Economic Survey Calls for a Sustained 8% Growth Rate for India to Become a USD 5 Trillion Economy by 2024-25.

Economic Survey States “India’s Economy has Performed Well During Last 5 Years”

Underlying Theme of Survey is for “Shifting of Gears” to Enter into a Virtuous Cycle for a Sustained Economic Growth

Virtuous Cycle is to be of Savings, Investment and Exports Supported by Favourable Democraphic Phase

The Economic Survey tabled by the Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman in Parliament today portends bright prospects for economic growth. The Survey says its theme is about enabling a “shifting of gears”, “to achieve the objective of becoming USD 5 trillion economy by 2024-25, as laid down by the Prime Minister”.  It says, for this “India needs to sustain a real GDP growth rate of 8%”. The Survey says that it departs from “traditional thinking by advocating a growth model for India that views economy as  being either in a virtuous or a vicious cycle, and thus never in equilibrium”.  

The Survey says that it “makes the case for investment, especially private investment as key driver, that drives demand, creates capacity, increases labour productivity, introduces new technology and generate jobs”.  The Survey suggests that “Exports must form an integral part of the growth model because higher savings preclude domestic consumption as the driver of final demand.”

The Survey suggests that to tackle various economic challenges of demand, jobs, exports these elements are to be all complimentary and not as separate problems. The Survey states that these macro-economic elements exhibit significant complementarities, and may become a part for catalyzing the “economy into a virtuous cycle”.  The Survey presents “data as a public good, emphasizes legal reform, calls for policy consistency and for encouraging behavior change using principles of behavioral economics.”

The Economic Survey states the key ingredients should “include focus on policies that nourish MSMEs to create more jobs and become more productive, reduce the cost of capital and rationalize the risk-return trade-off for investments.”

I.  ACHIEVEMENTS:

The Economic Survey states that India’s economy has performed well during the last 5 years and Government has ensured that the benefits of growth and macroeconomic stability reached the bottom of the pyramid of society.

The Economic Survey states that while world output grew at 3.6% in 2014 and in 2018, India took giant strides forward to become the sixth largest economy by sustaining growth rates higher than China.  The Survey stated that the “average inflation in these 5 years was less than of the inflation level of the preceding 5 years matching the lowest levels attained in the country’s post-independence history.   The current account deficit (CAD) remained within manageable levels and foreign exchange reserves rose to all-time highs.”

The Survey states that such scenario emerged from a new institutional framework of constituting of the ‘Monetary Policy Committee(MPC)’ in February 2015 with the mandate to target a headline inflation of 4 per cent with a band of two percentage points on either side.  It said that “discipline was also imposed on the Gross Fiscal Deficit(GFD). The Fiscal Responsibility and  Budget Management (FRBM)Act of 2003 which determines the glide path for the ratio of  Gross Fiscal Deficit to GDP target of 3% got a new lease of life since 2016 and this ratio declined from 4.5% in 2013-14 to 3.4% in 2018-19.  The Survey states that other macro stability indicators have similarly improved.

BENEFICIARY FOCUS AND TARGETED DELIVERY

The Survey states that the “Aadhaar Act, 2016 has enabled creation of pathways for the benefits of growth to reach the bottom of socio-economy ladder.”   The Survey states that the Pradhan Mantri Jan Dhan Yojana(PMJDY) and Jan Dhan, Aadhar, Mobile (JAM) trinity further secured Direct Benefit Transfers (DBT)  of over 7.3 lakh crore rupees under various schemes like Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), National Social Assistance Program(NSAP), Pradhan Mantri Awas Yojna-Gramin(PMAY-G), Pradhan Mantri Ujjwala Yojana(PMUY) etc,.  Presently 55 central ministries through 370 cash-based schemes are transferring benefits under the DBT mechanism.

INFRASTRUCTURE

The Survey states that creation of physical infrastructure accelerated significantly during 2014-19.  “Electricity finally reached everybody in India in April 2018.  The construction of national highways (NH) proceeded at a rapid pace with more than 20% of the existing highway length of 1,32,000 km being constructed in the last four years alone.  Scheme to extend  flight connectivity to Tier 3 and Tier 4 towns was launched in 2017.

FEDERALISM

 Fiscal federalism strengthened significantly when the 14th Finance Commission increased the share of States in the divisible pool of central taxes from 32% to 42%.  The launch of GST in July 2017 and the GST Council experiences provides key learning for implementing cooperative federalism in several other areas such as labour and land regulation.

CORPORATE EXITS

The Insolvency and Bankruptcy Code (IBC) was operationalised in 2017 and significant number of non-performing assets were brought under its ambit.  Large sums were recovered by creditors from resolution or liquidation bringing in overall improvement in the business culture of the country.

II. BLUE PRINT FOR GROWTH & JOBS- NEXT FIVE YEARS           

“India aims to grow into USD 5 Trillion economy by 2024-25 to become the third largest economy in the world.  This requires real annual growth rate in GDP of 8%.”

The Survey states that “it departs from traditional thinking by outlining growth model that views the economy being in a constant disequilibrium – a virtuous cycle or a vicious cycle”.  It says “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 discusses the case of growth stories in China, Thailand, Indonesia and South Korea to highlight the issue of Gross Capital Formation – savings & investments contributing to  GDP in these countries.

JOBS

Citing the Chinese experience, the Survey says “when examined in the full value chain, capital investment fosters job creation as capital goods production, research and development, and supply chains also generate jobs.”

EXPORTS

The Economic Survey emphasizes on the importance of exports for economic growth of the country pointing out that India’s share in global exports is low and that it should focus on market share.  The High Level Advisory Group, chaired by Dr.Surjit Bhalla, submitted its report in June 2019 on how India can enhance its exports and these need to be implemented where possible.”

EQUILIBRIUM & DISEQUILIBRIUM OF ECONOMIES

The Economic Survey Report states that “the earlier attempt to create 5-year plans, largely using the equilibrium framework, failed because it was too prescriptive for an inherently unpredictable world. Therefore, navigating this uncertain world of dis-equilibrium requires three elements:  (i) a clear vision; (ii) a general strategy to achieve the vision; and (iii) the flexibility and willingness to continuously recalibrate tactics in response to unanticipated situations.

The Economic Survey Report suggests that tactics to achieve the vision of a USD 5 Trillion economy by 2024-25 would require that we need to model the different elements of the economy simultaneously in an integrated manner with assimilation tools like behavioural economics and pursuit of other new concepts for enhancing productivity and efficacy of welfare programmes.

Accordingly, the Survey says that it has dealt  in separate chapters of the report, the aspects of behavioural economics, issue of continuous recalibration of policies, through data-driven evidence, to achieve the 5 trillion dollar economy.

As a part of blue print for next 5 years for achieving the objectives for the growth and also increasing jobs, the Survey suggests that “strengthening the legal system may be the best investment Indian reformers can make.”

III. MAJOR FACTORS, REFORMS AND RISKS FOR INDIAN ECONOMY

ROLE OF DEMOGRAPHICS

The Survey says that it has discussed it in a separate chapter as the aspect of demographic dividend was seen “to have had a significant effect on economic growth throughout Asia between 1960 and 1990.”  The report graphically “highlights that the working age population (20-59 years), which comprised 50.5 % of the overall population in 2011, will increase to about 60% in 2041.  A rise in the share of the working-age population, brought about by a decline in the fertility rate, increases income per capita as output per worker remains unchanged but the number of youth dependents declines.  Finally, saving also increases as a result of a composition effect; as a large portion of saving tends to occur between the ages of 40 to 65 as people start to save for retirement.

The Survey says that its “analysis, shows that savings is driven primarily by demographics and income growth.  Therefore, keeping domestic interest rates high may not encourage savings behaviour; a mildly positive real rate is good enough. At the same time the reduction in real interest rates can foster investment and thereby set in motion the virtuous cycle of investment, growth, exports and jobs.”

MSMEs, THEIR SIZE, AGE, INCENTIVES AND LABOUR LAWS

The Survey says that it has found interesting facts based on an analysis conducted using  ‘firm’-level data from the Annual Survey of industries for the year 2016-17.  It says that firms that are able to grow over time to become large(those employing 100 or more workers and  not more than 10 years old) are the biggest contributors to employment and productivity in the economy.

The Survey highlights that restrictive labour regulations, which exempt small firms from such regulations, and other size based incentives, which provide benefits to MSMEs, irrespective of their age, have played a crucial role in providing perverse incentives for firms to remain significantly smaller in the Indian economic landscape.  Thus it recommends focusing incentives on infant firms, i.e., firms less than ten years of age with the appropriate grandfathering of the existing pattern of incentives to MSMEs.

 Citing the labour law changes in Rajasthan, the Survey states reforms of restrictive labour regulations can foster job creation and capital accumulation in the States.  It says “the labour law changes are crucial also because they can enhance investment.”

ROLE OF FINANCIAL SECTOR

The Economic Survey states that “the investment led growth model implies a rapid expansion in the financial system– both banks and capital markets.”  But, at the same time the Survey points out that “Our own experience of rapid credit expansion from 2006 to 2012 illustrates the risk, where the quality of credit sharply deteriorated when the quantity was expanded.  In this context, recent efforts to clean up the banks and establish a bankruptcy process should be seen as valuable measure that must be completed.  Painful as it may have seemed, the banking sector clean up and the IBC framework are important foundations that will now reap benefits when the investment-driven growth model is put into motion.”

THE RISK RETURN IN THE ECONOMY

The Economic Survey states that “systematically lowering the risks faced by investors in India is critical for the success of the investment-driven model for economic growth.  The Survey points out that India is now ranked 3rd in the world in the start-up ecosystem and that it is important to continue the favourable circumstances for such an ecosystem, for private investments, to enable the virtuous cycle of investment, demand, exports, growth and jobs.

Investment-driven growth model to catalyse a virtuous cycle of savings, investment, exports and jobs for sustained GDP growth. Economic Survey promotes an investment-driven growth model to catalyse a virtuous cycle of savings, investment, exports, productivity and jobs. It prioritises private investment supported by legal and institutional reforms, completion of financial-sector clean-up and a focused MSME incentive structure that avoids perverse size-based benefits. The Survey stresses exports as integral to demand, recommends modest real rate reductions to spur investment, and calls for data-driven, behavioural-economics informed policy consistency to enable the transition to sustained high growth.