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CEA Krishnamurthy Subramanian authored this year's Economic Survey
CEA Krishnamurthy Subramanian authored this year's Economic Survey

Old wisdom and modern economics

  • After GDP growth dipped to a six-year low of 4.5% in the July-September quarter of 2019, many had wondered how far it would fall before the economy found its feet

India’s latest Economic Survey offers some comfort on the health of the Indian economy. Authored by chief economic advisor (CEA) Krishnamurthy Subramanian, it suggests that the growth slowdown has bottomed out, and a recovery is on the cards. It estimates that our gross domestic product (GDP) would expand between 6% and 6.5% in 2020-21, up a percentage point or more from the 5% expansion it pencils in for the current fiscal year.

After GDP growth dipped to a six-year low of 4.5% in the July-September quarter of 2019, many had wondered how far it would fall before the economy found its feet. In this respect, the survey’s projections are quite encouraging. Such a growth revival, however, would require the support of fiscal policy, which plays a crucial role in exceptional times like these. Private investment is showing few signs of life and monetary policy tools seem decidedly blunt. This means tax cuts or increased outlays on infrastructure and social programmes would have to stimulate growth. Unfortunately, India operates within a rigid fiscal framework that caps the extent to which a government can outspend its revenues. Some fiscal leeway does exist for exigencies, which the Survey nudges the Centre to resort to. For fiscal policy to be more adaptive to tough economic conditions, though, Parliament may need to modify the Fiscal Responsibility and Budget Management Act at some point.

If finance minister Nirmala Sitharaman takes its cues from the Survey for the Union budget to be presented on Saturday, it could help the wheels of the economy get out of their rut. Once growth stabilizes, the excess spending would need to be scaled back—lest other aspects of the economy get distorted. The Survey calls for strengthening the invisible hand of the market and supporting it with the “hand of trust". Like Subramanian’s previous Survey, this one also veers into advice from ancient Indian texts, such as Kautilya’s Arthashastra, to make its points. While all this gives it a touch of exotica, it doesn’t depart from market economics. Expanding the pie must precede efforts to redistribute it, in its view. For that, private enterprise must play its role. And we must trust that the self-interest of business will work in favour of everyone.

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