Sober expectations

Economic Survey outlines barriers to restoring high growth

The Economic Survey for 2016-17 stands out not just because of the breadth of the research it contains but also because it provides a sobering, realistic and credible view of the Indian economy. It praises the government’s “bold new experiments” in economic policy and points out that, even after demonetisation, India will likely remain the world’s fastest-growing large economy next year. But it also provides a clear-eyed view of India’s long-term prospects. While it is not too late for India to become a high-growth economy, time is short. According to its estimates, India’s demographic dividend will peak in 2020. Unless deep structural reforms are rapidly introduced – reforms that enhance investment, productivity and growth – India will not take full advantage of the second half of its demographic dividend, just as it has already failed to do with the first half. However, if the reforms that it outlines are carried out, then a shift to a high-growth trajectory is not just possible but probable.

Some diagnoses and recommendations in the Survey stand out because they depart from current orthodoxy. For example, the costs of demonetisation for growth are notable, in this telling, bringing growth down to below 7 per cent. In addition, while pointing out the many benefits of digitalisation of the economy, the Survey pointedly argues against a shock therapy-style transition to a more digitalised India. In addition, it says that cash continues have its benefits and that a rigorous cost-benefit analysis of the degree of digitalisation is necessary. It is to be hoped that, as the government plans the policies that are to follow up on demonetisation, the Survey’s recommendations are taken on board.

The Survey argues that the true extent of the cash reduction after demonetisation was much smaller than previously thought, and is being rapidly remedied. This is a valuable, data-assisted contribution to the debate. It is to be noted, however, that much of the other economic data that has traditionally been a large part of the Economic Survey’s review and outlook sections in years past has not been produced for this year’s Survey. This is a disappointment, given that conditions at the moment are particularly uncertain and questions about data quality and availability are spreading. Had the otherwise credible Survey taken on the challenge to provide data backing to discussions that are currently taking place, it would have helped.

Some other recommendations are equally out of the norm. While stopping short of recommending privatisation, the Survey does highlight the continuing inability of public-sector banks to sort out their governance issues. It argues that a decentralised approach to loan resolution has failed, and inches closer to a “bad bank”-style solution. But it fails to provide a solution to the existing problem of stressed assets. Transferring those assets at book prices to a bad bank will lead to zero private-sector participation, and the socialisation of losses; but determining a market-based price for such assets will be difficult and time-consuming. In other words, the Survey cannot at the moment envisage the end to India’s ongoing investment crisis — another reason why India appears stuck in a low-growth equilibrium. Overall, while praising actions so far, the Survey is also a call to action: Time is running out, and India deserves swifter movement on economic reform if future generations are not to be disappointed.