It is seductive as a theory. It is currently on the subject-line of informed online chat groups debating the political economy. It is clever in its construct and argument, located as it is in the context of an economy that is a train wreck and the optics of corruption. The theory is simple: the rupee plunges in value against the dollar just before every election. Ergo, the fall in the rupee’s value is a political ploy.
Stretching the theory all the way back to the 1984 polls, online theorists contend that the rupee slid by 13 per cent before the 1998 polls, 14 per cent before the 1999 polls and 25 per cent before the 2009 polls. If one took a tour of historical rupee-dollar rates for 25 years, there is validation—if only for the fall. The value of the rupee fell from Rs 14.96/dollar in November 1988 to Rs 16.92/dollar before the November 1989 polls, to Rs 20/dollar before the May 1991 polls and from Rs 31.40/dollar in April 1995 to Rs 34.31/dollar prior to the April 1996 polls.
The theorists maintain that the fall in the value of the rupee is designed to enable political parties reap windfall profits when they import their ill-gotten wealth—via hawala or otherwise—back into India. The imputation is that the precipitous fall in the value of the rupee to 65 per US dollar in the run-up to the 2014 polls is engineered to profit. There is, no doubt, an allure to the theory given the conjecture about the causative—the ring of believability about election funding, corruption proceeds and hawala banking by political parties. However, let us set the record straight. The theorists are ignoring a parade of counterfactuals—primarily the context and economic circumstances of those periods.
The real cause of the rupee’s perennial slide is embedded in the nature of politics that is practiced in India, where growth is an accidental by-product, not an objective. Every regime since the ‘Garibi Hatao’ campaign of 1970s—and very visibly since 1990s—has ignored basic economics to propel base politics. It has been fashionable to raid the exchequer to woo the voters. The slide in the value of the rupee in 1988 was triggered by a combination of high fiscal deficit and high current account deficit—binge expenditure worsened by rising imports and market borrowings. In November 1989, newly elected V P Singh declared, “The coffers are empty.” That, though, did not stop him from announcing a Rs 10,000-crore loan-waiver in the 1990 budget.
Unsurprisingly, the sins of the 1980s were paid for in 1991. But lessons of history are rarely learnt. In the run-up to the 1996 polls, barely four years after the IMF bailout, fiscal deficit shot up to 6.7 per cent of GDP in 1994-95 and government borrowings shot up from Rs 21,250 crore to Rs 38,364 crore in 1995-96. The trend continued. When the United Front government came to power in 1996, the difference between the income of the government and its expenditure was Rs 66,733 crore. By the time the curtains came down on the Gowda-Gujral duet, it had shot up to `91,025 crore. Thanks to a series of sop stories, including the implementation of the Fifth Pay Commission.
Interestingly, the only exception to the trend has been 2004. The rupee had strengthened, from Rs 47.39/dollar in April 2003 to Rs 43.89/dollar in April 2004 when polls were held. Fiscal deficit had come down from 5.7 per cent to 4.3 per cent. Thanks to the principle of fiscal consolidation and investment-led growth adopted by Prime Minister Atal Bihari Vajpayee and his two finance ministers, Yashwant Sinha and Jaswant Singh. In his first innings as finance minister, P Chidambaram brought fiscal deficit down even further from 4.3 per cent to 2.5 per cent in 2007-08. The rupee strengthened from `45.17/dollar to Rs 39.67/dollar by Budget 2008 and GDP growth clocked 9-plus per cent three years in a row.
The seeds of the 2013 crisis were sown in 2008, with a loan-waiver for farmers that cost the exchequer Rs 70,000 crore. By 2009, fiscal deficit was 6 per cent of GDP and the consequent inflation in double digits (yes, there was a crisis in 2008 and yes, there was a stimulus package for industry but that was 1 per cent of GDP). Between 2004 and 2009 polls, government borrowings shot up from Rs 80,350 crore to Rs 2.74 lakh crore. In 2013-14, as borrowings touch Rs 5.69 lakh crore, as the rupee tumbles to Rs 65/dollar and as growth struggles at sub-5 per cent, the government is getting ready to unroll the Food Security Act and more.
As finance minister, presenting the 1995-96 budget, Manmohan Singh said: “If we try to fund every project and programme, irrespective of the revenues available, we will only generate high inflation, high interest rates which will choke off investment… this approach will only jeopardise our basic objective of development with social justice since it is the poor who will suffer most from the resultant inflation and slow growth of employment…”
Between 2004 and 2013, under Prime Minister Manmohan Singh, the UPA has done just that—expanded the nanny state. Clearly, he has since changed his parish. The economy and the rupee are collateral victims of electoral economics.
Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change
shankkar.aiyar@gmail.com