If GDP jumped to 6.9 percent in 2013-14, how did UPA lose badly?

The sharp revision of GDP growth in 2013-14 using the new gross value-added (GVA) method of calculation, from the earlier figure of 4.7 percent to 6.9 percent, is likely to lead to the usual political slug-fest with the Congress claiming it did much better and didn’t get enough credit for it. [caption id=“attachment_2073237” align=“alignleft” width=“380”]  The people didn’t notice the UPA measures[/caption] Former Finance Minister P Chidambaram has already started crowing about it. “The data released today (30 January) and the other economic indicators conclusively establish that the UPA government succeeded in substantial measure on all the four objectives.” The four objectives he was referring to are fiscal consolidation, containing the current account deficit (CAD), moderation in inflation and putting the economy back on the growth path. There is no need to deny him credit, for he certainly did some of the right things, including raising diesel prices, which helped fiscal consolidation. However, he is not entirely correct in claiming he achieved all four objectives, especially when the method of calculation itself has changed. The spike in growth shown by the new method is largely the result of the base effect, thanks to the choice of 2011-12 as the base year in the new GVA series. GDP growth using the new GVA method, which is substantially GDP at market prices (GVA plus taxes, minus subsidies), lowered the nominal size of the base year’s GDP from Rs 90.1 lakh crore using the old method with 2004-05 as base to Rs 88.3 crore using the new 2011-12 base (see the details here; the comparisons are on page 29 of the official document released yesterday). For 2012-13, the nominal GDP total again falls from Rs 101.1 crore under the old calculation to Rs 99.9 crore. This is why 2013-14’s final GDP figure of Rs 113.5 lakh crore, using the new GVA method, looks a very healthy 6.9 percent over two years of lowered bases. (The 6.9 percent resulted from a 13.6 percent growth in GDP at current prices, adjusted for inflation). The sharp rise in nominal GDP using the GVA method in 2013-14 happened because inflation was high in the year, and not due to the moderation in inflation, as claimed by Chidambaram. Inflation fell only marginally. More interestingly, due to the changed calculation, the UPA actually saw the fiscal deficit rising (over the old figures) in 2011-12 and 2012-13, with the new number showing the deficit rising from 5.6 percent under the old calculation to 5.8 percent for 2011-12, and from 4.8 percent to 4.9 percent in 2012-13. In 2013-14, miraculously, due to high inflation and reviving growth, the fiscal deficit remained unchanged at 4.5 percent. This means between the base effect and inflation, economic performance under Chidambaram in 2013-14 improved. The fiscal deficit was contained by inflation bloating the GDP base on which it was calculated. It was not all his doing. However, it would be churlish to deny the fact of the actual revival. For this he certainly deserves credit. Chidambaram also claimed that the UPA did not mismanage the economy. The Economic Times quoted him as saying: “I am happy that the government has released the revised GDP data. It should put an end, once and for all time, to the misconceived charge that the UPA government had mismanaged the economy.” Well, not quite. The fiscal  slippage of the two years previous to 2013-14 show mismanagement of a high order. Chidambaram can claim credit for what he did to reverse the slide in 2013-14, but that does not exonerate the UPA of all charges of mismanagement. The political question that arises now is this: How did the UPA lose so badly in the Lok Sabha elections if the actual economic performance was clearly improving in its last year of office? The answer must lie in the fact that what was happening was not felt by the population. One can surmise that it takes two or three years of continuing growth for people to feel the effect in their daily lives, and one year’s rebound was not enough to give the people a full sense of improvement. In fact, this was the exact reason why the NDA also lost unexpectedly in 2004 despite the sharp rebound in GDP growth in 2003-04 at 8 percent. But this one year of revival was not enough to justify the NDA’s claim of India Shining. That’s why it lost. It would have worked better if elections had been held in 2005 or 2006 instead of 2004. The UPA won in 2009 despite a sharp drop in GDP growth in 200809 to 6.7 percent from 9.6 percent the year before. One year’s drop was not felt after three years of 9 percent plus growth, and the fact that the government was already re-stimulating the economy by its farm loan waiver and huge fiscal tax cuts. In 2013-14, it had to do the opposite – tighten the fisc and roll back spending. This is why the UPA lost despite an uptick in growth. If the Lok Sabha elections had been held in 2015 or 2016 instead of 2014, perhaps it could have claimed credit for the revival. In a sense, the defeat of both the NDA and UPA in 2004 and 2014 respectively has parallels. Revival was not long enough for the incumbent governments to claim credit. The people didn’t notice.