Seen from an economist’s perspective, the Economic Survey looks eloquent. But execution could run into a logjam as politicians are prone to controlling the consumer
The Economic Survey for 2019-20 has been prepared by the Chief Economic Advisor, Dr K Subramanian, keeping the ambitious target of achieving the $ 5 trillion economy status by 2024-25, set by Prime Minister Narendra Modi, at its centre. The rigorous analysis (a lot of it involves running of “regression equations” — a euphemism in econometric analysis to bring out correlation between various economic parameters) done by the CEA has to be seen in the backdrop of deceleration in the GDP (gross domestic product) growth to its 11-year-low of five per cent during the current year (first advance estimate) and the dire need to resurrect it without losing much time. Indeed, he projects the growth for 2020-21 at 6.5 per cent (pertinently, this is significantly higher than the projection of the International Monetary Fund [IMF] at 5.5 per cent).
In sync with this pretty ambitious rebound and keeping the economy on a high growth trajectory for the next four years, the dominant focus of the survey is on “wealth creation” with better distribution, which in a way also reflects Modi’s assertion time and again that “unless wealth is created, it won’t get distributed.” These prognostications though need to consider a piece of research released by rights group Oxfam ahead of the just concluded 50th Annual Meeting of the World Economic Forum in Davos, Switzerland. According to the study, India’s richest one per cent holds more than four-times the wealth held by 953 million people who make up for the bottom 70 per cent of the country’s population. Further, the combined total wealth of 63 Indian billionaires is higher than the total Union Budget of India for the fiscal year 2018-19 (Rs 24,42,200 crore). Between 2014-15 and 2018-19, the average growth in GDP was about 7.5 per cent, which demonstrates that wealth was generated at a fast pace but its distribution was highly inequitable. So, by restoring growth to a higher level 2020-21 onward won’t assure better distribution.
The survey gives an indication of decline in growth having already bottomed out (during the second quarter, it was 4.5 per cent) and that during the second half, the pick-up is anticipated in view of increase in FDI, building demand pressure and increase in GST (Goods and Services Tax) collections. The reference here may be to GST collection during November/December, 2019 crossing Rs 100,000 crore each (this is likely to touch Rs 115,000 crore). But this is more due to intensified efforts to rein in tax evasion, increasing compliance and checking fraudulent claims of input tax credit (ITC) rather than being indicative of any significant revival in economic activity.
In any case, in view of the survey itself talking of five per cent growth for the whole year, it is abundantly clear that there is not going to be any dramatic turnaround during the second half.
To see resurrection of growth during 2020-21, Dr Subramanian has alluded to the need for deviating from the fiscal deficit target of three per cent set by the Modi government for the year. This in itself is a substantial slippage from the three per cent glide path recommended by the Dr NK Singh committee on review of the Fiscal Responsibility and Budget Management (FRBM) Act to be achieved by 2018-19. Any reference to the three per cent benchmark is laughable when seen in the backdrop of the current year (2019-20), which is expected to end with a slippage to at least four per cent (against a target of 3.3 per cent), that too when off-budget liabilities and extra-budgetary resources (EBRs) are not included. If EBRs are included (there are some reports pointing to the Finance Minister’s intent to making these transparent in this budget), then the year may end up with a deficit close to six per cent.
Therefore, for boosting demand and investment (these are the two overarching constraints on growth), to expect the government to achieve this merely by deviating from the so-called prudential fiscal norms (read FRBM) is tantamount to “missing the wood for the trees.” Here, it may be pertinent to recap that already, through a number of mini-budgets presented by the Finance Minister (a spate of policy announcements and support measures made during August/September 2019 subsequent to the main budget presented in July 2019), the Government had already injected a number of demand boosters.
Indeed, a number of those measures had meant huge loss of revenue. For instance, the steep reduction in the corporate tax (from 30 per cent to 22 per cent for existing firms and from 25 per cent to 15 per cent for new companies to be set up after October 1, 2019) meant a loss of about Rs 1,45,000 crore; even after considering many firms not availing of the lower rates, the actual is still high at about Rs 1,00,000 crore. Taking into account other sops like tax refund to exporters, special dispensation for real estate sector, support to housing finance companies and so on, the total support would work out to well above Rs 2,50,000 crore.
As stated by the Prime Minister ad infinitum, the survey, too, reiterates the dire need for a whopping investment of Rs 100 lakh crore in infrastructure over the next five years. This is to be funded by 39 per cent contribution from the Union Government and States each and 22 per cent by the private sector. This will translate to Rs 8 lakh crore annually by the Centre and State each. For the Centre, this amount is even higher than its budget fiscal deficit [or total borrowings] for the current year. Likewise for the States, the numbers look theoretical to say the least. The official think tank will really have to look for innovative ways, including much greater participation of private sector (foreign investment included) of financing the mammoth investment in infrastructure. It is not as if the task is not doable. This requires a complete overhauling of the Indian banking sector as also the non-bank finance companies (NBFCs). In this context, the CEA needs to be commended for undertaking a comprehensive analysis of the reforms undertaken in the banking sector since 2015-16, viz cleaning up of the balance sheets of public sector banks (PSBs), the Insolvency and Bankruptcy Code (IBC) and its use for recovery of NPAs (non-performing assets), improvement in the quality of lending and so on.
He has visibly demonstrated as to how indiscriminate lending during 2008-2013 negatively affected investment and increase in the quality of lending from 2014 onward will positively impact investment and growth. But one wonders whether the “bad loan” syndrome has really bottomed out or more skeletons are yet to come out. The NBFC crisis in particular raises serious concern, especially when one looks at two behemoths in this segment, the Infrastructure Leasing and Financial Services (IL&FS) and Dewan Housing and Finance Company (DFCL) going bust. Considering that a sizeable chunk of the funds has reportedly been siphoned off by dubious promoters/management, the concern only gets aggravated.
With the government now being forced to consider and sanction special dispensation/packages even for NBFC (as the stakeholders consider their revival as crucial to revival of credit flows, investment and demand), one wonders we may not be landing in a situation of the exchequer pouring water (read funds) in a bottomless pit. One can only hope that we don’t see more cases of willful default or misappropriation of funds or else any revival attempt using tax payers money is bound to fail.
The survey rightly emphasises the need for expediting reforms particularly in the area of banking (the recommendation for reducing the government’s shareholding below the majority mark is pending for long), land acquisition, enforcement of contracts, elimination of bureaucratic red-tape, removing bottlenecks in transportation and clearances at the ports (this is particularly relevant for boosting exports) and so on as these major bottlenecks come in the way of ease of doing business and attracting investment. It has also guarded the Government against too much of intervention and micro-management of activities (including implementation of welfare schemes) which, if left to the market forces, would deliver much better results. Dr Subramanian has aptly articulated the role of what he euphemistically describes as the role of “invisible hand” juxtaposed with “public trust” in stimulating wealth creation.
Both are crucial pillars in galvanising Indian economy on to a high growth trajectory, yielding better distribution effects. Seen from an economist’s perspective, this looks eloquent. But, when it comes to execution which has to be done by the political class, one gets into a logjam as it is prone to controlling most of the things; in fact, almost all of the essential items in the consumer’s basket.
(The writer is a New Delhi-based policy analyst)
