The Economic Survey is usually a document that reviews the major developments in the economic fortunes of the country over the past year. Over the past five years, it has also become a vehicle for the Chief Economic Adviser to present ideas and suggestions for the future through analysis based on in-house and external research. The Survey is thus presented in two volumes. Volume I is a collection of thought pieces on ideas for the future while Volume II reviews economic developments over the past year.
The review of economic developments over the past year in Volume II of this year’s Survey makes for tough reading.
That is hardly surprising given that the entire country is well aware that India is in the midst of a painful economic slowdown. The Survey faithfully describes the ongoing growth slowdown as well as the unfolding fiscal implosion.
Where the Survey appears to be clutching at straws is in its attempts to provide explanation for the growth slowdown. As per the Survey, along with domestic credit conditions, the uncertain international trading environment due to the US-China trade war as well as a global slowdown in growth are the main downside risks to India’s growth prospects. The fact that trade is a very small part of India’s economy is conveniently glossed over, as is India’s rising protectionist tendency.
The Survey’s description of the fiscal situation has an air of resignation to it. The tax revenue data till November 2019 shows that net tax revenues that were budgeted to grow by 25 per cent in this fiscal year have increased by a meager 2.6 per cent between April and November 2019. Unless there is a dramatic improvement in tax collection in the remainder of the year, the fiscal position is going to deteriorate very sharply this year. The Survey acknowledges this with the further note that the growth slowdown severely limits the government’s options in terms of maintaining the fiscal target. Unsurprisingly, however, the Survey understates the deterioration of the fiscal position by not describing the borrowings of public sector undertakings. The general government deficit, which should include borrowings of the central and state governments as well as all public sector entities, is much higher than is being reported.
The Survey expresses the hope that the Rs 102 lakh crore investment in infrastructure planned in the National Infrastructure Pipeline (NIP) will help raise productivity and remove bottlenecks. The problem here is two-fold. First, the financing of this investment is never clearly discussed. Second, there is an implicit assumption that the returns to infrastructure investment are huge. Both of these have proved problematic in the past. The private-public-partnership (PPP) model that financed the bulk of our infrastructure boom in the first decade of the 2000s sowed the seeds for the explosion of non-performing assets (NPAs) of public sector banks. If the government plans to raise the funds by borrowing directly then we are looking at an alarming deterioration of the fiscal deficit. The government just doesn’t have the fiscal space.
In terms of the returns to infrastructure, the evidence from India is not good. In recent work with Urvi Neelakantan, we find that almost half of all NPAs today are concentrated in three sectors of the economy: Basic metals, construction and electricity, gas and water. These three sectors exhibit strange patterns in their interaction with banks: NPAs tend to rise when productivity rises while banks tend to increase their lending to these sectors when their productivity is low. Crucially, these three sectors are heavily linked to infrastructure and have significant interface with governments.
One reason why infrastructure investment in India ran into problems was the anaemic growth in sectors that would have been the main source of demand for infrastructure. In the absence of robust growth in effective demand for infrastructure, the firms that borrowed to invest in it were unable to recover payments from their customers. A number of those loans ended up on the books of banks as NPAs. In order for infrastructure demand to be high, we need robust growth in sectors like manufacturing which demand services like roads, electricity and ports. We need a balanced push for reforms rather than focusing on infrastructure alone. That might lead us back down the path to another round of NPAs.
An interesting chapter in the Survey is the one on the power of wealth creation. It pulls in various historical sources to argue that India may have forgotten its rich history of entrepreneurship and wealth creation. The chapter makes an eloquent case for policies to enable wealth creation, recognise wealth creators and encourage entrepreneurship. It does an admirable job of linking the liberalisation of the 1990s to wealth creation and the upliftment of living standards of people since then. Along the way, it also issues a shout out to the rewards of an open trading regime. While this isn’t necessarily new ground, at a time when businesses are suspected, there are capricious enforcement drives and a resurgence of protectionism, the Survey’s chapter on wealth creation hopefully provides some food for thought to policymakers.
The Survey also devotes some pages to the role of trust in an economy. It makes the valid point that such trust is an important feature of market economy. Unfortunately, the Survey fails to note that citizens also need to be able to trust the government. While the Survey devotes an entire chapter to trying to prove that GDP in India has not been overestimated since 2011, it appears to have not realised that the issue isn’t whether Arvind Subramanian was right or wrong. The fundamental issue is that the public doesn’t believe the official statistics. That is due to the breakdown of trust in government on account of its meddling with the data collection and dissemination process.
Overall, the Survey is worth a read, especially Volume II. The downside is that it seems a little out of ideas about the immediate way out of the current economic mess.
This article first appeared in the print edition on February 1, 2020 under the title ‘Clues, not ideas’. The writer is Royal Bank Research Professor of Economics,University of British Columbia.
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