In the first Economic Survey of Prime Minister Narendra Modi’s second term, new Chief Economic Advisor K V Subramanian constructed a growth template for India that he claimed was a “departure” from “traditional Anglo-Saxon thinking”. The Survey argued that economies were rarely in “equilibrium” but rather in either a vicious or a virtuous cycle, and went on to make the case for investment as the key driver of job creation, exports, demand, and economic growth.
The Survey commended the government on service delivery and macro-economic stabilisation and projected growth of 7 per cent in 2019-20. While acknowledging that growth had slowed over 2018-19, it argued that was due to a base effect, a decline in government final consumption, low acreage of the rabi crop, and “election-related uncertainty”.
In terms of a practical reform agenda for Modi 2.0, the Survey argued for a return to the basics: an investment- and exports-led growth strategy, such as has been perfected by the People’s Republic of China. This would require a shift from depending on consumption demand to drive overall growth; which in turn would mean that domestic savings and exports have to be energised. An “aggressive export strategy” would also solve the problem of current over-capacity plaguing private investment.
Key to increasing private investment would be further reductions in policy uncertainty. The Survey found that a single quarter of increased policy uncertainty reduced investment growth for the following five quarters. It recommended a quarterly “economic policy uncertainty” index be tracked at the highest level, and that “quality assurance of processes in policymaking must be implemented in government via international quality certifications”.
Boosts to the global competitiveness of Indian producers were also pushed. The Survey used the example of Rajasthan to show that “reforms of restrictive labour regulation can foster job creation and capital accumulation”. Labour law and other small-scale promotion regulations created “perverse incentives for firms to remain significantly smaller in the Indian economic landscape” with adverse consequences for jobs and growth. The Survey recommended shifting emphasis from protecting “small” industries to protecting “young” companies so as to incentivise growth.
Lower interest rates were also necessary, the Survey said, showing the real rate has increased significantly in India and was higher than in its peer economies.
The Survey praised the government’s performance on the provision of certain last-mile goods, combined with behavioural changes. The Swachh Bharat Mission and the Beti Bachao, Beti Padhao were, the Survey said, in line with the insights of behavioural economics. “Nudge”-based policy that incorporated “social and religious norms” should now be extended to other fields of government action, including tax compliance and increasing household savings through the Jan Dhan Yojana.
India’s legal system was, the Survey said “the single biggest constraint to doing business in India and thereby fostering investment”. It quoted India’s rank of 163 in the World Bank’s latest Ease of Doing Business Report for contract enforcement. The Survey argued that “productivity will need to increase by 24.5 per cent, 4.3 per cent and 18 per cent for lower courts, high courts and the Supreme Court respectively” but added that “the use of technology, increase in working days and administrative/process reforms can enable these ambitious yet achievable efficiency gains.”
Chapters in the Survey made specific recommendations related to energy, minimum wages and data policy. The Survey calculated that there were currently 1,915 different minimum wages in place in India. It suggested instead four categories — unskilled, semi-skilled, skilled, and highly skilled — based on geographical region, covering all workers. On data policy, the Survey said the “government must intervene” to create “data as a public good”, in part by “merging distinct data sets” and sharing the consequences with the private sector “within the legal framework of data privacy”. On energy, the Survey predicted that per capita energy consumption in India would quadruple, and that an Indian city could perhaps emerge as a “Detroit for electrical vehicles in the future”.
A chapter on demographics pointed out that “population in the 0-19 age bracket has already peaked”. Many states were already had total fertility rates below the replacement rate, and the national TFR would be below replacement level by 2021. Preparing for this demographic transition would require raising the retirement age, improving health care access, and shifting emphasis from quantity to quality in education.