UPA's fall from grace: Prudent decisions overshadowed by populist policies - The Economic Times
By Shaji Vikraman
In July 2004, a little after the Congress-led United Progressive Alliance (UPA) government came to power, Palaniappan Chidambaram while presenting his budget referred to the backdrop against which it was being unveiled. "The economic fundamentals appear strong and the balance of payments is robust."
The finance minister then went on to quote Prime Minister Manmohan Singh's address to the nation in which the latter had said that the people had sought a change in the manner in which this country is run, a change in national priorities and a change in the processes and focus of governance. Further, he held out the promise of mounting efforts to fulfil that mandate while adding that fiscal prudence and financial discipline would remain the overarching objective of his government.
In the terminal year of the UPA, or after almost close to a decade of managing the nation's finances, some of these statements of intent are sure to haunt Chidambaram. For good reasons, when he took over in July 2004, unlike many other governments, the UPA inherited an economy which was in good shape. Gross Domestic Product or national income was 8.1 per cent in 2003-04, average annual inflation was a reasonable 5.4 per cent, the Balance of Payments (BoPs) was strong then with three consecutive years of surplus, there was an accretion of $38 billion to foreign exchange reserves and another key ratio — short term debt to GDP was at just 3.9 per cent. Moreover, foreign exchange reserves were higher than total external or foreign debt.
UPA's fall from grace: Prudential decisions overshadowed by populist policies
Contrast that to what the government has to showcase now. GDP growth slowed to a decadal low in the year to March, average inflation has been close to double digits, external debt has zoomed to over $380 billion at a time when there is hardly any accretion to India's foreign exchange reserves. Besides, a high fiscal deficit and a record current account deficit has led to the rupee being battered. Worryingly, the proportion of short-term to total external debt has spiked from low single digits to 24.8 per cent of GDP by March 2013.
In many ways, the slide half way through the nine-year tenure of the government mirrors the mid 1980s, when the Congress government lost its way after an initial burst of reforms. It then led to huge commerical borrowings overseas and an expansionary fiscal policy which finally led to the crisis of 1990-91.
India's former cricket captain, Sourav Ganguly has often said that it is unfair to compare teams of different eras. The same may hold for governments of varying political dispensations, too, but what makes the economic management of the UPA worse is that it has botched up despite receiving record portfolio inflows in the last couple of years and the first half of this year, and the tide of global liquidity during its first term in office. And that too with a perceived team of A listers when it comes to fiscal management led by Manmohan Singh — an economist prime minister — Chidambaram, Montek Singh and C Rangarajan.
Power Management Conundrum
As former finance minister Yashwant Sinha points out rightly, much of the blame for the inept economic management has to do with the power sharing arrangement of the UPA, marked by the party chief Sonia Gandhi heading the National Advisory Council, or NAC, which exercises considerable influence on policies. "The question is, why have we reached this stage? Manmohan Singh is going along with all the excesses that Sonia Gandhi is committing with its deleterious impact on the economy," he says.
According to Sinha, who was finance minister in the NDA government led by Atal Bihari Vajpayee between 1998 and 2002, it is not that Chidambaram, Montek or Rangarajan lack knowledge or are clueless on what to do, but are helpless in front of Sonia Gandhi and are willingly playing ball. He may be right as few countries have had such a distinguished team of economic administrators. Given their collective wisdom, the nation's current trajectory has more to do with extraneous forces over which they appear to have little control.
Sinha sounds harsh but several former officials who have worked in the finance ministry with Manmohan Singh, Chidambaram and Montek are baffled as to why their collective wisdom has not translated into action on the ground. Some blame the huge loss of momentum on Pranab Mukherjee during whose three-year stewardship, the management of the economy worsened, forcing the government to reinstate Chidambaram in North Block to restore confidence.
A former secretary in the finance ministry compares Mukherjee's stewardship to that of a batsman in a 50-over, one-day cricket game who in the middle overs blocks the ball, bringing down the run rate, putting huge pressure on those who follow in the slog overs. That may be too simplistic, but government officials and economists admit that the last few years have been a set-back in terms of lost growth opportunities, creation of jobs and sentiment.
The political leadership may have failed but part of the blame also has to be shouldered by the bureaucracy in the finance ministry. Says a former civil servant in the finance ministry, "Most finance ministers are open to persuasion. But it takes courage and a lot of homework to convince them." Many of them have been found wanting on these counts, he says. To his credit, Chidambaram has managed to stave off a potential sovereign downgrade by travelling across the globe, creating the right buzz on policy changes and calming foreign investors.
The government also had to battle adverse global economic developments during the last few years especially high oil and commodity prices. It has hardly helped that this government does not have heft in terms of pushing policies from the PMO unlike in the heyday of reforms in the 90s. A downgrade may have been averted for now by postponing expenditure last year rather than compression or reduction. The finance minister had also bet on higher growth this fiscal year but not many are as optimistic. Revenue growth in the first half has been tepid and corporate earning forecasts are not encouraging.
In the run up to the 2009 election, the government announced farm loan waivers and this time many see the Food Security legislation — a modern-day variant of the food for work programme — as another cynical tool to woo the electorate.
Yashwant Sinha says that it is a scorched earth policy which the UPA Government is pursuing which indicates that the consequences of an expansionary fiscal policy will have to be borne by a new government if the current regime fails to win over voters next time around. He says that a close look at the fiscal deficit over the last five years shows that it has been more and more consumption expenditure and which is marked by a rising revenue deficit since 2008-09. That is the cardinal mistake the government has committed, says Sinha cautioning that an economic turnaround will take time. "They should have prepared for a rainy day earlier but now it's a heavy monsoon," he says.
At the fag end of the UPA-II's tenure, it is ironical that a team of economic administrators seen as the poster boys of reforms will take a reputational knock.
More so after this government claimed in FY05 that it had demonstrated its commitment to prudent fiscal and financial policies by notifying rules on fiscal consolidation.
[email protected]
By Shaji Vikraman
In July 2004, a little after the Congress-led United Progressive Alliance (UPA) government came to power, Palaniappan Chidambaram while presenting his budget referred to the backdrop against which it was being unveiled. "The economic fundamentals appear strong and the balance of payments is robust."
The finance minister then went on to quote Prime Minister Manmohan Singh's address to the nation in which the latter had said that the people had sought a change in the manner in which this country is run, a change in national priorities and a change in the processes and focus of governance. Further, he held out the promise of mounting efforts to fulfil that mandate while adding that fiscal prudence and financial discipline would remain the overarching objective of his government.
In the terminal year of the UPA, or after almost close to a decade of managing the nation's finances, some of these statements of intent are sure to haunt Chidambaram. For good reasons, when he took over in July 2004, unlike many other governments, the UPA inherited an economy which was in good shape. Gross Domestic Product or national income was 8.1 per cent in 2003-04, average annual inflation was a reasonable 5.4 per cent, the Balance of Payments (BoPs) was strong then with three consecutive years of surplus, there was an accretion of $38 billion to foreign exchange reserves and another key ratio — short term debt to GDP was at just 3.9 per cent. Moreover, foreign exchange reserves were higher than total external or foreign debt.
UPA's fall from grace: Prudential decisions overshadowed by populist policies
Contrast that to what the government has to showcase now. GDP growth slowed to a decadal low in the year to March, average inflation has been close to double digits, external debt has zoomed to over $380 billion at a time when there is hardly any accretion to India's foreign exchange reserves. Besides, a high fiscal deficit and a record current account deficit has led to the rupee being battered. Worryingly, the proportion of short-term to total external debt has spiked from low single digits to 24.8 per cent of GDP by March 2013.
In many ways, the slide half way through the nine-year tenure of the government mirrors the mid 1980s, when the Congress government lost its way after an initial burst of reforms. It then led to huge commerical borrowings overseas and an expansionary fiscal policy which finally led to the crisis of 1990-91.
India's former cricket captain, Sourav Ganguly has often said that it is unfair to compare teams of different eras. The same may hold for governments of varying political dispensations, too, but what makes the economic management of the UPA worse is that it has botched up despite receiving record portfolio inflows in the last couple of years and the first half of this year, and the tide of global liquidity during its first term in office. And that too with a perceived team of A listers when it comes to fiscal management led by Manmohan Singh — an economist prime minister — Chidambaram, Montek Singh and C Rangarajan.
Power Management Conundrum
As former finance minister Yashwant Sinha points out rightly, much of the blame for the inept economic management has to do with the power sharing arrangement of the UPA, marked by the party chief Sonia Gandhi heading the National Advisory Council, or NAC, which exercises considerable influence on policies. "The question is, why have we reached this stage? Manmohan Singh is going along with all the excesses that Sonia Gandhi is committing with its deleterious impact on the economy," he says.
According to Sinha, who was finance minister in the NDA government led by Atal Bihari Vajpayee between 1998 and 2002, it is not that Chidambaram, Montek or Rangarajan lack knowledge or are clueless on what to do, but are helpless in front of Sonia Gandhi and are willingly playing ball. He may be right as few countries have had such a distinguished team of economic administrators. Given their collective wisdom, the nation's current trajectory has more to do with extraneous forces over which they appear to have little control.
Sinha sounds harsh but several former officials who have worked in the finance ministry with Manmohan Singh, Chidambaram and Montek are baffled as to why their collective wisdom has not translated into action on the ground. Some blame the huge loss of momentum on Pranab Mukherjee during whose three-year stewardship, the management of the economy worsened, forcing the government to reinstate Chidambaram in North Block to restore confidence.
A former secretary in the finance ministry compares Mukherjee's stewardship to that of a batsman in a 50-over, one-day cricket game who in the middle overs blocks the ball, bringing down the run rate, putting huge pressure on those who follow in the slog overs. That may be too simplistic, but government officials and economists admit that the last few years have been a set-back in terms of lost growth opportunities, creation of jobs and sentiment.
The political leadership may have failed but part of the blame also has to be shouldered by the bureaucracy in the finance ministry. Says a former civil servant in the finance ministry, "Most finance ministers are open to persuasion. But it takes courage and a lot of homework to convince them." Many of them have been found wanting on these counts, he says. To his credit, Chidambaram has managed to stave off a potential sovereign downgrade by travelling across the globe, creating the right buzz on policy changes and calming foreign investors.
The government also had to battle adverse global economic developments during the last few years especially high oil and commodity prices. It has hardly helped that this government does not have heft in terms of pushing policies from the PMO unlike in the heyday of reforms in the 90s. A downgrade may have been averted for now by postponing expenditure last year rather than compression or reduction. The finance minister had also bet on higher growth this fiscal year but not many are as optimistic. Revenue growth in the first half has been tepid and corporate earning forecasts are not encouraging.
In the run up to the 2009 election, the government announced farm loan waivers and this time many see the Food Security legislation — a modern-day variant of the food for work programme — as another cynical tool to woo the electorate.
Yashwant Sinha says that it is a scorched earth policy which the UPA Government is pursuing which indicates that the consequences of an expansionary fiscal policy will have to be borne by a new government if the current regime fails to win over voters next time around. He says that a close look at the fiscal deficit over the last five years shows that it has been more and more consumption expenditure and which is marked by a rising revenue deficit since 2008-09. That is the cardinal mistake the government has committed, says Sinha cautioning that an economic turnaround will take time. "They should have prepared for a rainy day earlier but now it's a heavy monsoon," he says.
At the fag end of the UPA-II's tenure, it is ironical that a team of economic administrators seen as the poster boys of reforms will take a reputational knock.
More so after this government claimed in FY05 that it had demonstrated its commitment to prudent fiscal and financial policies by notifying rules on fiscal consolidation.
[email protected]
