The Indian Economy :
A spin-off from the reigns of the BJP and Congress
BY YASHODHARA KATAKI / NOVEMBER 19, 2022
Compared to Manmohan Singh, Narendra Modi saw faster GDP growth. Does this pass the fundamental smell test though?
he Indian Economy has undergone major changes under two of the most widely known political regimes, Indian National Congress and Bharatiya Janata Party. In 76 years of independence there have been changes in the economy due to different socio-political reasons, but the major paradigm shifts can be characterised under the aforementioned political parties.
The two main tenets of the Congress government's economic policy are 'wealth' and 'people's welfare'. The party, known for its liberalisation and privatisation policies, pledged in its most recent manifesto to create a favourable policy environment that would acknowledge the contributions of both the public and private sectors. The policies are to encourage innovation, support entrepreneurship, make use of cutting-edge technology, and reward risk-taking, as well as challenge to make up for the loss brought about by demonetisation and GST. In addition, the Congress Party also goes on to claim that during their rule from 2004 to 2014, 14 crore people were extricated from poverty. The Bharatiya Janata Party prioritises- the more native, protectionist system with a sizable welfare component. The party balances its emphasis on a protectionist system with an encouragement of the free market model that embraces globalisation and is capitalist-oriented. The government has created a plan for reaching a USD 5 trillion economy by 2025 and has pledged to increase the manufacturing sector's contribution to GDP, create a dispute resolution system for MSMEs, and increase exports from India by two-fold.
Are we heading towards or are close to the ideal economy as promised though? The answer is a paradox in itself.
A country's economic development is predominantly believed to be a result of a growth in GDP. However, there are other parameters that are vital for the growth of an economy and welfare of its people. The parameters chosen for this analysis are Unemployment, Debt Sustainability, Employment and Inflation.Each of these factors determines not only the nation's financial stability but also how changes will affect its holistic development. . While unemployment rates tell us about the gaps in the job sector that need to be filled, employment rates signify the way in which the efficiency of the working population is put to economic work. Debt sustainability elucidates the reliability of the country's ability to repay a loan, and inflation gives us an overview of prevailing currency rates and prices of goods and services. Thus, it is through these parameters, a comparative analysis of the Indian economy under the Indian National Congress & Bharatiya Janata Party regimes is presented.
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Unemployment
India's unemployment rate was 6.8% as of September 2022. The rate of unemployment reached an all-time high of 23.50% in April 2020 and a record low of 6.50% in November 2020, averaging 8.27 percent from 2018 to 2022. The fluctuations in the unemployment rate during this particular time period, and its abnormal rise in 2020, could be traced to the coronavirus pandemic. During the lockdown, people's freedom of movement was severely restricted and almost all essential business and service-related activities were effectively stopped.
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The presence of a striking unemployment rate in India throughout could also be traced to the fact that many people are still employed in the informal sector and such data isn't widely recorded.
Prior to the BJP taking office, the unemployment rate was 4.7% in 2012–13 and 4.9 percent in 2013–14 under the UPA alliance. Although unemployment rates are not consistent, such large increases and subsequent declines have never been observed. For instance, during the 20 years from 1993 to 2010, the unemployment rate changed from 6.0% to 7.3% to 8.2% to 6.6%. The presence of a striking unemployment rate in India throughout could also be traced to the fact that many people are still employed in the informal sector and such data isn't widely recorded. Apart from this, India being a collectivistic society which prioritises family and kinship, also sees voluntary unemployment, where people choose not to work because of the presence of generational wealth and property. This is prevalent mostly in rural areas and supplements the rate of unemployment in the country.
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The formal sector development is good despite the fact that no party has ever presented a convincing solution. Employees in the formal sector are enrolling more and more in the Employees Provident Fund Organization (EPFO). Based on EPFO data, the Central Statistical Organisation (CSO) asserts that a staggering 13.7 million formal sector jobs were created in 2018–19. What this points to is that none of the two parties have really been able to curb unemployment despite the fluctuations seen in the unemployment percentages. The BJP has, however, been successful in boosting the enrollment in the formal sector more in comparison to the Congress.
Debt sustainability
The trends seen under the two governments show notable variations in terms of the general government debt to GDP ratio, a parameter that assesses debt sustainability. The debt to GDP ratio of India, between the years 1990 and 2012 remained mostly around a range of 50% to 60%. The year Vajpayee government concluded its tenure, the debt to GDP ratio was seen to be an all time high, of around 63%. This ratio dropped to 50% around 2013, when the Congress was in control. During the first term of the Congress government, the overall debt to GDP ratio was generally held between 73% and 74%.
Illustration by Oliver Munday via Pinterest
Although primarily debt is seen as a sign of worry, higher debt in some way implies a governments effort to spend on capital formation of the country
During the second term of the Congress, it significantly declined, but after demonetization, it gradually began to rise once more starting in 2016. The blow of demonetisation harmed the cycle of economic growth, and it failed to get back to where it was before 2016. According to a report by the Business Standard, the centre has now reduced its debt to 56% for FY22, down from the budget's estimate of 60%. Although primarily debt is seen as a sign of worry, higher debt in some way implies a government's effort to spend on capital formation of the country. Despite the fluctuation, the private sector's gross fixed capital formation between 2004 and 2012 averaged more than 24% of the GDP. From 2016 onwards, it flattened, barely increasing to 22% in 2018. Gross fixed capital formation refers to the expenditure incurred on purchase of fixed assets, like, plants or machinery, construction of new houses or public investment like roads, bridges etc. Higher GFCF implies higher infrastructural development in a domestic territory. Thus, in order to boost GFCF, the government might have to incur debts. Higher debt sustainability is a boon for the country as better the records of clearing debts, better are the country's chances of getting debts for future projects. It is thus important to keep the debt at a percentage of the GDP which can be repaid in the future easily.
Illustration by Unknown via Pinterest
Employment
According to World Bank data, India's employment-to-population ratio before the pandemic was 43%, which was lower than the global norm of 55% in 2020. The employment rate in Bangladesh is 53%, and in China, it is around 63%. The Centre for Monitoring Indian Economy (CMIE) has estimated that the employment-population ratio is less than 38%. This highlights a persistent shortage of high-quality jobs for the working-age population, which continues to enter the labour field at a rapid rate each year
even during the pandemic. This low rate can also be attributed to inefficient implementation of rural employment guarantee schemes like MGNREGA. Inadequate budgets for the employment guarantee schemes, have made it difficult for states to provide adequate work to those in rural areas with fewer or no alternative opportunities.
A low employment-population is startling for all, and the root of it reflects a continuous lack of high-quality employment opportunities for the yearly influx of people of working age into the labour force, whose rate has remained strong even during the pandemic.
The states have found it challenging to give sufficient work to those in rural areas with few or no alternative options due to inadequate resources for the employment guarantee initiatives under the Modi government. In the case of Singh, to provide employees with a social safety net based on their jobs, the administration spent a lot of money on the rural guarantee scheme throughout both of his years in office. Such a low employment-population is startling for all, and the root of it reflects a continuous lack of high-quality employment opportunities for the yearly influx of people of working age into the labour force, whose rate has remained strong even during the pandemic. Apart from this, India is still a primarily agrarian economy, the result of which is seasonal unemployment which may also result in the numbers of employment showing a low value.
Inflation
The first few years of the Modi administration displayed a better track record in terms of inflation than Singh's second term. During Singh's tenure, the inflation rate was in double digits for 22 months straight, and there were rampant complaints about the UPA not being able to handle inflation well. The rise in consumer prices back then was primarily caused by external sources, or an inflation brought on by an increase in the price of oil. The increase could also be due to the Global Financial Crisis of 2008, which adversely affected India's exports. The overall public perception of the UPA, however, was that it wasn't successful in controlling inflation.
Illustration by Unknown via Pinterest
The increasing inflation in this current era can also be attributed to the dynamic changes in the economy of the United States.
The majority of the first and second terms of the Modi government saw relatively low oil prices. Since the Russian invasion of Ukraine has created uncertainty, the rise in oil prices has had a noticeable impact on both the wholesale price index and the consumer pricing index. The increasing inflation in this current era can also be attributed to the dynamic changes in the economy of the United States. The US is an economic superpower, and a shift in its business cycle, has deep rooted impacts all over the world. The demand of the US dollar is currently rising, as a result of which the value of the Indian Rupee is depreciating. Imports are discouraged by such depreciation. The price of imported items rise, this in turn increases inflation, as commodities get more and more expensive. Apart from this, the current increase in inflation can also be rooted in the government cutting taxes on the import of edible oils, and an excise duty cut on petrol and diesel.
In terms of dealing with inflation during a crisis, the BJP handled inflation better during the Covid-19 pandemic, than the Congress did during the Global Financial Crisis, which resulted in India being in one of the ‘Fragile Five’. Albeit, a financial crisis and a pandemic are two different catastrophic events, the general idea of how well a government is equipped to handle the economy in light of such adverse events can be understood if we analyse the behaviour of a government under any sort of crisis.
Conclusion
India's macroeconomic growth performance was at its optimum level between 2002-2011.This encompasses the first seven years of the Congress-led administration as well as the final two years of the Atal Bihari Vajpayee administration. Beginning in 2012, the management of economic policy had a time of systematic disruptions coupled with rising inflation and a time of policy stagnation under the second term of the Congress, which made it challenging to implement gradualist reforms. In the 8 years of BJP under the Modi government, controlling inflation has been at the heart of their economic strategy and they have somewhat succeeded in the same in comparison to the UPA led government. Apart from this, the BJP has successfully introduced schemes which have enhanced enrollment in formal sector employment. However, like a bullet to the tyres of a sprinting vehicle, demonetisation wrecked the foundations of the economy, leading to a crash in the economy which has been irreversible till date.
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Thus, the Modi administration must address three major medium-to long-term difficulties in addition to assuring a path of higher growth and uniting the community: a high degree of unemployment, fragmented labour markets, and weak GDP growth. These are all connected to India’s crisis of joblessness, poor work contracts, and high unemployment amongst the educated youth, all indicators where the country performs the worst in comparison to other rising powers.
Keywords
Congress, BJP, comparative analysis, Indian economy, people's welfare, economic policy, privatisation, demonetisation, GST, unemployment, debt sustainability, inflation, GDP
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References
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Sources:
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Mohan, D. (2022, May 31). Manmohan Singh vs Narendra Modi: Who handled the Indian economy better?. Scroll.in. https://amp.scroll.in/article/1025029/manmohan-singh-vs-narendra-modi-who-handled-the-indian-economy-better
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Centre for Monitoring Indian Economy (CMIE).(November 1, 2022). Unemployment Rate in India. https://unemploymentinindia.cmie.com/
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India debt to GDP ratio 1990-2022. MacroTrends. https://www.macrotrends.net/countries/IND/india/debt-to-gdp-ratio
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20 million indicators for 196 countries. Trading Economics. https://tradingeconomics.com/india/government-debt-to-gd
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Unemployment rate up at 4.9% in 2013-14. (November 1, 2022). The Economic Times. https://economictimes.indiatimes.com/news/economy/indicators/unemployment-rate-up-at-4-9-in-2013-14-labour-bureau/articleshow/45796927.cms?from=mdr
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We will deliver. (November 1, 2022) Congress Manifesto 2019. https://manifesto.inc.in/en/
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