The presentation of the Economic Survey to Parliament is a constitutional requirement, and it precedes the Union Budget by a day. It is a compilation of a huge wealth of authentic data. This year's Survey is about 350 pages long. Chief Economic Advisor Raghuram Rajan says this year his team cut the size (and hence, pages and ink) of the Survey 20 per cent. If this is a pointer to the coming expenditure compression by his minister, that's a good sign for fiscal consolidation.
The Survey says this financial year, growth will be about five per cent. It seems it now agrees with the advance forecast of the Central Statistics Office, about which the finance minister had some reservations. But the Survey is more upbeat about next year, forecasting a higher growth rate and a lower inflation rate. The short-term worry points are declining savings rate (especially financial savings), sharply lower consumption spending growth (down from eight per cent to four per cent), low investment spending and pile-up of stalled and shelved investment projects.
It correctly diagnoses the problem of widening current account deficit as the gap between savings and investment. This gap is the amount of foreign capital that needs to flow into the country. So, the remedy is not merely banning the import of gold, but to revive domestic savings. This in turn needs private and public corporate savings to rise, which is related to industrial revival and profitability.
The Survey wrongly emphasises the role of tight monetary policy as the cause of a fall in consumer and investment spending. It says external conditions caused exports to fall (though the rupee had fallen 20 per cent this financial year). It cites delays in clearances only as a third reason for the fall in industrial growth. Surely, a fall in GDP growth from 9.3 to 6.2 to five per cent now cannot be entirely because of a tight monetary policy and global slowdown. In not attributing prime importance to the failure of timely clearances or mining bans or stagnant coal (and therefore, electricity) production, it is being somewhat politically correct.
But the Survey does not hesitate to highlight the skew of subsidy beneficiaries. Its table on LPG subsidies is telling. The poorest quintile gets only 0.07 per cent of the subsidy whereas 52.6 per cent goes to the richest quintile. More such boldness should be peppered throughout the Survey. In another place, the Survey says that farmers should be given non-price incentives to improve farm production and productivity. What it is indirectly saying, is that the rise in Minimum Support Prices has been excessive. Indeed MSP has risen faster than the GDP growth rate in recent years, and has certainly contributed to food inflation. But then MSP hikes are political decisions, about which survey is necessarily silent. This government is committed to the Food Security Bill, which the survey has also supported (somewhat perfunctorily, one might add).
The highlight of the Survey is the second chapter. In recent years this chapter has had rigorous academic discussions and has often borne the stamp of the author, namely the CEA. The past CEA has also floated ideas like how to curb corruption, or how to change the incentives of tax collectors, or the foundations of a "moral society". No such "micro-foundations" this time. Instead we have an equally excellent chapter on a macro topic, namely the demographic dividend. This is the famous structural advantage that the Indian economy has in the medium term. India will add about two million job seekers every month for the next 10 years. This number may increase if more women also join the paid labour force. The best form of inclusive growth Rajan says, is to ensure a quality job for each of these seekers. Where will such good jobs come from? Only from manufacturing and services, not from shrinking sector of agriculture. Job growth is also the surest and quickest way out of poverty. But not from just low-end jobs. Hence such job creation strategy requires two things, one by creating a business friendly climate, and second by increasing the human capital of job seekers. This requires change in regulation and tax regime, so that even SME's can flourish, and do not operate in the informal sector. This also requires introduction of large scale vocational training, skill formation and apprenticeship.
The Survey says this financial year, growth will be about five per cent. It seems it now agrees with the advance forecast of the Central Statistics Office, about which the finance minister had some reservations. But the Survey is more upbeat about next year, forecasting a higher growth rate and a lower inflation rate. The short-term worry points are declining savings rate (especially financial savings), sharply lower consumption spending growth (down from eight per cent to four per cent), low investment spending and pile-up of stalled and shelved investment projects.
It correctly diagnoses the problem of widening current account deficit as the gap between savings and investment. This gap is the amount of foreign capital that needs to flow into the country. So, the remedy is not merely banning the import of gold, but to revive domestic savings. This in turn needs private and public corporate savings to rise, which is related to industrial revival and profitability.
The Survey wrongly emphasises the role of tight monetary policy as the cause of a fall in consumer and investment spending. It says external conditions caused exports to fall (though the rupee had fallen 20 per cent this financial year). It cites delays in clearances only as a third reason for the fall in industrial growth. Surely, a fall in GDP growth from 9.3 to 6.2 to five per cent now cannot be entirely because of a tight monetary policy and global slowdown. In not attributing prime importance to the failure of timely clearances or mining bans or stagnant coal (and therefore, electricity) production, it is being somewhat politically correct.
But the Survey does not hesitate to highlight the skew of subsidy beneficiaries. Its table on LPG subsidies is telling. The poorest quintile gets only 0.07 per cent of the subsidy whereas 52.6 per cent goes to the richest quintile. More such boldness should be peppered throughout the Survey. In another place, the Survey says that farmers should be given non-price incentives to improve farm production and productivity. What it is indirectly saying, is that the rise in Minimum Support Prices has been excessive. Indeed MSP has risen faster than the GDP growth rate in recent years, and has certainly contributed to food inflation. But then MSP hikes are political decisions, about which survey is necessarily silent. This government is committed to the Food Security Bill, which the survey has also supported (somewhat perfunctorily, one might add).
The highlight of the Survey is the second chapter. In recent years this chapter has had rigorous academic discussions and has often borne the stamp of the author, namely the CEA. The past CEA has also floated ideas like how to curb corruption, or how to change the incentives of tax collectors, or the foundations of a "moral society". No such "micro-foundations" this time. Instead we have an equally excellent chapter on a macro topic, namely the demographic dividend. This is the famous structural advantage that the Indian economy has in the medium term. India will add about two million job seekers every month for the next 10 years. This number may increase if more women also join the paid labour force. The best form of inclusive growth Rajan says, is to ensure a quality job for each of these seekers. Where will such good jobs come from? Only from manufacturing and services, not from shrinking sector of agriculture. Job growth is also the surest and quickest way out of poverty. But not from just low-end jobs. Hence such job creation strategy requires two things, one by creating a business friendly climate, and second by increasing the human capital of job seekers. This requires change in regulation and tax regime, so that even SME's can flourish, and do not operate in the informal sector. This also requires introduction of large scale vocational training, skill formation and apprenticeship.
Ajit Ranade
Chief Economist, Aditya Birla Group
Chief Economist, Aditya Birla Group