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The Economic Survey is a statutory scorecard of the economy for the year gone by. It also customarily has pointers to the government’s thinking about future economic policy. Will it be aggressive about disinvestment? Will there be substantive labour market reforms in the coming year? By examining and parsing what is stated and unstated in the document, one can divine the priorities for the forthcoming Union budget, which will be presented on Monday. In recent years, the survey’s contents, especially the early chapters, are increasingly supposed to bear the imprimatur of its principal author, the chief economic adviser to the finance ministry. This year’s survey too, especially the first volume, surely indicates the preferences and policy favourites of its principal author Krishnamurthy Subramanian. Both the volumes of the survey have 10 chapters each.

The first volume contains analytical chapters covering different topics such as the pandemic response strategy, debt sustainability, India’s sovereign rating experience and the connection between inequality and growth. The second volume also has 10 chapters organized along conventional topics, such as macro overview, state of public finance, external sector, inflation, monetary management, industry and agriculture.

Each chapter in the first volume is abundantly supported with an extensive bibliography and boxes with illustrative theoretical models and data. No wonder the Economic Survey has become required reading in some post-graduate economics programmes, such as the one in Mumbai University.

The survey expects the economy to show a sharp V-shaped recovery next year, achieving a nominal GDP growth rate of more than 15%, which would be the highest in the post-independence period. This would also have a favourable impact on tax revenues and deficit financing. It expects growth to be fuelled by a strong revival in capital expenditure, including the spending on infrastructure as part of the National Infrastructure Pipeline.

The survey strongly advocates substantially higher public expenditures even if it means exceeding the prudent limits on fiscal deficit. This will cause growth, which in turn, will improve government finances, and an eventual return to the path of sustainable debt.

Interestingly, the survey makes the point that growth leads to sustainable debt and not vice versa. That is to say, that austerity and small governments do not lead to high growth in the context of developing countries like India. This is an interesting contrarian proposition, but well-presented in the survey. This implies that India should be pursuing a strong countercyclical fiscal policy i.e. increasing deficits during downturns and cutting back during boom times. Indeed, it says, that loose monetary policy can also improve growth and reduce unemployment. On the face of it, this contradicts the Chicago school thinking exemplified in the writings of Nobel laureates Milton Friedman and Robert Lucas. Maybe the version of the Chicago doctrine has been updated in the post-pandemic economy by Subramanian, who is also a Chicago alumnus.

The debt sustainability chapter also has a very interesting model comparing the economy to a corporation, and printing of money is compared to the issue of equity.

A nice blend of finance and economics, but not clear whether applying the Modigliani-Miller theorem of corporate finance is applicable to printing money.

Remember that almost 90% of the 20 trillion Atmanirbhar Bharat pandemic relief package announced in May was simply liquidity support. So, in the coming months, we can perhaps see the empirical impact of the proposition that increasing money supply can increase output and employment.

The chapter on sovereign ratings makes a compelling case to argue that India’s current rating of minimum investment grade is unfairly low. This takes into account the track record of zero defaults, abundant foreign exchange reserves and stable macro. Indeed, back in March 1990 when India was just two months away from the brink of default, its rating was much higher. The current rating is clearly anomalous.

The survey invokes the Rabindranath Thakur poem (Mind without fear), exhorting much higher fiscal spending this year, without any fear of a rating downgrade. In this matter, the current chief economic adviser is following in the footsteps of his predecessor, who had openly challenged global rating agencies, and had alleged partisanship. The chapter on inequality and growth makes the point that both are correlated, and that at this stage of India’s development, the focus must be on achieving high growth. It is only high growth that can raise resources required for redistribution and reduction of inequality.

During the pandemic, the Reserve Bank of India has shown much forbearance, in terms of a moratorium on loan repayments, liquidity assistance for stressed assets, and possible restructuring of loans as per the K.V. Kamath committee report. Such forbearance makes sense in the unprecedented time of the pandemic. But the chapter makes the case that forbearance during the earlier period was excessive and went on for too long.

The survey has asked for another asset quality review of bank and non-bank balance sheets after the current moratorium period ends. This possibly sent the alarm bells ringing on Dalal Street, since the asset quality review has in the past, perhaps uncharitably, been accused of causing a credit growth slowdown. Hence, this should count as one of the controversial but reformist suggestions in the survey.

Nevertheless, all the material presented is backed with solid arguments and theoretical justification.

Ajit Ranade is the chief economist at Aditya Birla Group.

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