Rasananda Panda , Prashanta Chandra Panda, Ms. Shreya Biswas, September 23, 2016* 

People are supposed to be supreme in a democratic country. But dynasties rule the roost even now. In our earlier article, we had discussed in details how the political dynasties reinforce a level of inequality in access to political influence over the voters in the largest democratic country like India, Middle East, some European countries, Pakistan, Sri Lanka, Bangladesh, North Korea etc.

In this second part of the article, we will analyse how these dynasties performed while controlling the reins of power in India.

Dynasty at Centre and Prominent Economic Parameters (1980s and afterwards)

gandhi-dynastyDuring the initial years of rule by any member of Gandhi family ruled Congress government, the growth rate was good indicating clearly that they inherited an economy in better shape.

However the same cannot be said about their inheritors who usually face a poor growth at the beginning of their tenure. This is true for both the governments headed by P.V. Narasimha Rao-the only Congress government that was not under the tutelage of the Gandhis and Atal Bihari Vajpayee the only non–Congress government that had completed its full term.

narasimha-rao-with-soniaWhile the Rao government had a decelerated growth rate of 1.43%, the government under Vajpayee had a growth rate of 6.68% in the very first year. However by the time they completed their terms, the growth rate shot up to 7.29% and 7.97% respectively bringing the economy back on track.

This was in spite of the fact that the Rao government was formed amid worst ever economic crisis forcing it to opt for economic liberalisation, whereas the atal-vajpayeegovernment of Vajpayee faced the Kargil war but yet he made space for fiscal discipline and brought the landmark Fiscal Responsibility and Budget Management Act, 2003 (FRBM). FRBM Act aimed at institutionalizing financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.

To understand the real story behind the growth it is essential to look at the factors that contribute to growth and one of such key factor is Total Expenditure and the role of Revenue and Capital Expenditure in it.

indira-gandhi-252x350GDP Growth, Capital and Revenue Expenditure, Capital Formation
{Years 1980 – 81 to 1983–84, Prime Minister Indira Gandhi}

Despite political instability, the growth in the first year was a healthy 7.17%. However, it came down in the next two years to a lowly 2.92 % and then shot up to 7.85% in 1983 – 84 in the fourth year. Increasing space was created for Revenue Expenditure at the cost of Capital Expenditure. Growth in the Revenue Expenditure has always been ahead of the Capital Expenditure. Needless to say that capital expenditure leads to capital formation and creation of asset. Capital Expenditure has a crucial support for GDP growth. The share of the Revenue Expenditure always remained above 60% during all the years, while that of the Capital Expenditure remained below 40%.

During the first two years of Mrs. Gandhi’s regime, the growth in major subsidies actually fell, indicating that she inherited an economy less dependent on subsidies. But slowly after her slogan of ‘Garibi Hatao’ the growth in the major subsidies saw a monumental increase of 27.25% in the third year. Dolling out subsidies was the only way to put her slogan into action.

In 1983-84, the major subsidies again registered a double digit growth and the share of interest payment again rose. The growth in total liabilities was only 14.10% during 1981–82, but increased to 24.47% in the next year and was 22.71% during 1983–84. Mrs. Gandhi dished out subsidies financed not through taxes but through deficit financing. This led to shore up debt component and increased rising cost of debt servicing in the form of increased interest payment squeezing Gross Capital Formation (GCF) that fell to negative level in the second year, only to rise marginally in the next year.

{Years 1984 – 85 to 1988 – 89, P.M. Mr. Rajiv Gandhi}

The GDP during his first year was 3.96% with it remaining 5% for the next three years till 1987–88. A low growth rate in the first year of the rule i.e. during 1984–85 indicates that the economy he inherited was not in a very healthy state as these parameters have a lagged effect. The grorajiv-gandhiwth rate remained low for the next three years and it was only in the final year did the growth reached 10.16%. But it could not sustain and in the very next year it fell to 6.13% thus indicating that it was a one off incident.

The share of the Revenue Expenditure in Total Expenditure increased continuously from 63.46% during 1984 – 85 to 68.39% in 1988 – 89, while that of the Capital Expenditure decreased 36.54% during 1984 – 85 to 31.61% during 1988 – 89. An escalation of defence expenditure (an integral part of Revenue expenditure) was expected to raise revenue deficit.

The Rajiv Gandhi era can also be thought as a reformist regime as he brought some innovative economic policies like decentralisation, technology in the service of man, resource based agriculture etc. He also knew that resources would be needed for his ambitious plan and therefore to free resources, he did cut down on major subsidies. Its share in the revenue expenditure remained 10.94% and 10.54% during the first two years and fell to 9.54%, 9.02% and 9.98% in the following three years.

The interest payment grew at a high rate of 26.88% during 1984-85 and 25.58%, 21.97% and 23.75% in the next three years. It rose to an all time high of 33.41% in the final year i.e. during 1988 – 89. Its share in the revenue expenditure increased throughout the tenure. It remained at 20.39% in the first year, rising to 20.90%, 21.16% and 23.18% in the following three years. It increased further to 26.39% in 1988 – 89. Its share in the revenue expenditure increased from 20.39% in the first year to 26.39% in 1988 – 89.

Attempt was made to increase the Gross Capital Formation (GCF) as Rajiv Gandhi was more of a reformist person. Therefore, during the last two years of his regime the GCF reached the double digit number. But he was unable to bring down the total liabilities by a margin. The GCF was 5.04% during 1984-85 and further increased to 12.30% daccidental-prime-ministeruring 1988-89. Growth in liabilities increased at 18%.

{Years 2004–05 to 2013–14, Prime Minister Dr. Manmohan Singh}

The growth in the first four years of the rule experienced a very healthy growth rate of 7.05%, 9.48%, 9.57 % and 9.32%. In 2008 – 09 the growth rate fell to 6.72%. However UPA II was marred by poor growth. It fell to as low as 4.47% and 4.74% during 2011 -12 and 2012 – 13. UPA II regime faced many scams like the CWG scam, the 2G scam, the coal scam, the Augusta Westland case.  It was only during UPA II, when there was an audacious display of power by the dynasty to the extent that Rahul Gandhi openly undermined even the Prime Minister. The dual power structure became openly evident and the government was increasingly seen as incompetent and there was total policy paralysis. It was widely believed that reforms had taken a back seat during the UPA I regime and more so during UPA II. There was no control over expenditure and more so the revenue expenditure leading to poor asset creation.

The FRBM Act 2003 for fiscal management was done away with and the subsidy on petrol continued till June 2010. It was only in February 1, 2013 that decision was taken to increase the price of diesel by 40 paisa to 50 paisa in installments till the losses in diesel were wiped out. Lack of reforms was thought to be the major reason for poor growth rate during UPA II regime.

During these ten years the share of the Revenue Expenditure in Total Expenditure crossed the 80% mark while that of the Capital Expenditure fell below 15%. Only in the first year i.e. 2003–04 the share of the Revenue Expenditure in Capital Expenditure was at 77.14%. For all the rest of the term the share of the Revenue Expenditure exceeded the 80% mark while that of the Capital Expenditure fell below 15%. However Dr. Singh’s regime also saw the great economic recession of 2008 when international finance took a major hit. The government openly went ahead with increase in revenue expenditure to prevent growth from taking a hit.

Though the growth in subsidies and interest payments during 2004–05 and 2005-06 remained low, the share of interest payment in revenue expenditure remained high. This indicates high level of debt servicing the economy had to do. From the next year onwards the share started falling may be for the impact of fiscal discipline courtesy FRBM Act had on the overall economy. It clearly reduced the dependence on deficit financing checking the rise of debt servicing in the form of low interest payment. It was only in 2012–13 did the share of interest payment start to rise again.

During the depression of 2008–09 fiscal discipline that was done away with to save growth from falling. The share of the interest payment in revenue expenditure remained at a high of 33.03% and 39.19% in the first two years, before falling to 29.20% in the consecutive years and 28.77% in the 2007-08. It remained below 25% for the next four years i.e. till 2011-12. It was 25.18% in the 2012-13 and 27.28% in 2013-14. Debt servicing always has a delayed effect.

source-of-financingOn the other hand the share of the subsidies in revenue expenditure saw a zig–zag movement during most of the first parts of UPA I, but it was always less than 15%. It was only in the final year i.e. during 2008-09 did the share reach above 15%. Probably because this being also the year of economic depression it was essential to put purchasing power in the hands of the people.

But after that share of the subsidies continued to rise only falling in the last year i.e. during 2013–14 when the government again resorted to some type of fiscal discipline. During 2004–05 the GCF was at a high of 29.77%, fell to 16.25% and 13.38% in the subsequent years and falling to a dismal of -5.22% during 2008-09. It was 3.94% during 2011–12 before rising marginally to 5.25% during 2012 – 13. In the final year i.e. during 2013– 14 it increased to 44.40%.

It can be seen that the trend of increasing the share of revenue expenditure in total expenditure at the cost of capital expenditure, which started with Mrs. Gandhi’s regime has continued unabated till now irrespective of the change in regime. This indicates how sticky the components of revenue expenditure are. After the introduction of the FRBM Act 2003, for the first time the share of revenue expenditure fell below 80% level, while that of the Capital Expenditure crossed 20% share. A lot of this was attributed to the fiscal discipline induced by the Act brought about during the Vajpayee regime.

Again with economic recession gripping the world during 2008 the fiscal discipline went for a toss and the FRBM Act was put on hold. The result is unusual rise in revenue expenditure and further shrinking share of capital expenditure. It can be said that despite capital expenditure being the growth driver, it is still the revenue expenditure that is ruling the priority. Therefore it is essential to look into the components of revenue expenditure. Revenue expenditure comprises of three components subsidies, interest payments and defence expenditure. Leaving aside defence expenditure as it is thought to be essential it is interesting to see the role played by subsidies and interest payments in revenue external-debtexpenditure.

Throughout the dynastic rule the share of the subsidies along with that of the interest payment in revenue expenditure has increased though not immediately but after a few years due to a lag effect. Subsidies were provided at the cost of increasing the financial burden on the economy. The only other two regimes that completed their full terms and were not under the influence of any dynasty were the ones that was led by P.V. Narshimha Rao from 1991 to 1996 and the other one led by Atal Bihari Vajpayee from 1998 to 2004.

During P.V. Narshimha Rao’s regime the growth in the major subsidies were inconsistent the same can be also said about Vajpayee regime too. However the two are not comparable as during Vajpayee’s regime the petroleum subsidies were also included in the budget from 2002 – 03. Previously they were in a separate account known as the Oil Pool Account.

Therefore a sudden growth in major subsidies during 2002-03 and its share in the revenue expenditure too increased. However with the introduction of FRBM Act 2003, despite the presence of petroleum subsidies in the budget the growth in major subsidies fell to 7.33% and continued to remain low for the next three years. But despite a regime change the share of the interest payment continued to be high probably due to lag effect. This coincidentally shows that in the non-dynastic regimes an effort was made to cut down the freebies in the form of subsidies and reduce dependence on debt.

This is in continuation to the article published on 22-08-2016, http://bizodisha.com/2016/08/development-democracies-and-dynasties/—

  • (Rasananda Panda and Prashanta Chandra Panda are currently is Faculty of  Economics, Mudra Institute of Communications, Ahmedabad  and Pandit Deendayal Petroleum University, Gandhinagar and Ms. Shreya Biswas is Research Associate at MICA, Ahmedabad)

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