Heading for elections in winter?

It is tempting to compare the current economic scenario with the situation that prevailed in 1991 — a landmark year that witnessed the confluence of three highly debilitating developments that gave rise to an unprecedented macroeconomic crisis in India. Fiscal indiscipline, a precarious balance of payments situation and political instability brought the Indian economy to a grinding halt. The crisis eventually forced the government to introduce a series of reform measures that in the following few years brought the economy back on the path of fiscal consolidation and stability in the balance of payments.

The fear today, not entirely without reason, is that the current economic problems could drive India to the edge of a 1991-like economic crisis. A comparison of the key macroeconomic numbers then and now would, therefore, be useful to judge if such fears are exaggerated.

The economic situation in 1991 was quite grim. The growth in India’s gross domestic product, or GDP, fell to 1.3 per cent in 1991-92, down from 5.6 per cent a year ago. Industrial growth plummeted to 0.6 per cent, with the capital goods and consumer durables sectors showing a decline in production by 8.5 per cent and 10.9 per cent, respectively. Agriculture, too, recorded a contraction of over two per cent in 1991-92. Inflation, based on the rise in both the wholesale price index (WPI) and the consumer price index (CPI), was in double digits.

This in many ways was the outcome of fiscal profligacy and imprudent management of the balance of payments in the previous years. For instance, the fiscal deficit in 1990-91 was 7.85 per cent of GDP and it had stayed above the seven per cent mark in each of the six previous years. On the balance of payments front also, the current account deficit began widening in the mid-1980s and reached the uncomfortably high level of 3.1 per cent of GDP in 1990-91. Not surprisingly, import cover (the available foreign exchange reserves adequate to meet the country’s import needs) began falling in this period and was down to 1.9 months in 1989-90.

Consider the situation that prevails now. Economic growth for 2012-13 is down to five per cent and the CPI-based inflation is close to double digits, although the WPI-based inflation is down to 4.8 per cent. The government’s fiscal deficit since the Lehman crisis in 2008 has also remained high, which has even required a postponement of the target dates for achieving the desired level of fiscal consolidation. While in 2008-09 and 2009-10 the deficit was above six per cent of GDP, the following three years saw it hovering around the five per cent mark. The balance of payments situation is more alarming. The current account deficit in each of the last two years was well above four per cent of GDP. And import cover now is down to less than seven months, half of what it used to be in 2007-08.

What this comparison of the current state of the economy with the situation in 1991 does is to highlight the present government’s core area of concern: the balance of payments. The recent fall in the value of the rupee against the dollar is a sign of the widening current account deficit. The current fiscal deficit level may appear to be under control, but if the rupee continues to depreciate and foreign investors pull out of India in large numbers, the balance of payments problem will soon start undermining the government’s fiscal consolidation plan. The government’s bill on subsidies for the oil and fertiliser sectors would be the first casualty in such a situation. Add to that the government’s inflation concerns and its consequent dilemma over continuing to pass on the additional impact of the rising international crude oil prices and rupee fall to domestic petroleum product prices. And the situation may soon look like the one that prevailed                   in 1991.

There is a third element that may further complicate the situation. Major political parties have already begun preparing for the general elections, which are scheduled to be held in May 2014. The United Progressive Alliance government, too, is busy taking decisions that would help it win votes. Opposition political parties are not too happy about this and are determined to take the government to task whenever Parliament has its next session. In such a situation, it is difficult to see any meaningful legislative work being completed in the three sessions of Parliament that could possibly be held before the next elections. Remember that there will also be no full Budget next February. Under the rules, the government can only present a vote-on-account Budget for next year before going in for elections. For investors, this may be too long a wait; they might start looking for greener pastures to park their capital.

Are we, then, entering an uncertain phase where the government’s ability to manage a crisis will be severely limited by the politics that would be played out in the run-up to the elections? Is it necessary to prolong the pain of such uncertainty at such a huge cost to the economy and its health? Given the country’s current political mood and an impending economic crisis, a good idea would be to advance the general elections to November or December. Winter, rather than summer, is in any case a better season for holding elections in India, given the average age of our politicians!