The new Economic Survey released on Friday is a delight to read, both for the quality of its analysis and the elegance of its writing.
The survey does not provide any new numbers, which is a good thing because it shows the economic data is now available on a regular basis. The reform suggestions strewn across the survey are also well known, which you could either interpret as a signal that they continue to remain on paper or as a signal that the reforms agenda is well articulated in comparison with earlier reforms by stealth.
The most interesting message in the Economic Survey can be read between the lines, about the trajectory of economic growth and inflation in the next 20 years. Given the assumptions about the investment rate and capital productivity, the economists in the finance ministry expect trend growth to be close to double digits. The prospect of double-digit growth was explicitly communicated in the previous edition of the survey; this time around, there is a more modest hint: “The next two decades should see the Indian economy growing faster than it has done at any time in the past and also faster than the growth in the next two years.” Like Lord Voldemort, it seems double-digit growth cannot be named. We wonder why.
Inflation is also headed higher: “We will have an average annual inflation of nearly 5% during the next decade or so of rapid growth.” The survey repeats a point that Kaushik Basu has made earlier, that developing countries tend to have higher inflation as productivity and prices catch up with those in developed countries. The underlying theoretical premise is what is called the Balassa-Samuelson effect. However, it is interesting to note that China has grown at double digits over the last two decades with few inflationary episodes. Is that because it has higher productivity growth than India or is it because it has a bigger tradables sector?
The Economic Survey also offers an intriguing link between financial inclusion and inflation, though it hastens to add that that is no reason to go slow on the former. The poor continue to hold a large part of their savings in cash. Their inclusion in the formal banking sector will lead to faster growth in bank deposits and hence money supply, which is a recipe for inflation.
Higher inflation would not be a problem if growth were evenly distributed. But that may not be so. Well-designed social policies are needed to protect the poor. Like last year, the survey has an excellent chapter on the microfoundations of policy, which shows that good intentions are not an adequate guide to policy. The structure of incentives is also very important.
We wish more people read this perceptive chapter, so as to reduce the wearisome confusion in India between good intentions and good policy.
Will India touch a double-digit growth trajectory? Tell us at email@example.com