2004-2014: The Lost Decade

A few recent developments perfectly captured the journey of the Indian economy from despair to hope over the last two decades. It was also a reminder for the electorate to stick to their choice for a strong and decisive government in Delhi.

Last week, N R Narayana Murthy, co-founder of IT giant Infosys, stirred the hornet’s nest by literally describing the UPA rule between 2004 and 2014 as a lost decade that had put India way behind China in the race for development.

“I don't know what happened.... during Manmohan Singh's government, who is an extraordinary individual... somehow India stalled. Decisions were not taken quickly, everything was delayed,” he said at an event in IIM-Ahmedabad.

Murthy who was on the board of HSBC in London during that period elaborated on how India slipped into oblivion to the global community.

"In the first few years, when China was mentioned two to three times in the boardroom, India's name would be mentioned once... And by the time I left (HSBC), if China's name was mentioned 30 times, India's name was hardly found to be mentioned once," he said.

The relative decline of India can be established by GDP comparison.

In 2004, China was 2.8 times bigger than the Indian economy. By 2014, China was 5.1 times bigger. The slide was sharper in UPA-II.

It is incorrect to blame UPA alone for the wide difference in the size and capacity of the two economies. In 1978, when China opened up, its GDP was similar to India’s. As of 2021, China was 5.8 times bigger.

However, a closer look will reveal that the Indira Gandhi-led Congress government between 1966 and 1977 and the Congress-led UPA government of Manmohan Singh (2004-2014) contributed phenomenally to this poor performance.

Indira and UPA dragged India down

The Indira rule was exceptional in its nationalisation (bank, insurance, coal) overdrive at the wrong time of history. The coal nationalisation took place exactly three years before China opened the sector to private competition.

The Janata Party rule (1977-1980) aggravated the damage by sending off multinationals and snatching private businesses at the drop of a hat. The cronies also took the opportunity to pass on sick enterprises to the government.

To sum up, the P V Narsimha Rao government (1991-96) inherited an economy that had destroyed the culture of entrepreneurship. By that time China was growing at an average of 10 per cent and its economy was 1.4 times bigger.

This difference was difficult to bridge. But we could have done better.

Rao moved mountains to make India business-friendly. He opened the banking sector. But left Indira’s legacy in insurance and coal untouched. By the time his tenure ended China was 2.2 times bigger.

The United Front circus (1996-1998) ended too soon. When Atal Bihari Vajpayee came to power in 1998, China was 2.4 times bigger. Vajpayee carried forward the legacy of Rao.

The insurance sector was opened in 2000. Disinvestment took off. Infrastructure building started. A proposal to replace the archaic indirect tax structure with a modern goods and services tax (GST) was mooted.

Vajpayee was a visionary. Most of the logistics projects of trade and strategic interests, that Modi’s India is completing both in and outside the country, were rolled out by him. That was a decade before China rolled out the Belt and Road Initiative (BRI).

He also presented a bill to open the coal sector in 2002. But his government didn’t have the numbers to get it cleared. In his six years, the size difference between China and India grew from 2.4 to 2.8 times.

All hell broke loose in the next decade. China expanded at greater speed despite the 2008 financial meltdown. India failed to keep pace.

Modi corrected course

Surprisingly enough, the gap between the two economies narrowed before Covid. As of 2019, China’s GDP was 4.9 times of India's. The pandemic had cost India momentum.

However, considering that China has hit a slow track in 2022 and India is growing faster than most major economies, the balance may tilt in India’s favour, once again.

After a gap of nearly two decades, the country is now back in the global reckoning, in one of the most difficult times in world history. Most rating agencies expect India to be a growth hotspot for the next decade.

“India is the shining star of the global economy right now,” said the chief economist of S&P Global Ratings. Morgan Stanley expects the investment rate to increase from 31 per cent of GDP to 36 per cent over the next five years.

Jayanth Rama Varma, an external member of India’s monetary policy committee (MPC) and a professor at IIM Ahmedabad, recently said: "A recovery in private capex is underway.”

Verma is known as a “dissenter” in India’s policy circle. Naturally, his appreciation counts.

India has lately been growing on government-led investments. Return of private sector investment is badly needed to make this cycle sustainable.

Private sector capacity expansion became minimal since the end of the last boom cycle between the financial year 2003-2004 (FY04) and FY09, which coincided with the subprime bubble in the US.

A government that idled

And, that takes us to the question: Why did the private capex flow suffer and what did Modi do or didn’t do to revive it?

The answers to each are linked.

The UPA inherited an economy that was reforming at great speed. Manmohan Singh failed to maintain the tempo. Disinvestment was stopped. Insurance sector reforms went in cold storage.

Vajpayee allowed 26 per cent FDI in insurance; it was next escalated by Modi to 49 per cent in 2014 and 74 per cent in 2021.

The coal sector was denationalised in 2019. Private commercial mines are contributing to fuel production growth in FY23.

Hyping up on growth opportunities without backend reforms led to the coal scam, huge creation of idle capacities in power generation, locked private capital and, non-performing assets for banks.

Road construction followed a similar curve. Vajpayee rolled out highway construction, on limited routes, using build-own-transfer (BOT) or build-own-operate-transfer (BOOT) models.

These models required reconsideration for expanding the scope of the projects nationwide. That was not done. Road construction came to a grinding halt beginning 2012, contractors went bankrupt, and banks piled up sticky assets.

It took Modi two years to clear the policy backlog and resume highway construction at a decent pace. But all legacy problems couldn’t be resolved as was evident in the collapse of the IL&FS in 2018.

This government arm was funding long gestation projects using short-term finance. Asset monetisation and re-creation of development finance institutions are now filling up this gap.

During the 10-year UPA rule, the GST couldn’t be implemented. Everyone knew that the lending norms based on socialistic principles were outdated and the banking industry needed a bankruptcy code. It was not done either.

Governments should be elected to take decisions. Surprisingly, the Manmohan Singh government was re-elected in 2009, with Congress securing more seats, for not taking decisions, not even in key strategic areas.

From building border roads and modernisation of the airforce to building trade infrastructure with neighbours - every decision suffered. That was criminal. And, the voters must share the blame for this tremendous opportunity loss.

Also Read: China’s Economy: Bad News And More Bad News