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Modi govt yet to match UPA's economic record

By Krishna Kant
December 03, 2016 09:21 IST
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Experts say it will now be tough for the Modi government to catch up with the UPA's economic record owing to the shock induced by the currency demonetisation.
Krishna Kant/Business Standard reports.

Dr Manmohan Singh, then prime minister of India.The Narendra Modi government needs to grow the economy at twice the speed in its second term to catch up with the economic performance of the previous United Progressive Alliance-II government and even faster if it wishes to trounce UPA-I's record.

For example, the manufacturing sector needs to grow at a compounded annual growth rate (CAGR) of 4.2% in the remaining three years of the Modi government's tenure -- nearly twice the 2.2% growth recorded in the first two years.

The government needs even more catch-up in the farm sector.

Agriculture production needs to grow at an annualised rate of 5.6%.

Agriculture production, including food grains and cash crops, has declined at an annualised rate of 2.1% during FY14-16.

Exports need to jump 70% in the next three years to match the growth recorded during UPA-II and make up for a decline in merchandise exports and a flat growth in services exports during Modi's first two years.

The combined exports of goods and services declined at an annualised rate of 4.7% during FY14-16 against 9.1% CAGR growth during UPA-II.

Gross Domestic Product is the only macro-economic variable where the Modi government has matched the performance of the previous government.

GDP at constant prices has grown at a CAGR of 7.1% during Modi's first two years in line with 7.2% GDP growth during the five years of UPA-II.

The Modi government, however, has to work harder to translate the headline growth into income growth for individuals.

Unlike the previous government, faster GDP growth has not translated into income buoyancy for individuals.

The personal disposable income had grown at a CAGR of 9% during Modi's first two years, down from 13.6% growth during the whole five years of UPA-II.

It needs to grow at an annualised rate of 16.8% over the next three years to allow the Modi government to match the income buoyancy provided by the UPA-II regime.

Personal disposable income (PDI) is the share of GDP that accrues to household and individuals as their personal income.

It is calculated by deducting government taxes and duties, public-sector savings and corporate retained earnings from national income but adding government subsidies.

National income is GDP plus income from abroad.

In FY15, PDI accounted for 73.4% of the GDP at current prices, down from 76% a year ago and UPA-II regime's average ratio 78%, according to data from the Central Statistical Office.

The PDI figure for FY16 is calculated by taking the average ratio in the past two financial years.

Experts say it will now be tough for the Modi government to catch up with the UPA's economic record owing to the economic shock induced by the currency demonetisation.

"Earlier, there was hope that the Modi government might catch up with the previous government's economic performance and eventually surpass it in its remaining term. This now looks challenging given the economic dislocation induced by currency demonetisation," says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

He estimates that demonetisation could potentially lead to a 300 basis-point decline in GDP growth over the next 6 to 12 months, translating into potential output loss of Rs 4 lah crore to Rs 5 lakh crore.

This will pull down macro-economic and business variables, making it challenging for the government to maintain growth momentum.

Others, however, remain hopeful and pin their hopes on the long-term gains from demonetisation.

"The government still has a chance to outdo UPA's economic record. I expect big gains from demonetisation, allowing the government to push the growth pedal in the second half of its tenure," says G Chokkalingam, founder and CEO of Equinomics Research & Advisory.

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Krishna Kant
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