Over to Team UPA, Mark II

By M H Ahssan

To use a cricketing analogy, unlike in the first innings where the pitch lent support, this time the UPA will have to deliver without any support from macroeconomic fundamentals.

Steering the economy is a bit like playing a game of cricket. As in cricket, the pitch, macroeconomic fundamentals, are largely a given, to begin with. And as with cricket, you will almost never be lucky enough to get both a great pitch and a great team.

But in a toss up between what ultimately decides the winner — the pitch or the team — most cricket aficionados would agree it is the team rather than the pitch that makes the difference between winning and losing. A lousy team can throw the match however fantastic the pitch while a good team will win, however bad the pitch. The Australian team under Steve Waugh is a classic example of how a great team comes up tops regardless of the quality of the pitch.

So it is with the economy. Bad macroeconomic fundamentals can challenge, but will not necessarily defeat, a good government. On the other hand, a bad government can make a mess of even the best macroeconomic fundamentals. And that, unfortunately, is the story of the UPA government, Mark 1.

The country’s macroeconomic fundamentals, including the all-important public finances, were in fine fettle when the UPA government took over in May 2004. The economy, after growing at just 3.8% in 2002-03 had rebounded to grow at 8.5% in 2003-4; both the revenue deficit and the overall fiscal deficit were well below the budgeted numbers and subsidies were reined in — after increasing for years, the subsidy bill was more or less unchanged between 2002-03 and 2003-04. In short, we were more or less on course to achieve the FRBM target.

However, over the next five years, these advantages were steadily frittered away. Despite the rising tide of strong global growth lifting the Indian economy as well, populist and inefficient spending combined with a marked reluctance to mend the roof while the sun was shining (read, use higher tax revenues to retire debt, create infrastructure assets) resulted in an abrupt reversal in the health of the country’s finances.

From a scenario where government finances were progressively on the mend, we are back to a position where the deterioration is both rapid and sustained. Unlike in 2004 when the NDA government bettered itself on almost every budget parameter — revenue, fiscal and primary deficit — in March 2009, the UPA government’s performance had fallen well short of its own admittedly conservative projections.

Revenue deficit was 4.4% of GDP as against 1.0% estimated at the time of the budget in 2008, fiscal deficit was 6.0% as against 2.5% projected in the budget and the primary deficit, which had almost disappeared in March 2004 reappeared to touch 2.5% of GDP. Add the off-budget items and the numbers are far worse. The deficit for the Centre and states combined could be anywhere between 12-13%.

In fairness to the UPA though, its failure to capitalise on the excellent macroeconomic fundamentals it inherited during its first stint was not entirely of its own making. It had, in cricketing analogy, a good pitch but a lousy team. For four of the five years, the Left was a key ally and this made it much more difficult (though not impossible) to do sensible things like reduce oil subsidies, restructure fertiliser subsidies, rationalise centrally-sponsored schemes, disinvest small stakes in public sector enterprises, allow greater private sector entry, and so on.

THE prime minister could, of course, have taken a stand, like he finally did on the Indo-US civil nuclear deal, but he obviously did not think it important enough. Perhaps he was lulled into the belief that the good times would continue forever and buoyant tax revenues would permit the luxury of fiscal recklessness.

Whatever the reasons, UPA Mark I blew its chances. The end of the global boom and the subsequent financial crisis saw tax revenues lose their earlier buoyancy even as counter-cyclical fiscal measures saw expenses mounting. The net result has been a dramatic worsening of government finances.

Today, the macroeconomic pitch is not a patch on what it was in 2004. But if macroeconomic fundamentals have deteriorated, the PM now has a much better team. As against the earlier unwieldy coalition of 14 parties with the Congress commanding just 145 seats, this time around it has a much more cohesive coalition. Better still, its own position is vastly strengthened (206 seats). If it wishes, it can call the shots on virtually all issues.

However, a better team alone does not necessarily translate into better performance. This is where the captain’s role becomes important. What matters is the batting line up and here, unfortunately, the first signs, as seen in the choice of ministers, are not too encouraging.

Instead of deciding the batting line-up on the basis of competence, which might have given us a fighting chance of overcoming the disadvantages of a poor pitch, the prime minister has opted for the usual mix of realpolitik — caste, region, party affiliation, loyalty with competence coming much lower in the order than what the situation demands today.

Admittedly in a country as complex as India, competence alone cannot be the deciding factor, however much readers might wish. But coming from someone who started out as a technocrat rather than a politician, one wishes competence had been given a little more precedence at least in the case of key portfolios like telecom, power and petroleum, for instance.

More so since the challenges before the government are huge. The spate of stimulus packages unleashed by governments across the globe is bound to cause a sharp spike in sovereign debt even as liquidity infusion by central banks sees a build-up of inflationary pressures. In such a scenario choosing the right mix between stimulus and restraint calls for skills that will test the mettle of team UPA.

In the mid 19th century, UK minister, Aneurin Bevan, who once described politics as a blood sport, disparaged British Prime Minister Clement Attlee saying, ‘He brings to the fierce struggle of politics the tepid enthusiasm of a lazy summer afternoon at a cricket match.’ Attlee, however, turned the tables on him and went on to introduce sweeping reforms that dramatically changed the face of Britain. With a little bit of luck, so might Manmohan Singh!