India started using a new method to calculate gross domestic product in January 2015. The trouble was that this new method had data starting from financial year 2011-12. Hence GDP growth (or economic growth), a key economic data point, could be calculated only from 2012-13 onward.

There were no GDP growth data available for the pre-2012-13 period.
Recently, the Report of the Committee on Real Sector Statistics, constituted by the National Statistical Commission of the government of India, was published. This report has GDP data starting from 1993-94, and fills in the gap of the lack of GDP data for the pre-2011-12 period. Incidentally, the government of Prime Minister Narendra Modi removed the online report after the GDP figures showed high growth under his predecessor Manmohan Singh.

Let’s take a look at GDP growth, which basically plots annual economic growth, over the years.

per year GDP growth Figure 1
Annual GDP growth under Indian prime ministers Atal Bihari Vajpayee, Dr Manmohan Singh and Narendra Modi. Image: Vivek Kaul

What do GDP growth figures tell us? Economic growth between 2014-15 to 2017-18 was 7.34% per year. Through much of this period, Narendra Modi of the Bharatiya Janata Party (BJP) has governed the country as prime minister, having taken over from Manmohan Singh of the Indian National Congress in May 2014.

At 7.34% per year, the economic growth is lower than the economic growth seen between 2004-05 and 2013-14, the years when Manmohan Singh was prime minister. Hence the growth during the Modi years was lower than the growth during the Manmohan Singh years. But saying just that would be a very lazy piece of analysis.

The Manmohan Singh years were an era of easy money, which pushed up economic growth at that point of time, but the costs of which are still being borne by the country in various forms.

Let’s first look at lending to industry carried out by the government-owned banks as a percentage of GDP.

public sector bank lending Figure 2
Data from Report of the Committee on Real Sector Statistics and the Reserve Bank of India showing public sector bank lending. Image: Vivek Kaul

What do the above figures tell us? It tells us that the lending carried out by public-sector banks to industry rose very sharply between 2003-04 and 2008-09, from around 8% of GDP to 15.4% of GDP.

One could argue that this was the era of global growth, and hence there was nothing surprising in the massive rise in lending to industry (as we shall see, India’s private banks did not show a similar jump). But the surprising thing is that this growth continued even after 2008-09, when the global financial crisis struck, with Lehman Brothers, the fourth-largest investment bank on Wall Street, going bust.

India’s public-sector banks continued their “easy” lending to industry. This couldn’t have happened without some support and encouragement from the government. This also explains how India’s economy grew by close to 11% in 2010-11.

While public-sector banks were going easy on lending to industry, what were India’s private-sector banks up to? Let’s take a look at private banks’ lending to industry, which makes for a very different picture.

private sector bank lending Figure 3
Private banks’ lending to industry based on calculations on data from Report of the Committee on Real Sector Statistics and the Reserve Bank of India. Image: Vivek Kaul

Private bank loan data clearly show that the lending of private-sector banks to industry, unlike their public-sector counterparts, has risen at a very gradual pace over the past two decades, except for one small spike in between.

The easy lending carried out by public-sector banks to industry was characterized by a lack of proper due diligence. This has led to huge defaults over the years. The total bad loans of Indian banks crossed 10 trillion rupees (US$143 billion) as on March 31, 2018. Of this, the government-owned banks had bad loans of around 8.96 trillion rupees. When it comes to loans to industry, more than 28% of lending by public-sector banks have gone bad.

Bad loans are those on which a repayment installment has not been made for a period of 90 days or more.

Yes, growth in the Manmohan Singh era was higher than in the Modi years, but it also led to a spate of bad loans by public-sector banks, which the country is still dealing with. The Indian government spent close to 900 billion rupees recapitalizing public-sector banks in 2017-18. This financial year it plans to spend another 650 billion rupees on this front.

Let’s look at the fiscal deficit of India’s central government as a percentage of GDP (shown below).

fiscal deficit figure 4
India’s fiscal deficit based on on data from Report of the Committee on Real Sector Statistics and the Reserve Bank of India. Image: Vivek Kaul

As can be seen from the data above, the Manmohan Singh government also ran a significantly higher fiscal deficit than the Modi government, in order to pump up India’s economic growth. The higher fiscal deficits created double-digit inflation and led to higher interest rates.

The point is that economic growth during the Manmohan Singh era came at the cost of other things, some of which India is still paying for.

Now this is not to say that economic growth during the Modi era has been extremely kosher. Modi could have easily beaten the economic growth during the Manmohan era given that oil prices have been significantly lower in the last four years than they were between 2009 and 2013. India imports more than 80% of the oil that it consumes.

Modi’s two big mistakes were the hare-brained demonetization and a huge hurry to implement a half-baked goods and services tax. The negative effects of these mistakes are still playing out. Demonetization destroyed large parts of India’s informal sector including agriculture. It also had a big negative impact on India’s micro, small and medium-sized enterprises, which account for about 45% of the country’s manufacturing output and around 40% of total exports.

As a recent Reserve Bank of India document points out, “The micro, small and medium enterprises sector has witnessed two major recent shocks, viz, demonetization and introduction of goods and services tax (GST). For instance, contractual labor in both the wearing apparel and gems and jewelry sectors reportedly suffered as payments from employers became constrained after demonetization.”

Once one takes these factors into account, both Modi and Manmohan had their fair share of mess-ups, the costs of which had to be borne by the Indian economy.