Reforms, clarity of leadership led to turnaround, what govt’s White Paper shows

The Narendra Modi government’s turnaround of the Indian economy from among the “Fragile Five” in the world to the fifth largest in the world in 10 years is a result of prudent counter-cyclical macroeconomic policy, commitment to reforms and clarity of political leadership compared to policy paralysis, fiscal irresponsibility and corruption under the United Progressive Alliance (UPA) government, a White Paper released by the government on Thursday said.

The document accused the UPA-regime of severely undermining the country’s macroeconomic foundations in its quest to maintain high economic growth by any means after the global financial crisis of 2008. “One such foundation that was severely weakened by the UPA government was price stability. Inflation raged between 2009 and 2014 and the common man bore the brunt. High fiscal deficits for six years between FY09 and FY14 heaped misery on ordinary and poorer households. Over the five-year period from FY10 to FY14, the average annual inflation rate was in double digits.Between FY04 and FY14, average annual inflation in the economy was 8.2%,” it said.

The banking crisis was one of the most infamous legacies of the UPA government, the paper added. “The banking crisis in 2014 was massive, and the absolute sum at stake was too large. Gross advances by public sector banks were only ₹6.6 lakh crore in March 2004. In March 2012, it was ₹39.0 lakh crore. Further, not all problem loans were recognised. There was much under the hood.”

Citing a Credit Suisse report published in March 2014, it said the top 200 companies with an interest coverage ratio of less than one owed about ₹8.6 lakh crore to banks. Nearly 44% of those loans ( ₹3.8 lakh crore) were yet to be recognised as problem assets. In 2018, in a written response to a Parliamentary Panel, a former governor of the Reserve Bank of India said that “a larger number of the bad loans were originated in the period 2006-2008”. “This note was prepared by Professor Raghuram G. Rajan on September 6, 2018 at the request of the Chairman of the Parliament Estimates Committee, Dr. Murli Manohar Joshi, MP,” it added.

The Modi government, once it assumed office, rejuvenated the reform agenda, restored the health of the financial sector, increased the share of capital spending in overall expenditure and also achieved fiscal consolidation while doing all these, the paper said. This has led to an improvement in India’s international economic standing and the economy is at the cusp of sustained high growth phase despite the global economic situation continuing to be volatile, it added.

“Our government, unlike its predecessor, invested in the foundations of the economy along with building a sturdy superstructure. Looking back at the last 10 years, we can say with humility and satisfaction that we have successfully overcome the challenges left behind by the previous government.”

The additional argument, which the document makes – it is more important from a political than economic standpoint – is that fiscal consolidation and the improvement in quality of government spending (capital over revenue) under the Modi government has been achieved without dialling back on welfare programmes which have seen an expansion.

The document cites multiple statistics (it has a ‘then and now’ table comparing 35 indicators divided into three sub-categories of macroeconomy, physical and digital infrastructure, and secure future and ease of living from inflation to number of tap water connections) and observations by multilateral institutions to buttress its arguments. Among the most important comparisons made in the document are a lowering of inflation (8.2% under UPA and 5% under the Modi government), rise in inflation adjusted purchasing power parity per capita GDP, fall in multi-dimensional poverty , and a massive rise in direct benefit transfers to vulnerable households.

While some of the comparisons which show the Modi government in positive light are a result of favourable exogenous factors – average Brent crude prices were above $100 per barrel for three years ending 2013-14 and have never crossed this mark since – the document’s criticism on issues such as reckless lending leading to a pile up of bad loans in India’s financial system which precipitated a twin balance sheet crisis of stress in bank and company balance sheets and slowed down investments is not without merit. Similarly, the fact that the Modi government could get by without incurring higher fiscal deficits even during the pandemic and has committed to a faster than expected fiscal consolidation shows that it has more political capital than its predecessor to implement counter-cyclical fiscal policies.

In a very subtle way, the document also credits a centralised approach under the current government for better implementation of both welfare and infrastructure programmes under the current government than its predecessor. “Then, we had sporadic coverage of development programmes; now, we have ‘saturation coverage’ for providing basic necessities for all, with measured, targeted, and inclusive support for the needy and empowerment of all to pursue their aspirations”, the document says. “The share of capital expenditure in the total spending by the Central Government, excluding interest payments improved to 28% in FY24 (RE) from 16% in FY14. Moreover, the efficiency of how capital was utilised improved due to “Whole of Government” approach using Gati Shakti and monitoring through Pragati”, it added.

These observations suggest that Prime Minister Narendra Modi’s clear leadership and authority in the current government has been a key factor in the macroeconomic turnaround the current government has achieved compared to its predecessor.