India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy that unleashes the power of competitive markets to generate wealth on the one hand, and weaning away from “pro-crony” policy that may favour specific private interests, especially powerful incumbents, on the other, according to the Economic Survey2019-20 tabled by Union Finance Minister Nirmala Sitharaman in Parliament on Friday.
The Survey said that economic events since 1991 provide powerful evidence supporting this crucial distinction. “The creative destruction has increased significantly after reform. The liberalization of the Indian economy in 1991 unleashed competitive markets and enabled the forces of creative destruction, generating benefits that we still witness today. Creative destruction brings new innovations in the market that serve people better than the old technologies they displace.”
The Economic Survey 2019-20 observed that pro-crony policies, in contrast to pro-business ones, erode wealth in the economy as cronyism fosters inefficiencies by inhibiting the process of creative destruction. Despite impressive progress in enabling competitive markets, pro-crony policies have destroyed value in the economy.
For example, an equity index of connected firms significantly outperformed the market by 7 per cent a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense. In contrast, the index under-performed the market by 7.5 per cent from 2011, reflecting the inefficiency and value destruction inherent in such firms.
“The strengthening the invisible hand of markets with pro-business policies and minimum government intervention would go a long way to build confidence of the policy makers, investors and the consumers,” said Dr. D K Aggarwal, president, PHD Chamber of Commerce and Industry.
The Survey said that wilful default, if unchecked, would increase the cost of borrowing for everyone else, including genuine businesses with profitable investment opportunities before them. Adverse selection may force genuine borrowers to exist the market altogether, leaving only cronies in the market and resulting in a market failure that slows economic growth, employment and wealth creation capacity.
“The tone of the Survey aligns well with the government’s pro-market, pro-entrepreneurship and wealth-creation stance. We expect the FM to adhere to these principles and deliver a strong and credible budget tomorrow,” said Ms. Anagha Deodhar, Economist, ICICI Securities .
Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation. Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.
“The argument in favour of pro-business policies, the need for aggressive divestment of CPSEs, concerns on the injurious effects of freebies and debt waivers are all pro-market views that are to be welcomed. The survey leaves little room for doubt about economic thinking. The big question is whether the budget too will reflect the same thinking.” said, Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
