The economic record of the United Progress Alliance (UPA) is a major election issue, and the Bharatiya Janata Party (BJP) is making the case that weak leadership and a welfarist ideology led the UPA to fritter away India’s economic future.
At a press conference earlier today, BJP leader and former Finance Minister Yashwant Sinha posed 18 questions (that are mostly rhetorical, I should warn) to Finance Minister Palaniappan Chidambaram, and ended with the following statement:
The fact of the matter is Sri Chidambaram that you will be remembered by history as a spoiler, as some one who specializes in sub 5 percent growth rate, for your hubris and for your baseless tall claims which you do not tire of making even today. Your words and statements have lost all credibility.
Feelings do seem to be running high here. But what is the UPA’s actual record of delivering economic growth?
The case against the UPA is encapsulated in the following chart, which shows a discernible economic slowdown from early 2012:
#India GDP growth rate 2008-2014(Projected) , looks it will be outstayed around 4.5% to 4.7%
UPA defenders counter that, the current slowdown notwithstanding, growth in 2004-13 has been much faster than it was under the BJP-led National Democratic Alliance (NDA) in 1998-2004:
They also point out that India under the UPA has been the second fastest growing major economy in the world after China:
How to make sense of all this? A growth number means nothing in isolation: it must be pegged to a baseline expectation. As an example, economists Maitreesh Ghatak and Sanchari Roy recently examined the claim that Narendra Modi has transformed the economy of Gujarat since becoming chief minister in 2001. They found that:
Gujarat’s growth rate in the 1990s was 4.8%, compared to the national average of 3.7%; in the 2000s it was 6.9% compared to the national average of 5.6%. The difference between Gujarat’s growth rate and the national average increased marginally, from 1.1 percentage points to 1.3 percentage points. A good performance? Yes. Justifying the hype? No.
Just as a proper evaluation of Gujarat’s economic performance under Modi must take into account how the broader Indian economy is doing, any judgement regarding India’s economic performance cannot be divorced from the state of the global economy with which India is now tightly integrated. The NDA had to endure the effects of the dot com crash and 9/11 in 2000-01 while the UPA’s record was affected by the collapse of the US housing bubble and the recession that followed in 2008-09.
I therefore compare India’s per capita GDP growth since 1998 with that of developing countries in general (using World Bank data). Doing so allows us to isolate — to some extent — the domestic determinants of economic growth from global factors.
So what do the numbers show? India’s per capita GDP grew on average 1.2 percentage points faster every year between 1998 and 2013 than did that of low- and middle-income (let’s call them “developing”) countries. If we define 1998-2003 as the NDA period and 2004-13 as the UPA period, we find that growth in the former was 1.8 percentage points higher than the developing countries while in the latter it was only 0.9 percentage points higher.
Slam dunk for the NDA? Not quite. Since many NDA supporters believe that the high growth during UPA1 was shaped by the NDA’s policies, let’s do the minimum and introduce a one-year lag i.e. give credit for growth in the first year of each government to its predecessor.
All of a sudden, the per capita GDP growth gap (in India’s favour) during the NDA period drops to 1.2 percentage points while during the UPA period it rises to 1 percentage point.
Many people like to distinguish between the UPA1 (2004-08) and UPA2 (2009-13), the argument being that the first was some sort of golden period for the UPA while the second witnessed an economic unravelling. The numbers do bear this out: the UPA1 (1.6 percentage points) now shines in comparison with the NDA (1.2 percentage points) while the UPA2 (0.3 percentage points) looks weaker.
If you’re wondering why introducing a one-year lag made such a dramatic impact on our findings, the reason is this: the Asian crash of 1997 hurt the growth rates of developing countries that had convertible capital accounts, which made India shine in comparison in 1998 and 1999. Correspondingly a pick up in developing country growth between 2003 (3.8%) and 2004 (6.3%) made India’s 2003 performance (6.2%) look much better than its 2004 performance (6.3%) in relative terms, even though the absolute number in 2004 was higher.
Now let’s run the numbers with a two-year lag under the reasonable assumption that a new government’s economic policies take more than a year to really affect growth.
The UPA now seems to have outperformed the NDA, with the UPA1 beating its developing peers by an incredible 1.8 percentage points, and the UPA2 under-performing the NDA by a little over a percentage point.
So what does all this tell us about these governments’ relative economic performance? The NDA may be better or worse than the UPA, and the UPA may be better or worse than the NDA. Their relative performance jumps around so much under different cut-off points that it is hard to reach a definitive conclusion. My own view is that the effect of government policy on economic growth is cumulative, and that there is little to separate the various governments in terms of broad direction.
Will we all stop making exaggerated claims now? (I thought not.)