The Facts Behind a White Paper

THERE IS A good chance that one may have to look up the term “taper tantrum”. But back in 2013, barely a decade ago, India was “poised at the edge of a fiscal precipice” after the US Federal Reserve announced that it would “taper off” the buying of bonds. The actual tapering off would begin in late 2014 but by that time the damage had been done. In India, the rupee went into a tailspin and the decline in the value of the rupee against the dollar was neatly correlated with the taper announce­ment in June of that year. The Indian economy was on an edge after many years of robust growth.

To get the full picture, one has to wade through reams of eco­nomic data and have a feel for contemporary economic history, at least of the past quarter-century. The story has been told in detail in the ‘White Paper on the Indian Economy’ tabled by Union Fi­nance Minister Nirmala Sitharaman in Parliament on February 8. The performance of the Indian economy in the two periods— from 2004 to 2014 and from 2014 to 2023—could not be more different. Each period had its own constraints, challenges, and opportunities. The difference lay in how governments responded to them. What mattered in the end was how political and policy choices were exercised in the two periods.

The truth was that those years of high growth, 2004 onwards, hid many economic mistakes and poor management of the economy. Domestically, the emphasis of the government was on social welfare, something that led to ramped-up expenditures even as the economy remained supply-constrained. The result was a steady rise in the rate of inflation: going up from a benign 3.9 per cent in 2003-04 to a peak of 12.3 per cent in 2009-10. Four years down the line, at the end of the United Progressive Alliance (UPA) government’s tenure, inflation remained elevated at 9.4 per cent. What added fuel to the fire was the adoption of a pro-cyclical fiscal policy in the wake of the 2008 global financial crisis that allegedly required the government to impart a fiscal stimulus to the economy. The Indian economy witnessed slower growth of 3.9 per cent in 2008 but bounced back to 8.5 per cent growth in 2009. There was no reason for a fiscal stimulus in such conditions. But once it was started, the government could not roll it back. If one graphs the changes in growth rate and the rate of inflation together, the two go hand-in-hand during this period.

External pressures, too, built up during those years. That era was the high mark of globalisation. Money was available cheaply in global financial markets and external commercial borrowings (ECBs) shot through the roof. Over these years, even as the trade deficit widened, that did not reduce India’s energy dependence. The result was a steady rise in the Current Account Deficit (CAD) over time. In 2003-04, India had a current account surplus of 2.3 per cent of GDP. By the time the “taper tantrum” hit the coun­try, its CAD had widened to 4.9 per cent of GDP. India’s reliance on short-term financial inflows to meet its current account require­ments was widely commented on. The CAD was the proximate reason for markets getting spooked.

The White Paper comments in detail on how these excesses were unwound once the Narendra Modi government took charge.

Today, it is fashionable to say that economic growth was high­er during the 10 years of UPA when compared to the 10 years of the Modi government. That would be a partial truth at best.

The reality is that by the time Modi came to power, the “twin balance sheet” problem had gripped the Indian economy, making the 7-8 per cent growth seen in previous years a target too far to reach. On the one hand, companies that had binged on debt dur­ing the boom years were overleveraged and, on the other hand, banks with a very large stock of gross non-performing assets (GNPAs) were in no position to lend. The productive sectors of the economy were unwilling to borrow and invest—something es­sential for the economy to grow—and the banks were unwilling to lend. This, in a single sentence, is the story of India’s faltering growth until very recently.

The banking sector tells its own story. In many ways, it is a larger story of how National Democratic Alliance (NDA) gov­ernments inherit a broken banking system, fix it, and then successor governments make the most of the positive chang­es. This was as true of the Atal Bihari Vajpayee years as it is of the Modi era. Back in 1998, when Vajpayee became prime minister for a second term, the banking system had GNPAs that stood at 16 per cent. This was the product of the messy coalitions of the 1990s when governance and regulation of the sector took a hit. In its third term, the Vajpayee government enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. This Act and other measures enabled the restoration of the banking system back to health. When Vajpayee demitted office in 2004, GNPAs had shrunk to 7.8 per cent.

In the next decade, the combination of large government borrowings, poor regulation and oversight, and a spending binge broke the banking sector once again. GNPAs stood at 12.3 per cent in 2013. Unlike the last time, the unwinding process took longer, was more painful and required greater efforts on the part of the government.

The White Paper’s description of the situation in 2014 bears quoting in extenso: “The banking crisis in 2014 was massive, and the absolute sum at stake was too large. Gross advances by public sector banks were only ₹6.6 lakh crore in March 2004. In March 2012, it was ₹39.0 lakh crore. Further, not all problem loans were recognised. There was much under the hood. According to a Cred­it Suisse report published in March 2014, the top 200 companies with an interest coverage ratio of less than one owed about ₹8.6 lakh crore to banks. Nearly 44% of those loans (₹3.8 lakh crore) were yet to be recognised as problem assets. That alone would have added another 6.7% to the GNPA ratio.”

Any wonder that India’s economic growth went off the rails for a number of years afterwards?

IN 2012, THE Vijay Kelkar Committee—the Committee on Roadmap for Fiscal Consolidation—noted that India’s fiscal deficit was higher by an estimated one percentage point of GDP. It recommended urgent steps to reduce the fiscal deficit. This was in September 2012. But warnings about fiscal excesses had been around for a while. In January 2012, then-RBI Governor D Subbarao had made a pointed reference to high expenditures and the danger of how they fuelled inflation. Such was the situa­tion that—unusually for an RBI governor—he stated all his fears about the fiscal situation in an interview with The Wall Street Jour­nal on February 13, 2012. But this was to no avail. Instead of tak­ing steps that were obvious, the UPA government waited for six months and then appointed a committee to devise a “roadmap” for fiscal consolidation. It was also angry at Subbarao as he had spoken openly about the need for fiscal consolidation. Its wrath fell on Subir Gokarn, the deputy governor in-charge of monetary policy, who was denied an extension.

What made matters worse was that much of the expenditure was “off budget” in the form of special bonds for expenditures incurred by the Food Cor­poration of India (FCI), Oil Marketing Companies (OMCs), and fertiliser com­panies. These expenditures totalled to a neat ₹1.6 lakh crore over five years from fiscal years 2006 to 2010. On paper, the fiscal deficit seemed within acceptable bounds but in reality, once these bonds were accounted for, it rose significantly in those years. This was not disclosed properly to the Parliament.

This is in marked contrast to the Modi government’s approach in the matter. All governments, irrespective of political complexion, are forced to borrow extensively. Sometimes these borrowings are kept “off budget” as was the case in the UPA years. The Modi government, too, had its share of such borrowings. In 2016-17, these amounted to 0.5 per cent of GDP. In 2017-18, these went up to 0.9 per cent of GDP. In 2018-19, these were around 0.7 per cent of GDP. As a result, in each of those years, the actual fiscal deficit was higher than the stated figure. But then there was a difference between the UPA and NDA governments: starting from the July 2019-20 Budget, Sitharaman introduced a statement on Extra Budget­ary Resources (EBR)—Statement 27 in the Expenditure Profile section of the Budget—that detailed the borrowings and their expenditure across different ministries and departments over the years. There have been no “off budget” borrowings from 2022-23 onwards. More importantly, the quality of these expenditures is very different from those before 2014. In the Modi years, these have been almost exclusively towards the building of assets and infrastructure. The only exception was the ‘cleaning’ of FCI’s books for food security management. That was the reason that in 2020-21 the fiscal deficit jumped from the budgeted estimate of 3.5 per cent of GDP to revised estimates going up to 9.5 per cent of GDP, an increase of a whopping 6 percentage points. Interest­ingly, the markets did not react negatively to this “truing up”. If anything, this cleaning up was appreciated all round.

One can always ask why this expenditure was necessary. In theory, expenditure can always be pared down when there are revenue constraints. But that is a textbook answer to a com­plicated political reality in a country like India. A lot depends on the priorities of the government. In the UPA era, spending was skewed extraordinarily in fa­vour of welfare. In the Modi years, there is greater emphasis on physi­cal infrastructure and productive investments. At the same time, expenditures on schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) cannot be brought down and such steps are bound to be politically very expensive. After 2017, when the Modi govern­ment faced a revenue shortfall of ₹1 lakh crore, EBR spending be­came inevitable. The six years from 2017 to 2022 were probably the most trying ones in recent eco­nomic memory. These revenue shortfalls, when compared to budget estimates, rose steadily— from ₹1.6 lakh crore in 2018-19 to ₹3 lakh crore in 2019-20—and fac­tors as diverse as teething problems in the Goods and Services tax (GST), low dividends from RBI and more were responsible.

What matters in the end is how EBR and other available resources were expended. In recent years, India’s rapid investment in physi­cal expenditure, from highways to railways and from aviation in­frastructure to ports, has been widely commented on. The re­ality is that from 2013-14 to 2023-24, there has been a fivefold increase in capital expenditure—from ₹1.9 lakh crore in 2013-14 to ₹9.5 lakh crore in 2023-24. But at no point in these years did India face macroeconomic instability of the kind seen from 2012 to 2013.

One can always give a partisan spin to any data at hand. UPA partisans point to the high growth in those years as an achieve­ment in the face of high oil prices. In contrast, they point to an “oil price windfall” during the Modi years and lower GDP growth as ‘proof’ of UPA’s superior performance. Even if one is partial to the extreme, this is a misrepresentation. Given abundant money and cheaply at that, one can always cook up any miracle. The reality is that, in the UPA years, money was spent on welfare schemes at the cost of infrastructure and other vital nation-building tasks. That binge left a hangover that took years to fix.

Each decade tells its own story. The 2000s were the high watermark of globalisation. The 2010s and 2020s are a story of mounting global protectionism, war, and pestilence. Factor out these events and you get a very different picture of the relative economic performance of the UPA and NDA governments. That is the story of the ‘White Paper on the Indian Economy.

D SubbaraoGDP growthglobalisationIndian economyinfrastructureNarendra ModiNDAUPAwelfare schemesWhite Paper