There has, of late, been a lot of commentary on the similarities in the economic situations during the first National Democratic Alliance (NDA) government under Atal Bihari Vajpayee and the current one headed by Narendra Modi.
On some aspects, the resemblance is, no doubt, striking. GDP growth was relatively low during the six years of NDA-1 (1998-99 to 2003-04), averaging about 6%, compared to 7.8% during the subsequent 10 years under the Congress-led United Progressive Alliance (UPA). Growth during the first three years of the Modi regime, too, averaged below 7.3% and has, moreover, posted a decline in every consecutive quarter from January-March 2016 to April-June 2017.
Agriculture didn’t do too well during NDA-1; it is in crisis mode under the present regime as well — the main reason being low crop prices, driven, in turn, by global commodity markets that were more favourable to producers during the UPA years.
Both NDA-1 and NDA-2 have presided over a build-up of bad loans by banks — touching 15% of their gross advances in 1998-99, more or less the levels of today — although these were largely inherited from the reckless investment booms during the preceding years (1994-96 and 2004-11).
But on the other hand, the record of the NDA governments has been vastly superior when it has come to fiscal prudence and inflation control. The annual increase in the wholesale price index averaged 4.8% during NDA-1 as against 6.5% under the UPA, and it has been a mere 0.4% so far in the Modi regime. Reduced government borrowings and keeping prices under leash — the FRBM (Fiscal Responsibility and Budget Management Act) was a legacy of NDA-1, just as the Modi government has adopted a monetary policy framework agreement explicitly committing to a 4 per cent consumer inflation target — have enabled an environment of low interest rates, seen during both these regimes.
The similarities, however, probably end here. The tenure of the present government, if anything, has been marked by paradoxes that did not exist during NDA-1.
The first paradox relates to the markets. In the Vajpayee period, the Sensex rose by around 18%, from an average of 3,813 in 1997-98 to 4,492 in 2003-04. But between May 16, 2014 (when Modi’s party registered a landslide victory in the Lok Sabha elections) and September 15, 2017, it has registered a jump from 23,906 to 32,273 points. This 35% surge in barely 40 months has come despite sputtering growth and investment: the average growth in gross fixed capital formation, at 4.1% during 2014-15 to 2016-17, has lagged even the overall GVA (gross value added) growth of 7.3%, with the gap between the two widening in the April-June 2017 quarter (1.6% versus 5.6%). Single-digit growth in bank credit — it has actually shrunk by 0.9 during April-August — has further added to the discrepancy between the real economy and stock market performance, which was not all that apparent under NDA-1.
To what extent has the bullishness in markets been powered by foreign inflows?
Well, between May 16, 2014 and September 15, 2017, foreign portfolio investors (FPI) have pumped $ 65.35 billion into Indian equity and debt markets. Significantly, though, out of this total $ 65.35 billion, just over a third ($ 22.69 billion) has entailed investment in equity; the balance $ 42.66 billion has been in debt. The Sensex’s and Nifty’s sensational run has been fuelled mostly by Indian investors, especially mutual funds. While net resources mobilised by mutual funds stood at Rs 54,579 crore in 2013-14, in the following three years, they surged to Rs 102,880 crore, Rs 131,758 crore and Rs 343,418 crore, respectively.
That leads on to the second paradox: while low interest rates have led domestic investors to move away from debt — they have lost interest even in real estate and gold — and to aggressively put money into stock markets, the FPIs have been attracted more towards Indian bonds rather than equities. Proof of this is in the latter already exhausting 86.4% of their upward investment limit of Rs 275,100 crore in government bonds, with this utilisation ratio at 99.2% of the total of Rs 244,323 crore for corporate debt. The FPI appetite for Indian debt is also evidenced in resource mobilisation in the private placement market, which hit an all-time high of Rs 667,290 crore in 2016-17, up from Rs 412,600 crore, Rs 446,484 crore and Rs 399,179 crore during the preceding three fiscals. Simply put, lack of finance is not a constraint at least for large corporates. If they aren’t investing today, the reasons clearly lie elsewhere. Credit crunch arising from the poor health of banks, and aggravated by demonetisation, has basically impacted micro, small and medium enterprises.
The third paradox has been the strengthening of the rupee — a notable feature during NDA-1 and also under NDA-2 (in the UPA period, the rupee’s real effective exchange rate, against a basket of 36 currencies and adjusted for inflation differentials, fell 8.4% between 2010-11 and 2013-14). But under NDA-1, there was a clear explanation for the rupee’s rise, linked to the current account deficit (CAD) in the country’s external balance of payments. CAD levels were very low in the Vajpayee era. In the last three years (2001-02, 2002-03 and 2003-04), India actually ran a surplus, with its receipts from export of goods and services, remittances, etc. exceeding imports and other current account payments.
In the Modi regime, by contrast, the CAD has shown a rising trend, more so since early 2016, also coinciding with a growth slowdown. That has, nevertheless, not stopped either the rupee from strengthening or even the country’s foreign exchange reserves from soaring from $ 314.93 billion to $ 400.73 billion between May 16, 2014 and September 8, 2017. Much of this has, of course, been courtesy capital flows. FPIs, particularly, have been enthused to invest in Indian debt because of a combination of high yields (relative to global levels) and a stable rupee.
But how long this party will continue, in the absence of a real growth and investment revival on the ground, is the billion-dollar question. During NDA-1, a recovery did happen towards the end, which turned out to be politically too late. The Modi government seems still in a honeymoon phase, but if investment, jobs and incomes don’t revive fast enough, the story could well turn out differently in April-May 2019.
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