Bad economics, bad politics: How UPA is paying for its sins of 2007-09 with a lag

Does good politics lead to good economics? Or vice-versa? The experiences of the NDA and UPA government show that good economics and good politics are inter-linked - but the problem is they are linked with a lag effect. Put another way, one government’s good economics may result in good politics for another party, and vice-versa.

Take the case of the UPA-1’s economics - which has resulted in sustained bad results on inflation in Indian economic history.

If you want to trace the roots of double-digit inflation, especially the politically vexatious food inflation, you have to go back to the follies of the final UPA-1 years: 2007-08 and 2008-09.

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Even though inflation had been rising and the Reserve Bank was raising interest rates at that time, the match that lit the food inflation fire was the politically astute - but economically destitute - decision to raise minimum support prices (MSPs) for foodgrain by unheard-of amounts. Rajiv Shastri of Pramerica Asset Managers, writing in Business Standard, says that these high MSPs would have helped only rich farmers and not poorer ones. “When subsidies harm intended beneficiaries, it’s apparent that they are either badly thought out or badly implemented.” Quite.

Look at the accompanying chart above and you will shake your head in disbelief.

Annual increase in MSPs of foodgrain and pulses were benign between 2001 and 2007, including the election year of 2004 (which showed the NDA’s good economics). But in 2007 and 2008, UPA-1 threw a lighted match into a can of kerosene (which showed that good politics can gut the economy without good economics).

In paddy, price increases were earlier in the range of 0-4 percent annually. This suddenly shot up in 2007 and 2008 with the UPA pushing prices up by 11.2 percent and 39.5 percent, respectively. This uncalled for munificence can’t be explained by any motive other than electoral gain.

What UPA gained, the economy lost.

Ditto for wheat. After rising annually in the range of 1.6-5.2 percent till 2005-06, in the next three years UPA jacked the prices up by 15.4 percent, 33.3 percent and 8 percent. When you push costs of staples up so regularly, how can the result not be high inflation?

For pulses, the tinder-box year was 2008-09 - the year just before the polls in May 2009. Arhar, moong and urad went up by 29 percent, 48.2 percent and 48.2 percent, respectively.

The lighted match was met with a more combustible demand scenario, with the make-work NREGA scheme getting into high gear and putting crores of rupees in the hands of rural workers. The government also wrote off farm loans worth Rs 72,000 crore in 2008 - adding further to rural demand and a worsening fiscal deficit. This created the right conditions for both cereal and protein inflation. In short, 2008-09 set the stage for wages and prices to chase each other in an endless spiral.

The rest, as they say, is history.

Since then, inflation has never looked down, and UPA-2 made matters worse by persisting with the post-Lehman economic stimulus for three full years.

The point is simple: UPA won in 2009 due to a booming economy and bad economics, but its big win has planted the seeds of high inflation and political failure in 2014. Bad economics in 2008-09 is resulting in bad political karma in 2014.

[caption id=“attachment_71241” align=“alignleft” width=“380”]  UPA won in 2009 due to a booming economy and bad economics, but its big win has planted the seeds of high inflation and political failure in 2014. Bad economics in 2008-09 is resulting in bad political karma in 2014.[/caption]

The mistake that the NDA failed to commit - it did not raise farm prices by whopping amounts in the 2004 election year, unlike UPA in 2008-09 - is now showing up the UPA in the worst possible light.

The larger lesson for political parties is this: good economics may have a short-term downside, but a long-term payoff. Bad economics is just the reverse. Bad economics in 2007-09 is now coming home to roost in bad politics for the UPA.

UPA is paying for the sins of those years in 2014.