Blueprint For Growth: Economic Survey

04 Jul 2019

Economic Survey was released on 4 July 2019 by the Union Minister of Finance in Parliament.

Relevance of the News: The Survey forwarded a private investment-led growth strategy to achieve Prime Minister’s vision of making India a $5 trillion economy by 2024-25.

Highlights of Economic Survey:

It projected the Indian economy to grow at 7% during 2019-2020, slightly faster than 6.8% achieved in the previous year.
Sustained real GDP growth rate of 8% needed for a $5 trillion economy by 2024-25.
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 Survey suggests a move towards a “virtuous cycle” of savings, investments and exports to transform India into a $5 trillion economy.
Virtuous cycle would require the adoption of certain practices and norms on data, legal reforms and policy certainty, and some micro-economic aspects such as boosting MSMEs and reducing the cost of capital.
When the economy is in a virtuous cycle, investment, productivity growth, job creation, demand and exports feed into each other and enable all sectors and energies in the economy to thrive.

Private Investment as the Key Driver of Growth, Jobs, Exports and Demand:

Investment is the “key driver" to catalyse the economy into a self-sustaining virtuous cycle. It is the key driver for demand, capacity, labor productivity, new technology, creative destruction and job creation.
It suggests protecting the private investment from being crowded out. In order to achieve this, the Survey suggests the government to follow its fiscal consolidation glide path. This includes being committed to a fiscal deficit of 3.4% of GDP in 2019-20, and 3% each in the subsequent two years.
The general apprehension is that a high investment rate would mean labour would be substituted out by capital but this has been proved as incorrect by the Chinese Model which has shown that how a country with the highest investment rates also created the most jobs.
According to Survey, capital investment fosters job creation since capital goods production, research and development, and supply chains also generate jobs.
Key ingredients for a self-sustaining virtuous cycle:
Presenting data as a public good.
Emphasizing legal reforms.
Ensuring policy consistency.
Encouraging behavior change using principles of behavioral economics.
Nourishing MSMEs to create more jobs and become more productive.
Reducing the cost of capital.
Rationalizing the risk-return trade-off for investments.

Data “Of the People, By the People, For the People”:

Data must be viewed as a public good and used in a concerted way to deliver services.
It is of societal interest and is generated by the people which can be created as a public good within the legal framework of data privacy.
It suggests merging the distinct datasetsheld by the government into a single dataset, which would generate “multiple benefits.”

MSME and ‘Dwarf’ Firms:

Dwarfs i.e. small firms that never grow beyond their small size despite surviving for more than 10 years, dominate the Indian economy.
Contribution of dwarf firms (firms with less than 100 workers) to employment is only 14% and to productivity is a mere 8% but large firms account for 75% employment and close to 90% of productivity despite accounting for about 15% by number.
Survey favours incentivizing firms (MSMEs) based on their lifespan rather than on size, which leads to “dwarfing" of MSMEs, encouraging them to remain small and hold back job creation and productivity.
Survey calls for unshackling MSMEs and enabling them to grow by way of:
A sunset clause of less than 10 years, with necessary grand-fathering, for all size-based incentives.
Deregulating labor law restrictions to create significantly more jobs, as evident from Rajasthan.
Re-calibrating Priority Sector Lending (PSL) guidelines for direct credit flow to young firms in high employment elastic sectors.

Policy for Real People, Not Robots: Leveraging the Behavioral Economics of “Nudge”:

Survey calls for the usage of behavioral economics to ‘nudge’/ guide people towards desirable behavior w.r.t. several issues including gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.
Using insights from behavioral economics to create an aspirational agenda for social change:
From ‘Beti Baco Beti Padhao’ to ‘BADLAV’ (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi).
From ‘Swachh Bharat’ to ‘Sundar Bharat’.
From ‘Give it up” for the LPG subsidy to ‘Think about the Subsidy’.
From ‘Tax evasion’ to ‘Tax compliance’.

Boosting the reduction in government revenues:

The Survey highlights that government revenues for current fiscal year will witness a decline of about 1.6 lakh crore mainly because of fall in expected tax revenues due to slow growth.
This fall in revenue can be bridged by boosting the non-tax revenues through:
Releasing the land held by PSUs and monetizing them.
Higher disinvestment target should be set. Government could reduce its holdings in some PSUs to below the majority stake of 51% of direct control.

India's Demography at 2040: Planning Public Good Provision for the 21st Century

Sharp slowdown in population growth is expected in next 2 decades. Most of India will enjoy demographic dividend but some states will transition to ageing societies by 2030s.
It is forecast that the population rate will grow less than 1% from 2021 to 2031 and under 0.5% from 2031 to 2041 due to the fall in the total fertility rate (TFR), which is projected to decline between 2021 and 2041 and fall below replacement level fertility at 1.8 as early as 2021.
At the State level, southern States as well as West Bengal, Punjab, Maharashtra and Himachal Pradesh have below replacement level fertility and will see TFR decline to 1.5-1.6 by 2021. And by 2031, all States are likely to see below replacement level fertility.
The size of the elderly population, 60 years and above, is expected to nearly double from 8.6% in 2011 to 16% by 2041.
This will throw new policy challenges such as provision for health and old-age care, access to retirement-related financial services, public pension funding, and retirement age.
This will mean additional jobs will have to be created to keep pace with annual increase in working-age population of 9.7 million during 2021-31 and 4.2 million during 2031-41.
Increasing the retirement age for both men and women going forward could be considered in line with the experience of other countries like U.S., Germany and France.

A Minimum Wage For Inclusive Growth

Survey proposes a well-designed minimum wage system as a potent tool for protecting workers and alleviating poverty.
Present minimum wage system in India has 1,915 minimum wages for various scheduled job categories across states. Survey supports rationalization of minimum wages as proposed under the Code on Wages Bill.
‘National Floor Minimum Wage’ should be notified by the Central Government, varying across five geographical regions.
Minimum wages by states should be fixed at levels not lower than the ‘floor wage’.
‘National level dashboard’ under the Ministry of Labour & Employment for regular notifications on minimum wages, proposed by the Survey.

Enabling Inclusive Growth through Affordable, Reliable and Sustainable Energy

5 times increase in per capita energy consumption is needed for India to increase its real per capita GDP by $5000 at 2010 prices, and enter the upper-middle income group. Currently India is in the lower-middle income group.
Share of renewable (excluding hydro above 25 MW) in total electricity generation increased from 6% in 2014-15 to 10% in 2018-19.
Market share of electric cars is only 0.06% in India while it is 2% in China and 39% in Norway.
Access to fast battery charging facilities needed to increase the market share of electric vehicles.