The one thing one has learnt over the years is that the Economic Survey (ES) most often has no bearing on the forthcoming budget. This is most likely to be true this year as well. It will be futile in my view to look for tell-tale signs in the Survey for either reform measures or even the likely trends in and patterns of public expenditure or revenues contained in the budget. I would wait to see if the Finance Minister assumes the GDP growth for his budget estimates of between 6.75 to 7.5 percent as put out by the Chief Economic Advisor (CEA) in the ES.
But I do want to emphasize that the quality of the ES lies in being a dependable ‘document of record’ in the first place and suggesting new ideas and reform measure that could result in paradigmatic shifts in policy regimes over time as India continues its search of “that sweet spot (which) is still beckoningly there.” In its self-admitted attempt to ‘try and do everything’, I am afraid, the ES has perhaps underplayed its role as a document of record apart from virtually making it ‘too much of a good thing’ by crowding in a very wide range of issues raised and ideas. Its ideational sweep and presentation style would reinforce the perception by hard nosed practitioners, economic agents of being ‘too theoretical’. Could it be that the CEA has his gaze fixed more on the global audience than on the domestic one? Do the chapters on internal migration and domestic trade really address widespread domestic concerns? I would wait for the day when the ES results in a movement in the Indian capital markets.
The three risks pointed out are that of (i) lingering negative effects of demonetization in the absence of needed policy response; (ii) rising global oil and commodity prices and (iii) possible emergence of trade tensions amongst major economies and rising protectionist tendencies that could drive global growth downwards. On demonetization I would like to argue that despite its rich analytical discussion on the impact of demonetization, the ES has perhaps tended to under-estimate the benefits of this historical and unprecedented move. By encouraging digitization and de-addicting the economy from cash and by folding even a fraction of the parallel economy into the ‘official’ economy, demonetization could provide a substantial uptick in GDP growth numbers and also significantly improve investment climate and sentiments as it makes the economic system more transparent, process driven and less ridden with corruption. But ES does a real service by unequivocally rebutting those who saw demonetization driving the Indian economy entering into a downward spiral and to an extended recessionary period.
On global oil prices, we may see them softening once again as the US under a Trump presidency begins to pump out more oil from its principal reserves that were out of bounds hitherto and not wait only for recovery in shale oil which can come only when oil prices approximate $60-65. This could also put an end to the fragile OPEC agreement to restrain production that has pushed up prices in recent months. Moreover, Chinese demand for fossil fuels may remain soft as growth rates stabilize around 6-6-5 percent. Trade wars and tensions may not thankfully emerge as China decides to ‘work with the US’ in the latter’s efforts to reduce its trade deficit and generate domestic employment, just as Japan capitulated to voluntary export restraints on its auto exports to the US in the late eighties. Pragmatism and not adventurism is the hall mark of East Asian societies and that would be true of the Chinese as well despite the rising neo-nationalism.
ES does well to point out the upside risk of rising global economic growth and consequently greater scope for Indian exports, which seem to have finally shrugged off their shackles that saw them declining for 18 consecutive months and register a rise, though modest, in the past four-five months. With a mere 1.6 percent share in global trade in goods and only 2.3 percent in global services trade flows, India has a huge potential to aggressively expand its exports and use external demand as major growth driver in the coming years. I would have, in this context, really liked to see the CEA with his immense expertise in international trade give us the insights and recommendations on how Indian firms, specially those in small and medium (SME) category could get on a trajectory of rising export growth and become integrated with global and regional production networks. Merely saying that this can be done by signing more FTAs with EU and the UK (and may I ask why not the US?) and mentioning GST induced tax rationalization does not suffice. I wonder if the Economic Division of the Ministry of Finance, which produces the ES, discussed the issue of signing a larger number of FTAs with the Department of Commerce. The two do not seem to be on the same page.It would also have been useful here to discuss India’s optimal position on joining the RCEP, which China is now pushing in the wake of the US withdrawal from the Trans-Pacific Partnership (TPP).
Some of these concerns though are addressed in Chapter Seven that discusses the export prospects for clothes, shoes and leather goods, in which labor intensity is as much as 80 times more than in autos and 240 times more than in steel! These sectors are also those that are being vacated by China and India is at present consistently losing out to its smaller competitors like Bangladesh and Vietnam. ES discusses the multiple constraints faced by these sector in some detail and also suggests that targeting export growth in these sectors would also help generate much needed good quality employment. ES has chosen to steer away form the discussion now raging throughout the world on how these employment opportunities in the hitherto labor intensive sectors could be rapidly disappearing with the onset of ‘Industry 4.0’ and re-shoring of these capacities back to advanced economies aided by rising automation and networking capabilities generated by internet of things and machines. This is surprising in a document, which clearly tries, both in style and content, to be in step with global practices.
Does India objectively deserve to be six notches below China in investment grading? Most of us will be appalled at this. Therefore, ES must be commended for putting in their place the global credit rating agencies. Poor standards is just so apt a title to be applied to them. By pointing out in no uncertain terms the discriminatory treatment given by these agencies to India vis a vis China, whose recent growth and indebtedness record is far worse than ours, the ES has challenged them to make their country risk assessments more objective. Thankfully, foreign equity investors apparently do not rely on these ratings as is reflected in India attracting the highest ever volume of FDI in the second quarter of 2016-17 of nearly $26 billion. But the inexplicable rating performance does mean a higher cost of external credit for Indian companies and that is indeed a pity at a time when India’s investment needs are virtually insatiable.
That brings me to the most important challenge facing the country today. This is the continued extreme weaknessof private investment during the last four years. Real gross private capital formation is negative in the present year. This effectively implies a contraction in the economy’s production capacities and perhaps also an erosion of productivity levels. This is simply untenable. ES analyses these catastrophic trend in the context of the ‘twin balance sheet’ problem of the banking sector with unsustainably high levels of non-performing assets and the corporates becoming unviable because of massive debt overhang. It holds out the recommendation of establishing PARA (public sector asset rehabilitation agency) as a possible solution. It is not clear whether PARA would be able to take on the cases of private corporate sector debt as well and if it will perform any better than private sector asset management companies. ES does not really justify this recommendation except to say that it should be tried because other measures have failed. This is surely not workable. I would have rather seen ES argue for the government permitting mortality both in the public sector banking sector and also in the private corporate sector. I do not support taxpayers money being thrown at rescuing entities that have consciously taken on unwarranted risks.
Is an expansion in public capital expenditure a possible means for triggering private investment through the by now famous ‘crowding in’ phenomenon? I think so. Especially if this capital expenditure is sharply focused on sectors such as affordable housing that has backward linkages reputedly to nearly 200 industries and also helps improve labor productivity. I don’t see a discussion of this apparently effective investment raising modality in the ES. This is possibly due to its reluctance to appear to be even mildly suggesting a relaxation of the FRBM norms and any attempt by the Finance Minister to not continue with the path of fiscal consolidation. I have the opposite view. I think of fiscal policy as necessarily being counter-cyclical. I also would like fiscal policy to target revenue deficit and not necessarily the fiscal deficit because borrowing to raise productivity and expand capacities to generate more employment is eminently justifiable. I hope the FM will make the right choice in the coming budget.
Finally, the ES discussion on the Universal Basic Income (UBI) and its merits. To begin with I would have surely preferred if the CEA had cast this as a conversation between the Mahatma and DeendayalUpadhyaya, whose Antodaya was more forthright about helping the last in the queue than the Mahatma ever was. Moreover, the reasons for discussing UBI at all are not clear to me in the Indian context. We already have a plethora of subsidies that perhaps take up as much as 5 percent of the GDP if all of them at the Central and State level are accounted for. Is it not better to keep a laser like focus on improving the delivery of these existing transfer payments and eliminating leakages through a wider application of JAM based direct benefit transfers. Am I wrong in assuming that DBTs applied through JAM and focused on the poor as identified through either a self selection or asset based criteria will fulfill the objectives of UBI in our case. Is it necessary for us in India to take up every idea that is tried in some other country even if it may imply avoidable expansion in government bureaucracy and an even more avoidable duplication of already burgeoning subsidy budget.