Two years and counting is what PM Modi and the BJP are saying. After their unexpected victory in May 2014, and the change in course that they have attempted for the Indian economy since then, two years is enough of a time to begin to pass judgement. How good, or bad, economically speaking, have these two years been?
But how does one evaluate performance? One criteria could be that performance is measured as the difference between reality (what actually happened) versus expectations. The difference, let us call it Delta, is positive, then performance was better than expectations; if lower, then worse. Fair enough—but whose expectations? If one peruses the outpouring of literature on the second anniversary, it is clear that expectations are all over the place.
Some people mention that acche din were promised, and if one looks out of the window, and two successive droughts, it is “clear” that the good new days are not here. But is this the correct method of evaluation? It is not. It is like saying that Djokovic wanted to win the Grand Slam, lost the French Open, and therefore clearly is not the “best”.
Yet another method would be to evaluate what we, the “judges”, expected Modi to do policy-wise in the last two years. And besides looking at just success, we should also look at failures. For example, the BJP has been unable to pass legislation regarding the goods and services tax (GST). But can we really, under any stretch of the imagination, blame BJP for non-passage of GST. It is a failure, but whose failure? Could it not be the failure of the Congress for deviously obstructing, and the success of the BJP for unsuccessfully trying? Blaming the BJP for non-passage of the GST reminds me of that evocative (Indian nationalist!) phrase—ulta chor kotwal ko dante.
But there is an objective method of evaluation. It is a comparison that applies to economies, sports players, etc. How has the performance been relative to one’s peers? This is an objective method, a simple method, and one that can stand the test of time and space.The reference group (peer) for India is defined to be all developing economies with a population greater than 30 million in 2011, excluding both India and China and hereafter EM (for Emerging markets). But what are the indicators to be used? An important warning here to all those who make such attempts—comparison should not be about levels of performance (e.g. infant mortality rate) but should be about change, about Delta. Regarding Delta, several economic indicators can be used: export growth, change in the share of fiscal deficit in GDP, change in investment rates, change in savings rates, etc. Each indicator has its advocate. In the mid-1960s, distinguished American economist Arthur Okun came out with a misery index for the US, and this index was a simple average of two negative indicators, the inflation rate and the unemployment rate. Higher the index, worse the economy.
Unfortunately, data on employment (and unemployment) are available only on a five year basis in India (i.e. on the occasion of the large sample NSS survey of employment and unemployment). But a performance index can be formed for India (and other countries where frequent employment data are not available) as follows. The three step procedure is as follows:
Step 1: Compute the difference (dG) in the GDP growth rate of the country and the population weighted growth rate of its peers.
Step 2: Compute the difference (dC) in the median CPI inflation rate of the peer group and the CPI rate of the country. A lower than peer inflation rate is positive, a higher than peer inflation rate is a negative.
Performance is defined by dG for growth and dC for inflation. Both incorporate global effects, and both ignore domestic shocks. US interest rates, oil process, commodity prices, slump in world growth, etc. all affect the computation of dG and dC.
There is one final computation, and assumption, involved before we can reach a conclusion as to how good the two Modi years have been. How does one aggregate growth and inflation performance? This is the first (and only) subjectivity that we bring to our analysis. Any weighting of the two indicators will be subject to criticism and accusations of bias. Since time immemorial, social scientists have taken refuge with the “average” and we do the same. Maybe the average was invented to settle debates of performance!
How good have the first two Modi years been? The first major result emerging from the table is that the Modi years are the third-best in the last 20 years (since 1996, data not shown for FY97 and FY98). The best two years were the BJP Vajpayee-Sinha years of FY99 and FY00. Macro-economic performance in those two years averaged 152 basis points, i.e., on average, India was 1.5 percentage points (ppt) better than the EM peers. Note that GDP growth in India was 2.7 ppt (or 270 basis points) higher than EMs. Somewhat surprisingly, CPI inflation was also lower than EMs—3.6% versus 4%.
The second best two-year period were the first two years of the Sonia Gandhi-Manmohan Singh government of FY05 and FY06 (hereafter UPA-I). Average performance index, 130 basis points with GDP growth being almost 300 basis points above average. Marginally behind, the third best two-year period are the Modi years with an average index of 125, only 5 basis points behind the UPA-I average of 130.
It is instructive to look at two other factors. The nature of the economy inherited by the two regimes (UPA-I and Modi1) and rainfall. On both counts, UPA-I was decidedly luckier. The economy was booming, and inflation low, when UPA came to power in May 2004. The economy was in shambles, and inflation very high when Modi assumed responsibility. Further, average rainfall during UPA-I was 5% below long run average (the normal range is ± 6% from the average); during Modi1, it was 13% below the long run average. All things considered, it is only fair to conclude that economic performance during the first two years of Modi were the second-best in the last 20 years. Now, think about this—if Monsoon 2016 is as expected, then the first three years of Modi will be the best three years since 1996, and possibly the best three consecutive years in Indian post-Independence history. Which means the best three years ever!
The author is contributing editor, The Financial Express, and senior
India analyst, The Observatory Group, a New York-based macro policy advisory group.
Twitter: @surjitbhalla
