Economic Survey: Road map and challenges for growth | Analysis
The Chief Economic Adviser (CEA) Krishnamurthy Subramanian has presented his first Economic Survey today. The document begins with the current CEA acknowledging the contribution of his predecessors in making the release of the survey a much anticipated event. The irony is, his immediate predecessor, Arvind Subramanian, has perhaps created more news by questioning India’s official growth statistics after quitting office, than he ever made while he was in the job.
There are two reasons why Arvind Subramanian’s views have attracted so much attention. One, the Indian economy has been experiencing a deceleration in economic growth for two consecutive years. From 8.2% in 2016-17, growth dipped to 7.2% in 2017-18 and 6.8% in 2018-19. Many believe that the slowdown could be worse. The periodic labour force survey (PLFS) gave the first official statistics on employment after the 2011-12 employment unemployment survey (EUS). The PLFS says that unemployment rate in India stood at 6.1% in 2017-18, a four-decade high if the statistics of previous EUS were to be compared. India, thus, is faced with a slowing economy and rising unemployment at a time when the world economy is already mired in what is perhaps a nascent trade war. This makes for an extremely worrying alignment of stars on the economic front.
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The economic headwinds have come at a time when political traction for the Narendra Modi government is the highest it has ever been. The scale of Bharatiya Janata Party’s (BJP) victory in the 2019 Lok Sabha elections shows that an overwhelming section of the electorate, which was already facing economic hardships when they voted, has reposed its complete trust in this government to solve their problems on the economic front.
This is the context in which the Survey, especially its first volume, which normally also has an imprint of the CEA’s views, needs to be evaluated. And it is on this count that the second Modi government’s economic perspective does not seem to be very different from its first term in office.
Here is why. The Survey calls for shifting gears in the economy through private investment as the key driver of jobs, export and demand. This is exactly what ‘Make in India’, the first important flagship programme announced by Prime Minister Narendra Modi, sought to do for the Indian economy. The economic performance of the last two-three years tells us that even though some of these initiatives could be working, they have not been able to firmly place India in a stable high-growth trajectory.
To be sure, the first Narendra Modi government had its share of legacy issues in terms of economic problems, the most important of which was the twin-balance sheet crisis in the banking sector. The Survey rightly notes that the worst of the non-performing asset (NPA) mess is now behind us and key reforms such as Goods and Services Tax (GST) are past their major implementation hurdles. Similarly, a significant decline in inflation could help in lowering the cost of capital (interest rates) and hence stimulate investment in the future. The survey believes that it is these successes which will provide the basis for higher economic growth in the future.
Having said this, the Survey can be accused of oversight on a principle it itself describes as extremely important — that economies are in constant state of disequilibrium, which, in simple terms, means being subject to both push and pull factors. One example can be given to explain this. Low inflation compared to double-digit levels five years ago has created the possibility of interest rates to be much lower. However, because the decline in inflation has been largely achieved via a squeeze on food prices, it also threatens to dampen rural incomes and hence aggregate demand in the economy. If the level of demand were to go down in an economy, investment might not increase at even lower interest rates. Thus a policy success in terms of low inflation need not be an unambiguous blessing. To be fair to both the government and the Survey, it does address these concerns in passing and hopes that direct income transfers under the PM-KISAN scheme will provide some sort of a stimulus to rural demand. One will have to wait for the budget to see whether the government intends to do more to stimulate both consumption and investment demand in the economy.
One thing which the Survey deserves credit for is trying to address issues which have normally been seen outside the purview of economic policy. It has a complete chapter on pendency in India’s lower judiciary and predicts significant economic gains if this were to be solved via ramping up capacity. A finance ministry document saying such things matters because this increases the likelihood of adequate resource allocation to take care of such long-pending institutional problems.
Last, but not the least, is the question of messaging by the Survey regarding the ambitions of the second Narendra Modi government vis-à-vis the Indian economy. It is here that it leaves us with a puzzle. On the one hand, there are multiple objectives and targets which seem to be extremely ambitious. However, it also says that its vision of India becoming a $5-trillion economy by 2025 can be realised with a real GDP growth rate of 8%, assuming an inflation rate of 4%. This raises the question whether the Indian state has given up on its dogged pursuit of double-digit economic growth rates.