Economic Survey lays out blueprint for growth to make India a $5-tn economy

New Delhi: The Economic Survey on Thursday prescribed a private investment-led growth strategy to achieve Prime Minister Narendra Modi’s vision of making India a $5 trillion economy.

The Survey said India needs to cut real interest rates, ease labour rules, reduce capital gains tax on startup investments and encourage infant firms to grow at a sustained 8% rate to reach the GDP target by 2024-25.

The 2018-19 Survey, authored by chief economic adviser in the finance ministry Krishnamurthy Subramanian, projected the Indian economy to grow at 7% in the year ending 31 March, slightly faster than 6.8% achieved in the previous year.

The Survey, which was presented in Parliament a day before finance minister Nirmala Sitharaman unveils her maiden budget, said the strong political mandate for the Modi government would ensure political stability and bring out the animal spirits of the economy.

“Investment rate, which was declining from 2011-12, seems to have bottomed out. It is expected to pick up further in the year 2019-20 on the back of higher credit growth and improved demand,” the Survey said.

Drawing lessons from the growth trajectories followed by East Asian economies that experienced long periods of high growth, the Survey postulates the centrality of investment as the “key driver” that catalyses the economy into a self-sustaining virtuous cycle supported by a favourable demographic phase.

“China has relied primarily on savings and investment with consumption decreasing significantly as a share of GDP. China remains an investment-driven economy even today with its investment and savings rates reaching about 45% of GDP even in 2017,” the Survey said.

Sunil Kumar Sinha, principal economist at India Ratings and Research Pvt. Ltd, said the emphasis of the Survey on investment as the central driver for a $5 trillion economy is easier said than done, especially against the backdrop of a significant decline in savings/GDP ratio. “The households segment, which includes unincorporated enterprises, is the only net saver in the economy. Clearly, the alternative would be to rely on foreign savings (for investment) but this would expose the economy to widening current account deficit with its associated consequences,” he added.

The Survey said as investment depends crucially on a low cost of capital, reducing real interest rates need not necessarily lower savings when the demographics are favourable.

“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. In fact, a cross-country comparison shows that the cost of capital remains quite high in India, which affects investment prospects in the country,” it added.

Advocating an “optimal tax policy”, the Survey seeks rationalization of tax policy and its implementation for startups to foster innovation. “Several studies have also suggested that capital gains tax can have significant economic consequences for individual investors in terms of its lock-in effects and associated deterring incentives to use capital gains into riskier investments. Design of optimal tax policy also aims to raise revenue efficiently and fairly, while encouraging the bona fide taxpayers and punishing the mala fide ones,” it said.

The Survey seeks an “aggressive export strategy” for the investment-driven growth model. “While it is true that world trade is currently facing some disruptions, India’s share in global exports is so low that it should focus on market share. One could even argue that the current disruptions provide an opportunity for India to insert itself into global supply chains. The High Level Advisory Group, chaired by Dr Surjit Bhalla, submitted its report in June 2019 on how India can enhance its exports. Its recommendations need to be studied and implemented where possible,” it said.

The Bhalla committee has advocated reducing India’s overall tariffs to benefit from the ongoing trade war between the US and China.

The Survey favours incentivizing firms based on their lifespan rather than on size, which leads to “dwarfing” of MSMEs, encouraging them to remain small. Dwarfs, which the Survey defines as small firms that never grow beyond their small size despite surviving for more than 10 years, dominate the Indian economy and hold back job creation and productivity.

However, Subramanian’s most original contribution to the Survey may be in its attempt to lay out an ambitious agenda for behavioural change by applying the principles of behavioural economics to several issues including gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.

By analysing the successful behavioural change effected by the Swachh Bharat Mission and the Beti Bachao Beti Padhao campaigns, the Survey incorporates their learning and lays out frameworks for integrating behavioural economics into policymaking in various contexts.

“Behavioural insights can be leveraged to transform the tax culture from one of tax evasion to tax compliance. This would then provide the necessary revenues for investments in both the hard infrastructure of roads, ports, railways, etc. and the soft infrastructure of skills and education,” the Survey said.