State of the Economy facing the New Government after 2014 Elections

As the sun sets on the UPA-2, it would be worthwhile to look at the state of economy that the new government would be faced with. Wherever possible, I will compare UPA-2 with the previous two regimes, namely, UPA-1 and NDA.

There has been much talk about how the economy has suffered very badly under UPA-2. A summary measure of the state of the economy is the growth rate of real GDP.  This is presented in the table below:

Regime	Measure	GDP Growth rate (% per annum)
NDA  (1999-2000 to 2003-04)	Average for term	5.7
	Last year of rule	7.7
UPA-1 (2004-05 to 2008-09)	Average for term	8.1
	Last year of rule	6.5
UPA-2 (2009-10 to 2013-14)	Average for term	6.5
	Last year of rule	4.9

There is always a debate whether one should look at the performance of a regime over its entire term or only how it performed in the last year of its rule. Considering only the last year of the rule, clearly the NDA regime had the best last year with a rate of 7.7% as compared to 6.5% for UPA-1 and 4.9% for UPA-2.  As an economist, however, I would like to take a slightly longer view and look at average growth rates over the entire term of each regime. UPA-1 shines in this respect and UPA-2 does not look all that bad. 

Of course, it is important to look the state economy the out-going regime leaves for the next one. The NDA regime left an economy with a healthy growth rate of 7.7% and the UPA-1 regime was good enough to build on that.  UPA-2 also displayed extremely healthy growth rates of 8.25% and 8.91% in 2009-10 and 2010-11 respectively. Chart below gives annual growth rates for easy reference.

So, what happened after 2010-11? This is the time all the skeletons started to tumble out of the UPA-2 cupboard. Charges of policy paralysis started to fly thick and fast. While there cannot be too much dispute that UPA-2 lost its direction in the last two years, is it fair to blame it alone for the sudden slowing down of the economy? Let us look at what happened in a few other countries over a comparable time period.

Growth rate of GDP in Brazil fell from 6.1% in 2007 to 0.9% in 2012; China fell from over 14% in 2007 to a little under 8% in 2012; Russia declined from 8.5% to 3.4%; and the USA’s growth rates, after entering negative territory for a couple of years, has now started to revive.

What is point of this comparison? The point is that most countries of the world suffered the consequences of the Great Recession that began around 2008. India, which is now far more integrated with the rest of the world than ever before, could not but suffer. Sure, the UPA government deserves a lot of blame for some of its acts of omission and commission but there were forces beyond its control that were profoundly inimical to growth.

What about the future? Will the government be seriously handicapped by the performance of the last two years? I think not. Growth will pick up over the next couple of years: my optimism stems from the fact that most economies of world are starting to claw their way out of the recession. Just as when the world economy starts to slip, it takes most countries down with it, when the world economy revives, most countries are able to take advantage of the revival.

In addition to favourable external developments, internally as well the economy is not too badly handicapped. Growth requires investments and one of the key factors in the success of China was its ability to boost savings as percentage off GDP which made it possible to increase its Investment to GDP ratio. India too has been able to do that over the last ten years.

Regime	Measure	Savings/GDP (%)	Investments/GDP (%)
NDA  (1999-2000 to 2003-04	Average for term	25.9	25.6
	Last year of rule	29.0	26.2
UPA-1 (2004-05 to 2008-09	Average for term	33.9	35.2
	Last year of rule	32.0	35.5
UPA-2 (2009-10 to 2013-14	Average for term	31.9	35.8
	Last year of rule	30.5	35.3

Real change took place during the UPA-1 regime when the savings-GDP ratio rose to 33.9% from 25.9% achieved during the NDA regime and the investment-GDP ratio rose from 25.6% to 35.2%. Unfortunately, there was no major push during the UPA-2 regime but the gains of UPA-1 were not dissipated either. Of course, any uncertainty affects investment decisions and typically one would expect such decisions to be postponed during an election year. Once a new government is installed after the elections and there is sufficient confidence that it will last the full term, a new investment cycle will likely begin and with it growth of the economy will revive.