Opinion What you sow is not what you reap

Obviously,there is a lot riding on GDP growth and forecasts. More than ever before,growth matters because this is an election year,and an unusual election year in that many experts think the elections could be a turning point in Indian economics,and in Indian politics. Of course,no one believes that the turning point would arrive if somehow the Congress were to retain power. That is what many of us thought would happen in 2004,and even more of us were certain that a turning point for Indian growth and economic reforms was reached in May 2009,when the Congress obtained 206 seats and headed what seemed to be a comfortable coalition. Alas,alas,we all know what has happened under UPA 2 — a paucity of reforms,a precipitous growth decline and staggering levels of inflation.

Why is inflation at double digits and growth at stagnation levels of around 4.5 per cent for the second year running? It may have something to do with the UPA’s growth and distribution model. This socialist distribution model has been discussed extensively,and with no apparent effect on the policymakers. What about the UPA’s growth model? Without any risk of exaggeration,the UPA’s political economy model can best be described as follows. India is a dominantly agricultural country,and most of the poor reside in rural agricultural areas. Further,the farmers are an important political constituency. Hence,a win-win proposition,for India and the Congress party,is to increase agricultural output and to do so at highly remunerative farm prices. There will be growth,there will be lower inflation due to higher output,there will be an improvement in inequality,there will be spillover demand effects into the industrial arena,and voila India will be on an 8 per cent trajectory as far as the eye can see. And yes,this extra growth can be used for redistributive purposes,and especially for “In the name of the poor programmes named after the Nehru-Gandhi dynasty”.

Did the UPA movie turn out as planned? The table tries to examine agricultural performance in two broad periods — the 1998-99 to 2003-04 period under the leadership of the Vajpayee-led NDA and the 2004-05 to 2013-14 period under the leadership of Manmohan Singh and Sonia Gandhi,or Manmonia. Agricultural performance is modelled on only two variables — rainfall this year and rainfall last year. A heuristic explanation of the workings of the model (part of Zyfin Research’s monthly GDP model) is as follows. If normal rainfall yields a certain output,then normal rainfall in the second year will yield a zero growth in output. Rainfall matters most for growth when it has a large deviation from rainfall in the previous year.

Perusal of the table leads to the following conclusions:

First,the NDA period was witness to one of the worst six-year rainfall periods in Indian history (rainfall data since 1871). The rainfall index was a negative (-)15.6,that is,rainfall was about 16 per cent below normal. Agricultural growth was predicted to be only 1 per cent per annum,yet the actual average was 2.7 per cent.

Second,there were hardly any incentives given to farmers in the form of higher relative prices for crops. WPI inflation during this period averaged 4.9 per cent ,while procurement price inflation averaged 5.2 per cent per annum. The average relative price of agricultural goods increased by 0.7 per cent per annum.

Third,now along comes the UPA. Procurement prices are raised without hesitation,and at an average compounded rate of close to 9 per cent per annum between 2004-2012. But in the three years preceding the 2009 election,such prices were raised at an average rate of 12.1 per cent per annum,about 4 per cent a year more than the WPI. Relative prices of agricultural goods increased at a historic record pace of 6.4 per cent per year during these political economy years. Even for the entire nine-year period,relative prices increased at 2.7 per cent per year,again a record for India (and most likely the world — note that this is the change in the ratio of procurement prices to non-agricultural GDP prices that one is talking about). The inherent nature of most relative prices is to stay constant for short periods of time,say five to 10 years.

Fourth,did the UPA and India at least get some additional output,and lower food prices,from all of these incentives for higher production? Indeed not — agriculture inflation has never been so continuously high,and especially in the context of agricultural output increasing at above 3 per cent per annum for eight years. What makes the performance worse than terrible is that the UPA had the gods on their side — the rainfall index was above normal (0.8 vs 0) during their tenure,and rainfall was especially buoyant during 2006-07 and 2008-09 — an index of 13.3,one of the best three-year rainfall periods in Indian history. However,and this is the critical performance line,for the nine-year UPA period of 2004-05 to 2012-13,actual agricultural growth of 3.1 per cent was 0.2 per cent a year below the rainfall-only predicted growth of 3.3 per cent!

History is history,but can good rainfall save the UPA in 2013-14? There has been good rainfall,no question about it,and non-agricultural growth is insipid,at best. And if agricultural growth is 6 per cent-plus,this can provide the UPA with an extra 0.5 per cent growth and perhaps propel GDP growth to above 5 per cent. The rainfall-only model predicts agricultural growth of “only” 4.1 per cent in 2013-14. A large part of the reason for the unexceptional increase projected for 2013-14 is because 2012-13 was not such a bad rainfall year — rainfall during June-September in 2012 was 824mm,compared to 698mm in the genuine bad rainfall year of 2009-10.

So if you are looking for GDP growth in 2013-14 at even close to 5 per cent,you have to look at the skies to deliver a different manna than exuberant rainfall.

The writer is chairman of Oxus Investments,an emerging market advisory firm,and a senior advisor to Zyfin,a leading financial information company