Economic Survey eyes a virtuous self-sustaining growth cycle, says expert

The annual Economic Survey of the finance ministry, while projecting a shallow recovery in the current fiscal year, has set the policy path for increasing the size of the economy to $5 trillion by March 2025.
 
In that endeavour, the Survey targets a real growth rate of 8 per cent, which, along with 4 per cent inflation, or 12 per cent growth in nominal terms, would allow for reaching the target set by the government.
 
The journey towards that goal is envisaged through a virtuous self-sustaining growth cycle created by enhancing savings, investment and exports. The Survey draws on the experience of China and high-growth East Asian economies to identify investments, particularly private investments, as the key driver of that cycle.

 

Analysing the growth experience of these economies, the Survey establishes the primary role of savings in driving growth and calls for pushing up savings rates in order to enable an investment cycle funded from domestic resources.
 
It notes that since higher savings would preclude domestic consumption, it is imperative to develop an aggressive exports strategy in order to absorb domestic capacity created in the process. And, in order to gain a global market share, the Survey emphasises exports growth led by productivity gains rather than just currency depreciation.
 
Furthermore, taking into account the India’s demographic advantage of a rising share of working-age population, the Survey notes that mildly positive real interest rates would be enough for driving the savings rate higher and that will also help in keeping the cost of capital low. That conclusion is based on the evidence that favourable demographics helped drive savings higher in China and other high-growth East Asian economies.

 
Specifically, on the issue of cost of capital, the survey notes that real interest rates in India are quiet high in comparison to other countries and that affects prospects for investments. An investment-led growth model therefore requires lowering the cost of capital. In the financial sector otherwise, the Insolvency and Bankruptcy Code and banking sector clean-up, have laid the foundation for boosting investments. A key area of reform identified by the Survey is restrictive labour regulations and perverse incentives which encourage small firm size. It recommends labour law changes to enhance investments and foster job creation. The Survey also makes the case for a more supportive tax policy, monitoring and reducing economic policy uncertainty and creating an ecosystem for promoting private investment, especially in start-ups and new economy, to enable the investments driven growth cycle.

 
For the current year, the Survey projects a growth pick-up to 7 per cent from 6.8 per cent in FY19, helped by a nascent investment recovery, political stability, accommodative monetary policy, and lower oil prices. In terms of key risks to growth, an erratic monsoon and lower credit off-take from the non-banking financial companies sector are to be watched out for on the consumption front. Slower global growth and increased uncertainties around trade tensions, could affect external demand too.
 
Ahead of the Budget presentation, the survey also strikes a note of caution on the fiscal front. It notes that slowing growth has implications for revenue collections and therefore meeting higher allocation requirements for welfare schemes without a diversion from the newly revised glide path of fiscal consolidation, remains the foremost challenge.

 
The Budget may pay heed to that caution and may incorporate survey suggestions to kick-start investment activity.
 
Views are personal

Gaurav Kapur is the Chief economist, IndusInd Bank