed for it, it is really the case that not too many in the world and in India surely have answers for the financial viability of farming except through heavy subsidies. The lag between market signals and production decisions, the role of the weather and climate change and the fact the demand for food is income-inelastic make farming inherently a difficult economic proposition. In India, several other factors compound it – poor reach of irrigation, dominance of intermediaries, fragmented land holdings, excessive extraction of groundwater and application of fertilisers resulting in diminished soil fertility, etc.

The four articles actually show us that the NDA government had much better answers than its predecessors for farm sector woes. It relaunched crop insurance. It tried to create a national agricultural market. These two help farmers with two key requirements – one is risk management (crop failure, etc.) and the second is price discovery and remunerative prices. On the distribution side, the government had promised to unbundle the Food Corporation of India and immediately appointed a Committee to recommend actions.

The execution on crop insurance and on the national agricultural market was in the hands of states and they have muffed it. One of the four articles mentions that several states have not paid their insurance premium subsidy dues to the insurance companies for 2016-17 even now! The dominance of the middle men continues with unreformed or half-reformed Agricultural Product Market Committees.

Mr. Gulati and his co-author in their four-article series have mentioned more than once that the Union government should have or could have tried to move the reform process forward at least in BJP-ruled states, given that the BJP is in power at least in twenty + states. I agree with that very strongly. That missed opportunity is not just with respect to agriculture. In education, in labour (some modest labour reforms have happened in BJP-ruled states), there could have been a serious push to set the agenda for other States through initiatives and pilots in BJP-ruled States. That is a big missed opportunity.

Some of the government’s critics point to the fact that the economic growth numbers are overstated. That is true. But, that is a problem of the Central Statistical Organisation and not that of the government. I do not think it is mala fide because, more importantly, there is a more egregious overstatement of GDP growth from 2011 to 2014 too. The Bank Non-Performing Assets (NPA) numbers are telling their story. Industrial production growth (or, the lack of it) tells its own story.

Tax terrorism has continued and may have expanded. Even the government’s supporters have conceded that.

Of course, on the credit side of the ledger, there is Jan Dhan Yojana and Direct Benefit Transfer using Aadhaar. Then, there is infrastructure push. Goods & Services Tax (GST) and the Insolvency & Bankruptcy Code (IBC) implementations are good and they will be very important. Cooking gas connections to women, last-mile electricity to villages and Swachh Bharat must count too.

Good chance that a Congress-led Government would have done GST and IBC too but then, there is an equally good chance that the initial design and starting troubles with both would have been the same. That has to do with the nature of the political process in the country.  See the excellent interview by Arvind Subramanian in ‘Finance & Development’ of the IMF.

In his article in ‘Business Standard’, Shekhar Gupta notes that the election to 2019 might be more open than it was a year ago. But, the prospect of a return to 2004 or the 1996-98 days must make many Indians nervous. There is a feeling that coalition governments have worked well for India. I have to say that the evidence is very mixed or unconvincing.

In general, in the last thirty five years, India, at the level of the Union government, has had roughly six years of good governance: 1984-86, 1991-93 and 2002-04. I very much doubt that they were due to coalitions.  Some point to the first NDA government (1998-2004) and the UPA government in its first terms for evidence that coalition governments resulted in better governance. I beg to differ.

The first NDA government was pretty much an underperformer until 2002. It was held back more by internal critics of the BJP Parivar more than by coalition partners, as far as I can recall. But, the government redeemed itself with many decisions on infrastructure, on privatisation, on fiscal reforms and none of them were because of coalition partners.

My recollection of the first UPA government was that it was held to ransom by the Marxist Communist Party on almost everything it tried to do. Then, I do recall a Minister who was a fugitive from law. As far as UPA II is concerned, not many reasonable people disagree on the overall disastrous rule of UPA II and not just with respect to the economy – coalition or no-coalition. Hence, the evidence on the proposition or perception that coalition governments work well for India is flimsy at best and non-existent at worst.

However, I will concede this, even though this too is generalisation since we are working with too few sample points. That is in the nature of these things.You cannot have too many observations except over two centuries! Then, there will be other issues such as controlling for other factors, to worry about.

But, let me still go ahead and generalise:

If the BJP comes back to office, in a coalition framework, it might be better.
If the Congress comes to office heading a coalition or is part of a coalition, it is disaster.

For the BJP, coalitions tend to temper their arrogance and the extreme wings of the larger BJP parivar. That is good.
For the Congress, coalitions stoke their irresponsible, unsustainable and unviable redistribution tendencies. That makes a bad situation worse.

UPA-1 basked from the growth effects of NDA government policies and infrastructure push, global boom and capital inflows. Their incompetence and venality of the first term showed up in the second term on top of the consequences of the second term venality and incompetence. The most egregious example is banks’ NPA. We are still grappling with them.

The first NDA government did well in its last two years due to infrastructure reforms, privatization, global and Indian economic recovery and corporate balance sheets being in great shape after being put through the wringer. It had nothing to do with coalition.

After 2019, if there is a coalition government – whether or not the Coalition is led by the Congress or supported by it – there is a very high chance of it being fiscally ruinous. Fiscal irresponsibility and imprudence are not just some economists’ fancy pet peeves or themes. They are directly responsible for higher inflation.

This government has been, until now, a model of fiscal virtue. Government market borrowing including from Small Savings Schemes has hardly budged in the first four years. They had gone up by 9 times from 2005 to 2014!

Of course, the NDA Government has probably botched its copybook with farm loan waivers and it had managed to achieve the revised fiscal deficit target for 2017-18 only by postponing payment to Food Corporation of India – similar to what UPA did between 2013 and 2014. NDA had to make good UPA’s fiscal numbers and the oil price crash helped them do that, hugely.

So, how do I pull all of these together and summarise?

(1) The NDA Government has been somewhat more efficient and reasonably less corrupt than the two UPA Governments.

(2) The Congress or the Opposition will take off from where they left off in 2014. That will be quite a setback for the nation and not just with respect to the economy.

(3) The NDA Government has done quite a bit to boost the long-term growth potential of the economy. That is the big difference and clincher for me. The UPA government – in the two terms – managed to pull India’s economic growth potential down considerably. From around 8% in 2006, it had dropped to 6.5% by 2013, as per IMF estimates. Some of the policy decisions that the NDA government had taken will actually lift India’s potential growth up in the years to come.

If only the NDA government had thought of their role as doing precisely that – how to enable the potential growth to keep rising – then, they could have done much more.

But, what they had done on lifting India’s potential growth – in spite of their failures mentioned here and in spite of a sluggish global growth environment and rising hostility to globalisation of which India was a beneficiary – is a big contrast to what happened in the ten years between 2004 and 2014.

Some would mock the silence of this post on social issues that many are agitated about. Two reasons explain my silence. Most of the outrage is manufactured around election time and built on dubious claims. It is hard to separate the truth from propaganda and noise. Second reason – and this is the important reason – is that democracy is very active, vigilant, vigorous and healthy when a so-called ‘Hindu-Right’ (this government has not been pro-Hindu nor has it been an ‘Economic-Right’ government as is conventionally understood) government is in office in this government.

Come to think of it, lifting economic growth potential is one of the most secular things any government can do.

8 thoughts on “What do the four years since 2014 mean for 2019?

    1. Thanks for highlighting Sajjid’s piece. Well written. Good points. BIS REER index confirms his point about 20% REER appreciation. Actually, according to BIS figures, it is 24.2% appreciation from Sept. 2013 to Aug. 2017. It was spent because it simply went to plug the fiscal deficit hole that the previous government had left behind which was much higher than the 4.9% supposedly achieved by March 2014. India does have an export competitiveness problem, in any case. The export boom of 2003-08 was due to global factors. He is right about the daunting prospect of establishing export competitiveness. I do not think we have answers.


  1. “The NDA Government has been somewhat more efficient and reasonably less corrupt than the two UPA Governments.”

    On corruption: I’m not sure. Its annoying when the judgement is made by comparing the behavior of the cabinet. It should be judged in systemic terms. Have any reforms been done to reduce policy discretion? To enhance accountability down the bureaucratic chain, any new checks and balances? I’m not sure and instead I see an over-reliance on and entrenching of the same, rotten bureaucracy without any change in overall vision or bureaucratic reforms whatsoever.

    On efficiency: similarly, to make the babu-cracy work better is a dubious achievement when the grand vision is lacking. When the promise was one of “min govt, max governance” which I understood to mean a bringing to heel of the babu-cracy, certainly not succumbing to them and certainly not entrusting them with policy decisions without any accountability. If that’s the way its going to be, it might have actually been better if the babus slacked off and were inefficient.

    When the mandate was one of serious change, and there were no excuses, but it wasn’t delivered, I’d prefer outright failure and reboot to some marginal claims of improvement, coz all it does is ensure falling back to the old ways when the govt changes.

    And, I’d include the financial regulators (under UK Sinha and Rajan + Urijit) among the babucracy who have been behaving more and more in an unaccountable manner, no vision of developing a corporate bond market, losing market share in simple things like equity and forex trading and on and on… the list is too long.

    The thing is UPA had some delusions of inevitable growth, insufficient political capital and some individuals were corrupt. What is Modi’s excuse? The bar should be a lot, lot higher given his promises.


    1. Important and useful rejoinder, Vikram. Thank you for writing. I think there is indeed a compelling case for the bar to be higher. I agree. But, the era of diminished expectations forces us to reach out for the ‘lower than the lowest’ denominator. Surely, one wished that the choice was made on positive grounds and not ‘relative non-negative’ grounds. Pl. do read the MINT column of mine with Ajit. I had linked it at the beginning. That makes points similar to yours. Thank you for commenting.


      1. “Of course, the government had to bear the burden of disproportionate expectations in light of the thumping victory in 2014. Analysts wrongly assume that a majority in Parliament means license to steamroll disruptive reforms, be they economic, political or social. Even the Rajiv Gandhi-led government, with an unprecedented mandate in 1984, floundered midway in its term, and was unable to get re-elected.”

        I don’t think the expectations were disproportionate at all. In fact, many of his supporters think he has done very well! It is quite the opposite problem as the expectations of the Indian electorate are rather low! And, why should a financial/economic analyst care about re-election prospects. Furthermore, it is an unsubstantiated claim – there is no way to know about re-election prospects with disruptive reforms. I also suspect that many of these “disruptive” reforms did not have significant political costs. If the closing of a Nokia factory in Chennai does not have a political cost, if the banning of cryptocurrency trading when millions of voters want to indulge in it does not have a political cost, if the non-existence of a manufacturing sector, if the over-reliance on Chinese imports when they are a geo-political threat does not have a political cost, why should the closing of a smaller, piddly PSU bank have a political cost?

        Also, disagree that this was a middle over problem. Given the political capital and mandate, they needed to have a Sehwag-like opening blast. As I have argued before, Modi and Jaitely spent their opening stint raising FDI which was the continuation of the temporary fix by PC to plug the fiscal gap. Instead they needed to clean house (which incidentally would have also led to FDI increase without the need to do tamashas in other countries). When a new CEO of a public company takes control, the first thing he does is clean house and take losses upfront, let the stock price dump if it has to (which means let the stock market go where it wants to, let the GDP number and fiscal deficit numbers go where they want to), as he can blame everything on the previous management. The political cost is lowest in the opening overs. And, on NPAs, they didn’t even need to take a political cost, they could have put it all on Rajan who said he wanted to do something about it in his opening speech anyway. He could have been the fall guy if the heat was turned on…. no strategic, tactical nous is what it is.

        The crime was one of being risk-averse and waste the opening overs with a slow start on a good batting pitch. We needed Sehwag or a Kohli, instead we got a slow-poke Mongia or Prabhakar or Shastri, take your pick. And, due to the time lost in the opening overs there was more to make up in the middle overs leading to a loss of wickets, leaving the lower order much to do in the last few overs. There’s a better analogy…

        It should also be insulting to resign oneself to civilizational gradualism or what I would call self-afflicted mediocrity. We might as well also refer to our fatalism. The idea is (was? since the young aren’t young anymore) also at odds with the attitude of young India.


      2. Vikram, thank you for your detailed comments again. In these matters, it is impossible to arrive at one view and it is futile to seek it. Our perspectives are shaped by our own expectations, context and experiences. With the last one, our weights differ between the near and far experiences. So, there is plenty of scope to disagree with oneself and no surprises, therefore, that there is even better scope to disagree and argue with another. Collectively, I hope it helps each one of us to figure out our own conclusions and to act on them. The purpose of any public diary – a blog – is to help clarify one’s own thoughts and to help others clarify theirs. There is a place for discussions and even arguments but only up to a point. After that, the law of diminishing returns sets in.


    2. Indeed, I agree. I do not expect agreement or responses to every one of my rants. That would be quite tedious and unnecessary unless there is something specific or factual! Cheers.


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