A much-needed blueprint

The Economic Survey posits a clear development model to put India on a high-growth path

Over the last few years, particularly during the tenure of the previous Chief Economic Adviser (CEA) Arvind Subramanian, the Economic Survey (ES) morphed from an exhaustive — and often tedious— account of the economy’s performance over the previous year into a more analytical and forward looking policy statement. 

For one thing, it attempted to join the dots and draw the proverbial “big picture” pertaining to some of the critical contemporary economic issues. The notion of a balance sheet recession, for instance, and its ramifications for economic revival were first formalised in the ES in 2015-16. The 2014-15 ES provided a rationale for the efficiency and welfare gains from the interplay of basic bank accounts, biometric identification and mobile telephony (the so-called JAM trinity). The forward looking policy prescriptions included a workable model of Universal Basic Income, which underpins programmes like PM-KISAN, and the use of the Reserve Bank of India’s balance sheet reserves to fund budget expenditures. Both of these were discussed first in the ES.

In his first ES, the new CEA Krishnamurthy Subramanian (KS) keeps this new avatar alive and well. At the very outset, he provides a blue-print to take India’s GDP to $5 trillion by 2024-25 and create employment alongside. His key advice is to abandon the way economists and policy-makers think —in terms of economies fundamentally being in equilibrium except when there is the odd shock— and switch to a mode where there is constant disequilibrium with economies spiralling around in vicious or virtuous cycles. 

All this somewhat bewildering new age econo-babble translates into is a prescription for a sharp rise in investments (the “key driver” for the virtuous cycle) that create capacity and an expansion in exports to absorb this capacity. Investments, in KS’s scheme, need not displace jobs but will improve labour productivity and make exports competitive. Besides, “when examined across the entire value chain, capital investment fosters job creation as the production of capital goods, research and development and supply chains generate jobs.” In short, KS lays his bets on the Chinese growth model with some modifications.

Of course, all this has to be supported by complementary policies. Like other cheerleaders of the China paradigm, KS is a votary of scale and demonstrates that “dwarves” (firms that are old and small) are the biggest drag on the economy. Using data from other economies, he shows that young and relatively large companies have the highest potential to both “grow” and “employ” and, thus, the barriers to their growth have to be removed. This would mean both labour market reforms and phasing out incentives that encourage firms to remain small. The last bits of the growth jigsaw are high domestic savings, low cost of capital and a tax-regime that is both stable and encourages entrepreneurial risk-taking.

Critics could argue that it is difficult to repeat history, and an investment- and export-driven model on the lines of China’s growth model in the 1990s and 2000s cannot be replicated given the acceleration in automation that is fundamentally changing the relationship between capital and labour. One could also raise issues about education and the acute shortage of the most basic of skills needed to support a manufacturing boom in India.

While these debates will continue, the importance of this year’s ES is that it posits a clear economic model that could potentially drive the economy to a higher growth path in the Modi 2.0 regime. Thus, those of us who have complained that the government was high on targets but low on strategy should have less of a reason to whine. Besides, my understanding is that some of the senior bureaucrats in government today share the ES’s basic approach to growth. That is critical if this growth strategy were to stand any chance of being implemented.

Chapter 2 of the survey provides interesting insights into the use of behavioural economics, particularly the idea of a “nudge’’ in policy design. Take tax compliance, for instance. Signboards showing “tax money at work” in construction projects in a panchayat or district explicitly convey to citizens that their taxes are being used in valuable public goods. This addresses the issue of “vertical unfairness”, the perception that the services received by an individual are not commensurate with the taxes. What is important though is that simple interventions based on these insights are known to work in many areas of public policy. Thus the idea of a behavioural economics audit for every government programme (conducted by the Niti Aayog) that the ES espouses might sound a tad radical but is perhaps the only way to ensure that outlays are proportional to outcomes.

What about the bread and butter bits of the ES, the stuff on near-term growth, budget deficits and the like? The 7 per cent projection for the current fiscal year’s GDP growth is reasonably conservative as is the assumption that the investment cycle has perhaps bottomed out. There is indeed growing evidence of capacity constraints in a number of sectors. Besides, as the survey points out, rural wages growth, which was declining, has started to increase since the mid-2018. Further growth in rural wages should help spur rural demand.

For the financial market, the reiteration of the fiscal glide path of a central government fiscal deficit of 3 per cent of GDP by 2021 in the ES and the clear assertion by the CEA in the post ES release presser that budgetary consolidation is desirable have brought cheer and assuaged concerns that the Budget might go a little easy on targets to accommodate funding for projects promised during the elections.  

This ES has clearly gone the way of recent surveys, dense with ideas, liberal with academic references but not giving the business of economic hisaab-kitaab short shrift. Its key shortcoming is perhaps the fact that while it’s bursting with ideas about how to get to a higher growth path, it is perhaps a little reticent on why the current economic slowdown came to such a pass. 

The author is chief economist, HDFC Bank