Do Coalitions Deliver Higher Growth? Data Doesn’t Support Y V Reddy’s Claims

Last week, former Reserve Bank Governor Y V Reddy, made an astonishing claim: that economic growth has been better under coalition governments post-liberalisation.

A report in The Economic Times quoted Reddy as saying: “Interestingly, the highest growth in India from 1990 to 2014 was really during coalition governments. So, in a way it is consensus based...in (the) Indian situation, a coalition probably produces better economic results than a strong government.”

It is quite possible that Reddy’s questionable comments were made on the basis of the high growth rates achieved during United Progressive Alliance (UPA)-1. A closer look at the growth performances of single-party and coalition governments suggests that this generalisation has little basis in fact.

Though Reddy’s comments relate to the post-liberalisation period, one could start with 1977, when the first major coalition government was sworn in at the centre. After that we had two strong single-party governments, those of Indira Gandhi and Rajiv Gandhi, which were the last major single-party governments we saw before Modi’s rise in 2014.

While big bang reforms came in 1991, that was largely because we were about to go bust after the weak performance of the Rajiv Gandhi and VP Singh governments before that. We needed big changes to stay alive with an International Monetary Fund (IMF) loan.

In 1977-80, when the Janata Party (it was actually a single party that behaved like a coalition) was in power under Morarji Desai and Charan Singh, the average growth rate for those three years was 2.6 per cent – even below the so-called Nehruvian “Hindu” growth rate. In fact, India suffered a massive negative growth under this coalition in 1979-80, when the gross domestic product (GDP) crashed to 5.2 per cent. The only other time we had negative growth was in 1972-73, but the drop was marginal at 0.3 percent under Indira Gandhi.

So, India’s worst-ever performance was under its first coalition of sorts.

Then we had four years of Indira Gandhi (1980-84), and the average growth rate was 5.9 per cent.

Rajiv Gandhi’s five years (1984-89) recorded 5.2 per cent average; taken together, the nine years of Indira Gandhi and Rajiv Gandhi yielded an average of 5.5 per cent.

Between 1989 and 1991, we had two coalitions, headed by minority parties under V P Singh and Chandra Shekhar; the batting average was 5.7 per cent. This is roughly midway between what Indira achieved and what Rajiv did with minor liberalisations.

Then we had a minority government under P V Narasimha Rao, which gave us an average of 5.2 per cent. Yes, post-liberalisation, we saw growth fall below what Indira Gandhi, Rajiv and VP Singh achieved.

In 1996-98, we had two United Front governments under Deve Gowda and IK Gujral, and the average moved up to 6.1 per cent.

Atal Behari Vajpayee’s six-year tenure (1998-2004) gave us something similar, at 6 per cent.

This growth uptick can be seen as the lag result of the 1991 reforms, which finally began to pay off in terms of an improved economic potential. We can hardly give coalitions the credit for this slight rise. In fact, oil sector deregulation and privatisation were shelved after some initial success in this regard. Coalitions proved to be a drag on liberalisation.

The UPA tenure needs to be split into two parts – since there was a shift in growth calculation to the GVA (gross value added) method after 2011-12.

In the first eight years, GDP growth under the old method averaged 8.3 per cent; in the final two years, GVA average was 5.7 per cent.

The Narendra Modi government’s first three years gave us an average GVA growth rate of 7.3 per cent, but this may come down this year. We will have to wait till May 2019 to know how it did overall, but its performance on the first three years overshadows that of the UPA’s last two years.

The high growth years of the UPA coincided with the big rise in global growth, where even sub-Saharan Africa did very well. If we exclude this extraordinary period, there is nothing at all to suggest that economic performance was higher when coalitions were in power as opposed to single-party governments.

One can put the high growth years of UPA-1 to sheer luck, for no major reforms were undertaken. The growth surge lasted for a while as the government was on a spending spree in rural areas, and kept oil prices subsidised long after world prices had started moving up. In 10 years, the UPA paid out oil subsidies equivalent to Rs 840,000 crore, and topped that up with further excise stimulus of the order of Rs 180,000 crore. In short, UPA’s coalition era growth was built on steroids even when the global conditions were favourable. It had nothing to do with coalitions being more consensus driven; the only consensus was on allowing ministries to be run like private fiefs, including the money-spinning ones like telecom and coal. Corruption soared, and forced the next government to correct this loot.

Coalition during the UPA years led to fiscal imprudence. Overspending and bad economic management led to a slowdown, from which we are still to recover. The single-party government of Modi inherited a seriously decelerating economy, but the change in method of calculating GDP lulled it into a false sense of complacence on growth. The slowdown relates to the delay in handling the crisis, not the nature of the government. It could have happened even if the BJP had led a coalition this time.

Coalitions, or single-party governments, have less to do with economic performance than external conditions and internal reforms. Y V Reddy’s observations are not borne out by reality.

(Note: A part of this article was first published by Dainik Bhaskar)