The Indian government’s recent White Paper on the Indian economy has sparked a national conversation. This document outlines the current administration’s vision for the nation’s economic future, but it also paints a stark picture of the past. The White Paper heavily criticizes the previous UPA government’s handling of the economy, portraying a pre-2014 India as one plagued by “bleeding” finances, high inflation, and crippling scams. In contrast, the paper positions the current BJP government as the economic savior, highlighting its role in cleaning the system and bringing in a period of prosperity.
This blog post aims to critically analyze the White Paper on the Indian economy.
UPA’s Economic Woes: A Deep Dive into High Inflation, Fiscal Mismanagement, and More
1.) Failure of congress to curb inflation
The average inflation from 2004-14 was 8.4%. Over the five-year period from FY10 to FY14, the average annual inflation rate even reached double digits.
This alarmingly high inflation resulted in a significant erosion of purchasing power because even a 100% increase in wages couldn’t keep pace with the rising cost of goods and services which lead to a decline in the savings and overall financial well-being of the Indian middle class. The White Paper argues that the UPA government failed to effectively curb inflation which significantly impacted the economic stability of the nation and individual’s financial security
2.) Mismanagement of Banks
Let’s first understand what is Non-Performing Asset (NPA)?
Non-Performing Asset is a loan or advance issued by banks or financial institutions for which the interest payment remained overdue for the period of 90 days. As per RBI, an asset becomes non-performing when it fails to generate revenue for the bank. NPAs are further classified into Substandard, Doubtful and Loss assets.
The White Paper highlights another concerning aspect of the UPA era – the rise in Gross Non-Performing Assets (GNPA), signifying loans unlikely to be recovered by banks. According to the document, GNPA stood at a relatively low 7.8% when the previous NDA government under Vajpayee left office. However, by September 2014, under the UPA, this figure had climbed to a concerning 12.3%. This sharp increase, points towards “reckless lending” practices during the UPA regime. It suggests that banks approved a significant amount of bad loans risking the financial health of the banking system and impacting the overall economy.
Further it alleges that nearly half (44%) of bad loans were not included in the official GNPA calculation, potentially due to a lack of stringent regulations under the UPA. If these “hidden” loans were included then the true GNPA would have shot up to a staggering 19% by September 2014.
It implies that the UPA government failed to properly control these lending practices, leading to a “bleeding” of resources from the banking sector and impacting the nation’s economic stability.
3.) Elevated external vulnerability because of over-reliance on external commercial borrowings (ECB)
The White Paper talks about something called “external commercial borrowings” (ECBs). These are basically loans taken from foreign banks and institutions. It claims that during the UPA era, ECBs grew very quickly, at an average rate of 21.1% per year. In contrast, since 2014, ECBs have only grown at an average rate of 4.5% per year.
The UPA government had borrowed so much from outside that in 2019 when the value of the US dollar went up suddenly, India’s economy was in a weak position. The rupee lost a lot of value compared to the dollar (almost 36%). This made things expensive in India and hurt the overall economy.
The UPA government didn’t do enough to make India’s economy less reliant on outside borrowing. This left the country in a vulnerable position in 2013 when the US dollar rose sharply.
4.) Mismanagement of forex reserves by the UPA Government
India’s foreign exchange reserves decreased from 17 months in March 2004 to just 6 months in September 2013. This is where the Congress government came up with something called the FCNR(B) account in September 2013 to increase the Forex of India.
FCNR(B) stands for Foreign Currency Non-Resident (B) account. These are fixed deposit in India for NRIs (Non-Resident Indians) or People of Indian Origin (PIO) to save in foreign currency and earn interest tax-free.
By offering higher interest the RBI attracted Forex from all across the world. The amount raised by the RBI from NRIs through FCNR(B) (USD 26.6 billion) was 12 times the 1991 IMF bailout (USD 2.2 billion). While it appeared to be a strategic win, there was a catch. To attract these deposits, the RBI offered high interest rates. This burden of repaying both the principal amount and the interest eventually fell on the BJP government in 2016, instead of the Congress government that had initially secured the funds.
5.) The UPA Government’s response to the 2008 Global Financial Crisis
During the 2008 global financial crisis, the UPA government implemented a fiscal stimulus plan to boost the Indian economy. This plan involved using various tools, like tax cuts, infrastructure projects, and lower interest rates. Tax cuts put more money in people’s pockets, allowing them to spend more and stimulate businesses. Infrastructure projects, like building roads and bridges, create jobs and improve the overall business environment. Lowering interest rates makes it cheaper for businesses to borrow money, allowing them to invest and grow. By using these tools, the UPA government aimed to boost the economy and counter the negative effects of the global crisis.
During the GFC, India’s growth slowed to 3.1 per cent in FY09 but recovered swiftly to 7.9 per cent in FY10 and this recovery was quite fast as compared to other countries. Some critics argue that the government’s decision to keep spending more money for a long time after the crisis wasn’t actually necessary. They point to the significant increase in India’s gross fiscal deficit, which widened considerably as the government borrowed heavily to finance its fiscal stimulus programs implemented from 2009 to 2014. These critics claim that the prolonged spending surge may not have been essential for the rapid recovery and might have instead burdened the economy with a larger debt in the long run. India’s Gross Fiscal Deficit (GFD) to Gross Domestic Product (GDP) ratio was at least 4.5% for six years running, from FY09 to FY14. In three of the six years, it was from 4.5% to 5% of GDP, in one year it was between 5% and 6%, and in two years it was greater than 6%.
BY: Macroeconomic Effects of Fiscal Deficit on Indian Economy: An Empirical Analysis
But if we examine BJP’s record prior to the pandemic, we found that the gross fiscal deficit was 3.44%; however, because of COVID, this figure shot up to 9.18% and then decreased to 6.4%. This illustrates the financial mishandling that the white paper highlights during the Congress’s government.
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6.) The UPA Government not only took out an extensive amount of market loans, but it also made inefficient use of the funds it collected.
The capital expenditure when Vajpayee left was 31% whereas in 2014 it was just 16% and today it is again back to 28%. This decline indicates that a smaller portion of the government’s budget was allocated to capital projects.
The white paper also states that 16,000 km of highways were laid during the UPA’s ten-year power, while 24,000 km of highways were added during the NDA regime from 1997 to 2002. Therefore, what the NDA accomplished in 5 years is something that the UPA did not accomplish during their ten long years from 2004 to 2014. This indicates
that even though the UPA government borrowed money perhaps it did not use it for important Investment on infrastructure like highways. So, the question is, “Where did the money go?”
The UPA government spent too much on revenue expenditure. A prime example is the implementation of agricultural debt waiver and debt relief schemes in 2008. A total of 52,000 crores (0.9% of GDP), were spent on the Agricultural Debt Waiver and Debt Relief scheme (ADWD) in 2008. And this scheme did not lead to any expected benefits.
A recent study found no significant increase in investment, consumption, or wages following the program. And the surprising part is, after the program, banks stopped lending money to areas where lots of loans weren’t repaid before. They also found that even farmers who could afford to repay their loans started not paying them back, hoping for another forgiveness program in the future.
7.) Poor policy planning and execution
The UPA government’s social programs often left money unspent due to poor planning. This meant less help for people who needed it. Across the 14 major social and rural sector ministries, during the UPA Government’s tenure (2004–14), a total of 94,060 crore in budgeted expenditures were not spent, representing 6.4% of the total budget estimate for that time (Chart 7). On the other hand, under the NDA administration (2014–2024), 37,064 crores of the allocated funds—less than 1% of the total budget estimate—were not spent.
8.) The white paper also criticizes the UPA for various scams that occurred during its tenure.
Such as coal and telecom spectrum, the threat of retroactive taxation, unsustainable demand stimulation, misguided subsidies, and careless lending by the financial sector with overt favoritism etc.
NDA’s Measures to Revive the Economy
1.) The NDA government implemented rational fiscal and monetary policies in order to deliberately address the core cause of the persistent challenge of high inflation that it acquired from the UPA government in 2014. First, being economical was the foundation for the decisions that were made about government spending. The government mandated the Reserve Bank of India (RBI) to aim for inflation in the range of 2 to 6 percent in 2016. From an average of 8.2 percent between FY04 and FY14, the average annual inflation between FY14 and FY23 dropped to 5.0 percent. Note that this tenure between 2014 to 2023 includes both covid 19 and the Russia Ukraine war.
2.) FDI reforms taken by the NDA government unlocked a flood of technology, finance, and industrial competitiveness. By opening most sectors for foreign investment, Indian industry gained a significant edge. As against the gross FDI of USD 305.3 billion mobilized between FY05 and FY14, NDA government raised almost double that amount USD 596.5 billion between FY15 and FY23.
Forex reserves have nearly doubled, from USD 303 billion (covering 7.8 months of imports) in March 2014 to USD 617 billion (covering 10.6 months of imports) in January 2024. This signifies a much safer external sector for India.
3.) Capital expenditure has increased over five times from FY 2014 to FY 2024 (estimated), despite no inflationary pressures. During FY10 to FY14, the capital expenditure portion of total expenditure was on average 12.5%. This share rose to around 14.5% during FY15 to FY24 and, most notably, to 15.8% on average during the past five years.
While the UPA was wasting money in loan waivers the BJP reduced the compound annual growth rate of the revenue expenditure from 14.2% to 9.9%. Alternatively, the Capital expenditure has grown at a much higher compounded average growth under the NDA government.
4.) The NDA government recognized the burden of bad loans (Gross Non-Performing Assets or GNPA) on Indian banks. To tackle this, they introduced the Insolvency and Bankruptcy Code (IBC). This code streamlined the process for resolving stressed assets, allowing banks to recover debts more efficiently. The GNPA has dropped from 12.3% in 2014 to just 3.2% in 2023.
The measures outlined in this white paper paint a clear picture: the Indian economy is on an upward trajectory. Through strategic reforms, increased foreign investment, and a focus on infrastructure development, the NDA government has fostered stability and growth. Despite challenges, India’s strong external position and commitment to human capital development indicate its potential for continued success. To ensure economic prosperity in the long run, fostering innovation, promoting equitable distribution, and embracing sustainable practices are essential.
REFERENCE : WHITE PAPER ON THE INDIAN ECONOMY