Stop attacking capital: Eco Survey lays out road map to revive investment

The Economic Survey for 2017-18, tabled in Parliament on Monday, contained both optimism about the future direction of the Indian economy and some stark warnings about the risks to growth. The Survey has rightly said that over the medium term, three areas of policy focus stand out — employment, education and agriculture — but above all, India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines, private investment and exports. But the Survey’s prediction that growth will clock in at close to 7.5 per cent in the second half of the ongoing financial year and remain at or about the same level in the entire financial year 2018-19 is not straightforward, as it depends crucially on several aspects of the future panning out as hoped. For one, oil prices must not spike if the macroeconomic stability that is necessary for growth is to be retained. For another, manufacturing, agriculture and exports — drivers of growth — remain depressed. It is thus hard to see how a sustained growth revival can be achieved, even within the scenario sketched out by the Survey. 

The question of how a revival in investment can be engineered is particularly vexed. Without an increase in private sector investment, there is no clear path to a revival of manufacturing in India — a major political priority for the government. The Survey has pointed in particular to the need to de-clog the arteries of investment. The existing constraint on investment is the combination of stressed assets in banks, particularly public sector banks, and the heavy debts of companies, in particular, those in the infrastructure sector. The Survey has called this a “twin balance sheet” problem and has argued that this is being resolved following recent policy actions. In particular, the Survey claims that non-performing asset recognition has moved forward, that resolution processes have been put in place, and that funds have been committed to recapitalisation. However, there was a clear indication that, without the fourth ‘R’, or reform of the banking system, a revival of investment would be difficult to incentivise. 

The decision on whether the investment can be revived is essentially a political one. The trend of populist politics in the past few years has been implicitly anti-capital. The Economic Survey deserves credit for clearly calling out this trend as harmful to attempts to revive Indian growth. To repeat the word used by the Survey, “stigmatisation” of capital is counter-productive. Without the cooperation of capital, no growth revival is possible — it is necessary to have carrots as well as sticks. Further, the Survey says cooperation of capital cannot be forced and depends upon incentives and institutional reform. It recognises that there is a significant difference in the attitude of investors in 2018 and in the years of high growth prior to the 2008 crisis, and that reversing this attitude is central to any attempt to return to the high growth equilibrium of the mid-2000s. There is considerable evidence, marshalled expertly by the Survey, to indicate that what matters for the revival of growth is an investment, and not savings. Actions like demonetisation might cause a change in savings behaviour, but investment behaviour requires a careful understanding of investor incentives, and a less anti-capitalist political environment. It is to be hoped that the government has taken this message on board.