The Economic Survey 2019 presented by Chief Economic Adviser (CEA) Krishnamurthy Subramanian focusses on moving to a “virtuous cycle” of savings, investments and exports to transform India into a $5 trillion economy in the next five years.
According to the survey, India’s GDP is forecast to expand by 7% in fiscal 2019-20, slightly higher than the 6.8% in 2018-19.
In his preface to the survey, the CEA said the team had been guided by a ‘blue sky’ thought process, an unfettered approach to thinking about the appropriate economic model for India.
“When the economy is in a virtuous cycle, investment, productivity growth, job creation, demand and exports feed into each other and enable animal spirits in the economy to thrive,” the survey’s authors wrote. “In contrast, when the economy is in a vicious cycle, moderation in these variables dampen each other and thereby dampen the animal spirits in the economy.”
In his first Survey, Dr. Subramanian highlighted the fact that private investment was a key driver for demand, capacity, labour productivity, new technology adoption, and for job creation.
“What we have tried to talk about is that investment is really critical; related to that is that investment by the private sector cannot happen unless there is no crowding out because of the government,” the CEA said at a press conference.
Further, he said, implicit in the emphasis on private investment was the fact that the government had and would stick to its fiscal consolidation glide path. It has committed to a fiscal deficit of 3.4% of GDP in 2019-20, and 3% each in the subsequent two years.
Fiscal glide path
“Implicit in the emphasis on private investment, what we are also talking about is sticking to the glide path, which over the last five years we have done a very good job of,” Dr. Subramanian said. “And therefore we anticipate that is the path we would continue on. We will be sticking to the fiscal path.”
Moving the economy into a virtuous cycle would require the adoption of certain practices and norms on data, legal reforms and policy certainty, and some micro-economic aspects such as boosting MSMEs and reducing the cost of capital, he said.
Notably, the Survey made the point that data must be viewed as a public good and used in a concerted way to deliver services.
It said that as data of societal interest is generated by the people, it can be created as a public good within the legal framework of data privacy.
The government must intervene in creating data as a public good, especially of the poor and in social sectors.
Interestingly, the Survey talked about merging the distinct datasets held by the government into a single dataset, which would generate “multiple benefits.”
Another key area of focus for the Survey was the MSME sector and how to make it grow so as to boost profit creation, job creation, and enhance productivity.
It noted that ‘dwarf’ firms (with less than 100 workers), accounted for more than 50% of all organised firms in manufacturing by number.
Despite this, their contribution to employment was just 14% and to productivity a mere 8%. Large firms, on the other hand, are just 15% in number but account for 75% employment and close to 90% of productivity. Therefore, there is a need to “unshackle” MSMEs and enable them to grow into larger firms. Regarding employment, the Survey pointed out that the general apprehension was that a high investment rate would mean labour would be substituted out by capital. This, the authors said, was an incorrect assessment as shown by the Chinese model.
“The Chinese experience illustrates how a country with the highest investment rates also created the most jobs,” the Survey’s authors wrote.
When the full value chain is examined, Dr. Subramanian explained in the press conference, then it becomes clear that capital investment fosters job creation since capital goods production, research and development, and supply chains also generate jobs.
The Survey also pointed to the need for labour reform , highlighting the fact that factories in States that have flexible labour markets are much more productive than those in States with rigid laws.