In a fevered election battle, India's top candidates are claiming that they -- and only they -- can get the faltering economy back on track. But the data shows they're missing the point.
As Indians head to the polls this week in the first stages of an epic five-week election process to determine the next prime minister of the world's largest democracy, the ruling Congress party and the opposition Bharatiya Janata Party (BJP) are clashing sharply over India's faltering economy. The country's GDP growth rate has slowed from 9 percent in 2010 to under 5 percent, and voters are deeply frustrated by rising inflation and corruption. Congress candidate Rahul Gandhi and BJP challenger Narendra Modi are battling over whose approach -- redistributing wealth or promoting economic liberalization and fiscal responsibility, respectively -- has done more for the majority of Indians.
The good news is that, for once, an election campaign in India, which normally focuses on the candidates' personalities and castes rather than their platforms, is taking the economy seriously. The bad news is that the debate is backward-looking, mired in misleading claims, and oblivious to India's place in the world.
The truth is that India's economy tends to rise or fall with the global economy, not with the party in power. For virtually every five-year period since 1980, Indian GDP has grown at a rate about 1.5 percentage points faster than the emerging-world average. This is mainly because even after two strong decades of growth, India's per capita GDP is still only about $1,300 -- and it's always easier to grow fast from a low level. Over the course of the last three governments, one under the BJP and the last two under departing Congress Prime Minister Manmohan Singh, India's average annual GDP growth has ranked somewhere between 40th and 50th out of the roughly 150 countries in the emerging world, regardless of which party was in charge.
The last BJP-led government took office in 1999 under Prime Minister Atal Bihari Vajpayee. He helped liberalize India's economy by selling stakes in state-owned companies and established a cap on the budget deficit, but his reforms had little impact on India's ranking in the developing world. Over the next five years, India posted average annual GDP growth of 5.8 percent, ranking 50th in the emerging world, and average annual inflation of 3.9 percent, ranking 70th. This record represented little change from the prior two decades, so it is hard to see why today it should provoke much criticism, or bragging.
When the Congress party and Singh replaced the BJP in 2004, India stayed on a similar course. After 2003, with international trade booming and easy money pouring out of central banks in the West, growth accelerated sharply across emerging countries. India's GDP grew at an average of 8 percent from 2004 to 2008, but its ranking barely improved: From 2004 to 2008, India clocked in at 39th in the emerging world for average GDP growth and 73rd for inflation. And now the BJP campaign is implying that these boom years under Singh grew out of the reforms completed by Vajpayee. Although these reforms played a role, the real story is that India was simply reveling in a global party.
As a result of the economic boom, Singh won a second term as prime minister in 2009, but global conditions were getting tougher. After 2008, when the tide of easy money dried up in the global financial crisis, India, like many emerging countries, unleashed a stimulus package to keep growth alive, spending heavily on measures like guaranteed wages and income supports for the poor. But even that could not prevent India from slowing along with the world economy. Over Singh's second term, India's average annual GDP growth rate slowed to 6.5 percent, but its ranking remained basically the same at 45th. Underneath the headline growth number, however, the economy is starting to show serious cracks, in the form of rising deficits and inflation.
As India ramped up government spending after 2008, it began to slip in the global rankings of countries based on the size of the government deficit, which has risen from 3.3 percent of GDP in 2007 to 5.8 percent on average since 2008. Congress officials defend their record of heavy spending on income support and welfare for the poor, but this spending has driven up inflation, which attacks the poor hardest. India's inflation rate has risen from 6.5 percent in Singh's first term to 10.5 percent in the second, while its inflation ranking has fallen from 73rd in the emerging world to 130th. Since Singh took office, the misery index -- the combination of the unemployment and inflation rates -- has risen from a low of 12 percent in 2005 to 20 percent.
To be sure, it is not only Congress that overlooks inflation. India is in the grip of a money illusion, imagining gains that are in fact symptoms of an inflationary economy. Daily headlines hype the "record highs" of the stock market, which Congress officials spin as a vote of confidence in India's economic fundamentals and which BJP officials spin as a rally, anticipating reforms under Modi. But both sides are ignoring that these highs are being reached in nominal, not real, terms -- the apparent peaks are not corrected for the rise in inflation or the fall of the rupee, which has dropped more than 25 percent against the dollar in the last three years. Thus corrected, the market is about 35 percent below the highs it achieved in early 2008. Since then, corporate earnings have been rising 10 percent a year in nominal terms -- which means they have gained roughly nothing when adjusted for inflation.
The raging election debate over the economy is new and healthy, but it would be far more useful if it were less backward-looking. It is hard to understand why Modi and Gandhi are spending so much time defending the mediocre records of governments in which neither played a decisive part. Instead, they should be shifting their sights to the future.
The genuine Asian miracle economies, like Japan, South Korea, and China, were rising manufacturing powers that maintained decades-long runs of unusually rapid growth with low inflation, even when the world economy was struggling. As yet, no Indian party has achieved that feat. The question Gandhi and Modi should be answering is not what their predecessors did for the economy, but what they can do to make India a real miracle.
A version of this article originally appeared on the Times of India’s website on April 4, 2014. Republished with permission.