Challenging the traditional theory of economic growth based on equilibrium and silo macro parameters, Chief Economic Advisor Krishnamurthy Subramanian in his maiden Economic Survey for 2018-19, released on Thursday, outlined a model based on constant disequilibrium and complementariness in investments, savings, job creation, demand, exports, and economic growth.
Based on this model, Subramanian explained a strategy to make the economy grow 8 per cent a year, which is needed for gross domestic product (GDP) to touch $5 trillion by 2024-25 as envisaged by Prime Minister Narendra Modi.
For the current fiscal year (2019-20 or FY20), he pegged growth at 7 per cent, only 0.2 percentage higher than 6.8 per cent growth in 2018-19 or FY19.
The Survey said the economy was always on disequilibrium — either on a virtuous or a vicious cycle.
When the economy is in a virtuous cycle, investment, productivity growth, job creation, demand and exports feed into each other and enable it to thrive, the Survey said. In contrast, when the economy is in a vicious cycle, moderation in these variables dampens each other, thereby dampening the economy.
The Survey made a case for using investments as the key driver to keep the economy on virtuous cycle.
On the basis of his study, co-authored with Rajesh Chakrabarti and Sesha Meka, Subramanian said this investment can be from the government, in infrastructure, besides from private sources.
“We intend to shift gears, by taking the economy into a virtuous cycle driven by investment,” Subramanian said at a post-Survey news meet.
The Survey took on the traditional view which attempts to address challenges of job creation, demand, export, and economic growth as separate problems. The Survey said these macro-economic phenomena exhibit significant complementarities, and understanding the “key driver” and enhancing it enables simultaneous growth.
The Survey said the global financial crisis exposed the problems in conventional economic theories and blamed it for the failure of Five-Year Plans.
Rolling out statistics to prove his point, Subramanian said savings, investment and GDP have grown in a virtuous cycle in high-growth economies, such as China or other East Asian countries. “As the economy started doing better, China started saving and investing more. India needs to learn from this and adopt a virtuous cycle,” said Subramanian.
Quoting studies, the Survey claimed a positive correlation between savings and GDP growth was stronger than investments and growth. This was because investments were risky and entrepreneurs were exposed to the risk of idiosyncratic business failure leading to loss of the invested capital.
“Therefore, savings have to increase more than investment to allow for the accumulation of precautionary savings,” said the Survey, quoting the study.
It also highlighted the importance of exports as higher capacities created by investments cannot be consumed by the domestic demand alone since savings would also increase.
“This is why an aggressive export strategy must be a part of any investment-driven growth model,” said the Survey.
While global trade was currently facing disruptions, the Survey said India’s share was so low that it should focus on market share, and the disruption in fact provided India with an opportunity.
The Survey also debunked the theory that investments replaced labour and lead to job losses. Taking the Chinese example, the Survey said what mattered most was whether or not investment enhanced productivity and international competitiveness.
“International evidence also suggests that capital and labour are complementary when a high investment rate drives growth,” Subramanian said.