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The CAG and the Indian economic slowdown

Updated on November 11, 2016
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A member of the IAS, Jaspalkaler loves to read and write on current issues. He also loves mathematics and economics particularly game theory

The Delhi Metro Project
The Delhi Metro Project | Source

GDP growth falls

Indian economy was growing at a faster annual rate of 8 to 9 per cent when brakes applied suddenly in 2011-12. The growth of GDP fell to around 6.2 per cent in 2011-12 and 5 per cent in 2012-13. An important contemporary phenomenon was taking shape simultaneously. An activist Comptroller and Auditor General crippled the functioning of the government at the centre for almost good two years. We investigate here the extent to which the CAG activism can be held responsible for the slowdown of Indian economy post 2010.

The Devil in detail

Let us go straight to the numbers. The Indian economy grew at 9.5, 9.6, 9.3, 6.7, 8.6 and 9.3 per cent during 2005-06 through 2010-11. The growth rate however declined first to 6.2 pc in 2011-12 and then 5 per cent in 2012-13. But the devil lies in detail.

So we first look closely at the sectoral growth rates. The average growth of agriculture, forestry & fishing during 2005-10 period was 4 per cent compared to 3.6 and 1.8 per cent for the next two years. The average growth of electricity, gas and water supply during 2005-10 was 6.8 per cent compared to 6.5 and 4.9 per cent for the next two years. For financing, insurance, real estate & business services the average growth rate for 2005-10 period was 11.5 per cent which came down to 7 and 5.2 per cent during the next two years. However the shockers came from the manufacturing for which the average growth rate during 2005-10 of 10 per cent came down to just 2.7 and 1.9 per cent for 2011-12 and 2012-13 and the mining and quarrying for which the average growth rate of 4.2 per cent during 2005-10 became negative (-0.6) in 2011-12 and just 0.4 per cent in the subsequent year. For trade, hotels & restaurants, transport & communications also the average growth rate during 2005-10 of 10.8 per cent came down to 7 and 5.2 per cent in the next two years.

The hypothesis

Our hypothesis is that sectors that witnessed decline in growth were all the ones affected by the CAG activism.

The evidence

Take for example communications sector which was hit by the 2G scam. It pulled down the whole of the sector last mentioned above. Mining and quarrying was also affected in a big way since the so called coal scam hit the headlines. The growth rate of mining and quarrying, which was 5.9 per cent in 2009-10 and 4.9 per cent in 2010-11, became negative in 2011-12, coming down to -0.6 per cent. It recovered some ground to 0.4 per cent in 2012-13. But the negative investment sentiment, induced by the governance crisis of 2011-13 precipitated by scams unearthed by the CAG, contributed to slowdown in manufacturing as well. The average growth rate of manufacturing sector which was 10 per cent during 2005-10 came down to just 2.7 and 1.9 per cent in 2011-12 and 2012-13 Respectively.

The economic survey 2012-13 also notes that the growth of value added in industrial sector comprising manufacturing, mining, electricity and construction sectors slowed to 3.5 per cent in 2011-12 and 3.1 per cent in 2012-13 after it had recovered to 9.2 per cent in 2009-10 and 2010-11. The manufacturing sector, the most dominant in industrial sector also witnessed a decline to 2.7 per cent in 2011-12 and 1.9 per cent in 2012-13 from 11.3 per cent in 2009-10 and 9.7 per cent in 2010-11.


What these numbers boil down to? The national GDP comprises 14.1 pc in agriculture, 29.5 pc in industrial sector and 56.4 pc in services sector. The governance crisis precipitated by CAG activism affected the industrial and services sectors which contribute 86 pc of GDP and hindered both public and private investment in these sectors. The above statistics show that the sectors which experienced steepest slowdown are the ones most affected by the CAG activism. Therefore part of the blame for the slow down of Indian economy must lay at CAG doors. This however can't be a value judgement on the desirability or otherwise of the CAG activism, which must have done some long term good to public interest.


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