Development

Good days yet to come

Print edition : June 24, 2016

Assembly-line production at Honda Motorcycle & Scooter India at Vithalapur in Gujarat. The Index of Industrial Production of the Modi government is much lower than that of UPA I and UPA II and even the previous NDA government. Clearly much more needs to be done in boosting manufacturing. Photo: AMIT DAVE/REUTERS

Data show that our days are not statistically any more “acche” than they were under the previous governments.

THE second anniversary of Modi sarkar has just passed, and this is a good time to take stock of the performance of this government. Forty per cent of the five-year term of the present government is over, and a careful analysis will help in understanding the strengths and weaknesses as well as in planning course corrections.

The Modi government was elected on the promise of “vikas”, or development, and most Indians were keen that their lives should improve with Narendra Modi at the helm. Modi raised expectations during the 2014 election campaign with his slogan of “ acche din aanewale hain” (good days are coming), and when re-election time comes in 2019, people will very much like to know whether they have good times or not.

What is the progress of the government towards the goal of “acche din” in the two years that have elapsed? Keep in mind that Modi has asked the people to expect a very high performance from him. As he said in his campaign speeches, “You gave them 60 years; give me just 60 months.” While expecting a 12-fold performance improvement over that of the United Progressive Alliance (UPA) government is expecting too much, one can fairly say that a significantly better performance is expected. Has that been the case?

It is important that answers to such questions be made on the basis of solid, hard data rather than debatable opinions and anecdotes. Fortunately, there is a fair amount of hard data provided by the government itself through its publications such as the “Handbook of Statistics on the Indian Economy”. A press release of May 31 has also been valuable in updating the provisional figures mentioned in earlier publications with hard data from the January-March 2016 fiscal quarter.

It is also important that data on economic performance be studied at a medium term rather than the short term. In particular, it is well known that the big corruption scams of UPA II, post-2012, led to a policy paralysis and the slowdown of growth, which caused economic performance to plummet relative to what it could have been. Hence, showcasing the performance of the Modi government over just the past five years would be inadequate because it essentially means comparing with the worst years of India in recent memory (since 1992, for instance). A better evaluation of “acche din” would therefore be achieved by looking at the two years of the Modi government and comparing them with the previous three full terms of government—UPA II (2009-14), UPA I (2004-09) and the National Democratic Alliance (NDA) government of A.B. Vajpayee (1999-2004). This will not only tell us how the government is doing but also how high it needs to go to establish, as it clearly aims to do, a hitherto unprecedented period of progress in India.

To illustrate this comparison, several key parameters that indicate the health of the economy and economic growth in India, plus several measures of ease of doing business as well as the corruption index are examined, and the performance of the present administration is compared with that of its forebears. It would be desirable to compare several more indicators, but much of the data in the past two years are not easily available for comparison. For example, the Economic Survey of India reports total road kilometres only up to 2012-13. Similar lacunae exist in the “Handbook of Statistics on the Indian Economy”. This study represents an effort in good faith to obtain the best data available for comparison. ( Source: Handbook of Statistics on Indian Economy)

Economic indicators

The gross domestic product (GDP) is a measure of how much has been produced in a particular year in a country. It is the value of all produced goods and services minus the cost of production. Recently, a change was made to the GDP calculation method for India. Earlier, the GDP metric used to only account for the price of the goods sold and their cost of production. This was known as “GDP at factor cost”. However, more recently, the GDP has been changed to include both indirect taxes and subsidies. This is called “GDP at market prices”. It is the Indian government’s policy to henceforth report the GDP only at market prices, as is the custom internationally, and this practice is followed here.

I should point out that this change has caused considerable confusion. The Economic Survey of India of 2016, for instance, reports two values for the GDP of 2011-12. The GDP based on the old methodology is actually higher by about 4 per cent than the GDP based on the new methodology. This is said to be so because of the role of indirect taxes and subsidies, which are now part of the calculation of the GDP.

Table 1 shows the average GDP growth rates based on market prices in the NDA, UPA I, UPA II, and Modi regimes. These are obtained by averaging the growth rates for the years in which each regime was governing. So, for the NDA regime under Vajpayee, the growth rates for 1999-2000 through 2003-04 are averaged. For the Modi regime, the average growth rate of 2014-15 and 2015-16 is used. The latest values as reported in the press release of May 31 have been used.

This can be seen graphically in Figure 1. In this figure, Year 1, 2, 3, etc., refer to the years of that particular regime. Hence Year 1 for the NDA is 1999-2000, and Year 5 is 2003-04. A metric similar to GDP is the Gross National Product (GNP), which differs from GDP in that it also includes income from abroad. So, for instance, repatriated income is added to the GDP when calculating the GNP. The Gross National Income (GNI) also includes any product taxes (minus subsidies) in addition to the GNP. The GNI growth rates are shown in Table 2. This can also be seen graphically in Figure 2.

The Gross Fixed Capital Formation (GFCF) measures how much of a country’s income is invested in generating new fixed assets instead of just being saved. This is important for a developing country like India. Table 3 shows the average GFCF (as a percentage of the GDP) that was invested in the four regimes being compared. Figure 3 illustrates this graphically over the entire period from 2000 to 2016.

The Index of Industrial Production (IIP) measures how much production has been achieved in the country. It is based on three sectors: mining and quarrying, manufacturing, and electricity. The production in the three sectors are weighted and a composite value is obtained for the year, which is then compared with a base year to see how much growth in industrial production there has been relative to the base year.

Table 4 shows the average annual increase in the weighted IIP in each of the regimes. This is calculated by taking the difference in the IIP value of the last year of a regime and the IIP value of the last year of the previous regime, calculating the percentage increase, and dividing it by the number of years in the regime (for NDA, UPA I and UPA II, this would be five years; for the Modi government this is just one as data are only available for 2014-15). Figure 4 shows the change in IIP graphically for the period 2000-15.

Another important parameter that helps in the assessment of the economic health of the country is the total exports of the country. Table 5 shows the average annual percentage increase in exports under each regime. Exports have been declining for the past 17 months, so the negative figure corresponding to the Modi government should not be a surprise. The variation of total exports in the period 1999-2016 can be seen in Figure 5. Finally, to round off this brief discussion on economic metrics, we look at the exchange rate for the rupee versus the dollar (Figure 6). The rupee weakened substantially against the dollar during UPA II and is still quite weak.

In summary, this brief excursion into economic metrics shows that the performance of the Modi government is about average in comparison with the previous governments and in many cases below the high watermark set by the UPA governments. Its GDP performance is below that of UPA I, but marginally higher than that of UPA II, and the GNI performance is about the same as UPA II. It is interesting to note the fairly strong growth of UPA II in spite of the scandals and policy paralysis in the later years of the administration. The GFCF figures of the Modi government are in the ballpark of the UPA I and II numbers, but its IIP numbers are much lower than that of UPA I and UPA II, and even those of the previous NDA government. Clearly much more needs to be done in boosting manufacturing.

The worst performance among the metrics discussed is with respect to exports. Compared with that of the NDA, UPA I and UPA II governments, the Modi sarkar shows a decline in exports. While people can theorise on what may be the cause of the decline in exports (global slowdown, etc.), I wish to mention that the purpose of this analysis is not to determine why things are the way they are. Its purpose is simply to note the current state of things because the man on the street does not care why his days are not good. He simply wants to know if “acche din” are here yet or not. They may still happen at a future date. But the present analysis shows they are not yet here.

One comment that needs to be made on the basis of these charts is that “vikas”, or development, has always been there. The question is not whether the numbers for 2015-16 are better than those of 2013-14—we fully expect that they should be better—but how much better they are. If they are not substantially better, then our “din” are not much more “acche” than they were.

Ease of doing business indicators

A common refrain from the well-wishers of the government, when faced with evidence that economic growth is not that spectacular as was advertised, is that business has become easier on the ground. They say that the Modi sarkar has streamlined processes significantly and that everything is more hassle-free today than it used to be.

Has this happened? Again, we do not need to depend on anecdotal evidence to know this. There is hard evidence in the form of detailed surveys that have been carried out. The source is rather well-known by now—the World Bank Group’s Ease of Doing Business website. It was news last year when the website reported that India had moved up four places in the global ease-of-business rankings (not 12 places as was initially reported). ( Source: Ease of doing business rank)

As I have said before, we expect business to get easier with time. Business in India has been progressively getting easier since 1992, when there was a partial dismantling of the licence raj. Since then, successive administrations, notably UPA I and II, made significant strides in ensuring ease of business by putting more and more procedures online. (The data that follow will clearly illustrate this.)

So what we know (or should have known) is that business is always getting easier in India. The question is, has it got significantly easier under the Modi sarkar compared with previous administrations?

The Ease of Doing Business Index website reports data for the UPA I years onwards. Most of its data are for Mumbai city only; it has recently added Delhi as well, but there are not sufficient samples for Delhi to include it in the analysis presented here. In any case, the Delhi values, where available, are not significantly different from the Mumbai values. Let us look at some of the ease-of-doing-business metrics.

An important concept that should be clarified before we get started on this is the terminology used in the Ease of Doing Business study. It compares ease of accomplishing various procedures worldwide and assigns a value of 100 to the country where doing business is the easiest. Relative to this, values for each country are given in terms of a “Distance to Frontier”—which means how much of this 100 per cent a country has achieved. So, if India has an overall DTF value of 50, it means that India is halfway to the ideal. If it is 75, then it is that India is 75 per cent of the way to having a hassle-free government. The DTF concept is applied to each individual aspect of ease of doing business—paying taxes, time to start a business, cost of starting a business, and so on. The overall score is obtained by weighting the individual scores. Moreover, the study also reports things like time taken to get a construction permit, etc. With that background, one can look at the history of ease of doing business in India.

Figure 7 shows the overall DTF values for India. This is available only for the UPA II and Modi years. Table 6 shows the incremental annual improvement in DTF during the UPA II years and during the Modi sarkar.

The two values are reasonably close, which tells us that business in India has been getting easier at roughly the same rate in the past seven years. Table 7 shows the DTF score for a subset of the overall ease of doing business—that of starting a business. This, again, is the annual incremental change in DTF values.

Figure 8 shows the variation of the DTF score for starting a business over the years. It can be seen that starting a business has got easier under all three administrations—it is just the rate that is different. Starting a business has clearly got easier and is getting easier at a faster rate under the Modi sarkar. But how complex this concept of ease of doing business is can be seen when examining the different factors that make up this DTF value. The three components of this metric, for which individual scores are shown, are the time needed to start a business, the cost of starting a business (procedures, etc.), and the minimum paid-in capital needed to start a business (i.e., how much one can get by way of loans and how much one has to invest his own money into the business).

Figure 9 shows how the time needed to start a business has changed in Mumbai over the years. The change has clearly been most dramatic during the UPA I years and has considerably flattened out during the UPA II and Modi years.

Table 8 shows the average annual percentage decrease in the number of days in the UPA I, UPA II and Modi administrations. Although the Modi sarkar got more points on the overall DTF for starting a business, it is the UPA I administration under which the most dramatic change in the number of days needed to start a business happened. Some might (correctly) argue that these things may not be completely dependent on the Central government—that the State governments also have a big role to play. That is an important point and should be remembered at all times, not only when a metric shows the UPA in a better light.

However, the cost of starting a business shows a much different picture, as can be seen in Figure 10. This shows clearly that the cost of starting a business in Mumbai actually rose under UPA I, then went down under UPA II, and then went down very significantly under the Modi sarkar.

Table 9 shows the annual percentage improvement in the cost of starting a business in different regimes. Table 10 illustrates the third component—that of the minimum paid-in capital needed to start a business in Mumbai. Figure 11 shows how this metric has changed over the years.

Since the reader will have obtained a general idea of how the ease of business indicators work, I will keep the remainder of this discussion relatively brief, focussing only on the individual DTF indicators and not on their components. Table 11 shows the improvement in DTF for dealing with construction permits. There has clearly been a big improvement in the Modi years.

Table 12 shows the improvement in DTF for getting electricity for businesses. Again, there has been a significant improvement in the Modi years. Data for UPA I are not available in this case. Table 13 shows the improvement in DTF for registering property. Here, the UPA I government does the best, and things actually have got worse under the Modi sarkar.

Getting credit is another metric in which things have got worse under Modi, as can be seen in Table 14. There are many more DTF categories, and their subcomponents, such as “Protecting Minority Investors”, “Paying Taxes”, “Trading Across Borders”, “Enforcing Contracts” and “Resolving Insolvency”. I could go into the details of which administration did well in each category and its subcomponents, but I think I have made my point here, which I will restate below.

Business has been getting gradually easier in India since 1992 and since the widespread use of computers, irrespective of which administration has been in power. Some administrations have done well in some aspects of doing business, whereas others have done better in other aspects.

The improvement rate in the overall DTF for India also indicates that business has been improving at almost the same steady rate over the years since these metrics have been calculated. As such, the Modi sarkar has not done anything extraordinary in improving the ease of doing business any more than how business had already been getting easier to do.

One final metric I shall present in this section is the corruption score, since corruption greatly affects the ease of doing business. This is reported by a different organisation, Transparency International. The news of the corruption rank, again, made a splash last year when it was revealed that India had “moved up” the rankings of the less corrupt. What people did not realise was that only the rank had improved; the level of corruption, measured by the “corruption score” of Transparency International, had not improved. What this means is that India’s rank improved because other countries became more corrupt, not because India became less corrupt.

Figure 12 shows the change in the corruption score over the years. It can clearly be seen that there was a significant improvement in reducing corruption in the UPA years (a higher number is better here). The corruption score when the UPA II demitted office was 38, and the corruption score in Modi’s first year, in 2015, was also 38. Nothing changed. Table 15 shows the annual improvement in the corruption score for different regimes. It can be seen that corruption slightly increased under the Vajpayee regime, decreased significantly under UPA I, decreased less impressively under UPA II, and has not changed at all under the Modi sarkar in the one year for which we have data.

Conclusion

A careful, data-driven analysis of the three administrations prior to the Modi sarkar and the Modi sarkar itself reveals that overall, under the Modi administration, India is growing at pretty much the same rate as under the previous administrations, give or take a little. Some metrics look stunningly good in the UPA administrations, but some also look bad. The same is true of Modi’s administration. The ease of business also reveals the same pattern —some hits, some misses.

What this tells us is that with a large country like India and a large administrative service, a lot of credit probably goes to the babus who ensure continuance of good policy. While individual governments can and do leave their stamps in the emphasis they give to different aspects of governance, it is fair to say that overall the country tends to move in the right direction and at more or less the same pace. This is a good thing for stability.

However, from a political perspective, what this illustrates is that while grandiose promises may help someone get elected, delivering on those grand promises (such as much faster development) is likely to be rather difficult. One thing that this analysis clearly shows is that our days are not statistically any more “acche” than they were earlier. If people hold Modi to account for his promises, on the basis of objective data, he may face difficulty convincing them to re-elect him in 2019, assuming, of course, that people make their choices on rational bases and economics. If people vote for cultural reasons like Hindutva, all bets are off and this entire analysis is quite irrelevant.

Seshadri Kumar is an R&D Chemical Engineer with a BTech from IIT Bombay and an MS and a PhD from the University of Utah, U.S. He writes regularly on political, social, economic, and cultural affairs at http://www.leftbrainwave.com

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