Economic Survey: 'Counter-cyclical fiscal policy' to boost demand justified

The Economic Survey for 2019-20, presented to Parliament on Friday, laid out an agenda for wealth creation in India and sought to ground pro-wealth and pro-business economic policies in India’s economic experience and philosophical traditions. In the Survey’s preface, Chief Economic Advisor K V Subramanian revealed the Survey’s motivation: Prime Minister Narendra Modi’s speech on Independence Day 2019, which highlighted the contributions of wealth creators and that “only when wealth is created will wealth be distributed”. Subramanian argues that liberalisation is a return to India’s “roots” as a market economy, and thus advocates various wealth-boosting reforms in the Survey. 

From the macro-economic point of view, the Survey argues that since “the government, with a strong mandate, has the capacity to deliver expeditiously on reforms”, the upside risks to the economy dominate the downside risks. Given the base effect, it thus pegs growth in India’s gross domestic product or GDP in 2020-21 as being in the range of 6 to 6.5 per cent. The Survey admits that meeting the $5 trillion target set by the prime minister will be challenging, given the growth slowdown. 

The Survey places primary blame for the slowdown on global factors, saying “the deceleration of India’s GDP growth since 2017 has tracked the decline in world output”. It noted also that some recent research suggested that the length of the business cycle in India was about 13 quarters, perhaps faster during the deceleration phase. Given that history, the Survey predicted a resurgence of growth in the current half of 2019-20. 

The Survey also argues, however, that “the stagnation in private corporate investment at approximately 11.5 per cent of GDP between 2011-12 and 2017-18 has a critical role to play in explaining the slowing cycle of growth and, in particular, the recent deceleration of GDP and consumption”. This stagnation is linked to the decline in credit growth from banks. 

With important implications for the path of government spending to be outlined in the Union Budget for 2020-21, the Survey argues that boosting sluggish demand and consumer sentiment should be a priority and so “counter-cyclical fiscal policy” — in other words, fiscal slippage — is justified. 

Among the reforms that the Survey advocates to boost “wealth creation” in India is the end of unnecessary and counter-productive intervention by the government in the economy. 

 

Here the Survey highlights the Essential Commodities Act (ECA) in particular, using research that shows that the imposition of stock limits had “no effect” on price volatility of onions over the past year, but that 76,000 raids under the ECA were conducted during 2019 of which under four per cent led to convictions. 

Thus, the main effect of the ECA was to harass traders and to dis-incentivise inventory-keeping. Similar policies which had counter-productive effects included the Drugs Prices Control Order of 2013, which the Survey said increased the prices of drugs sold through hospitals. 

Highlighting the sharp increase in major subsidies in the Budget, led by the growth in the food subsidies, the Survey pointed out that “the intervention of government has led to a disconnect between the demand and supply of grains” and argued that farmer support needs to be realigned towards incentivising farmers to diversify their production away from foodgrain. 

The Survey also argues in favour of integrating India with world markets deeply enough that “network products” such as electronics and automobiles are assembled in India for world markets. In this context it dissents from general government policy by pointing out that recent free trade agreements have in fact benefited India, finding that on the average Indian exports to its FTA partners has increased more than imports. The Survey reiterated in this context that policy measures “should focus on reducing input tariffs and implementation of key factor market reforms”. 

Other chapters of the Survey focused on the growth of entrepreneurship, on dealing with cronyism, and privatisation. On entrepreneurship, the Survey found that a 10 per cent increase in the registration of new firms in a district led to a a 1.8 per cent increase in the district’s output. It argued also that the anti-corruption moves since 2011-12 had led to a reduction in cronyism that was visible in the data on, for example, related party transactions of firms receiving natural resources. 

In spite of its justification of fiscal slippage, the Survey also pointed out that the root cause of the slowdown was low private investment. It blamed that on risk aversion in scheduled commercial banks (SCBs) following the non-performing asset crisis. But it also gestured at government borrowing as a problem, saying that the “easy investment in G-secs” was a complementary factor and that SCBs “chose to invest thrice the amount in G-Secs in the current year as compared to the previous year, while reducing their credit off-take by more than four-fifths”. 

In terms of policy prescriptions for the financial sector, however, the Survey has been relatively restrained. Instead of arguing again for greater private control, Subramanian instead suggests leveraging big data algorithms by pooling data held by public sector banks, and by increasing employee ownership to give them more of a stake in the PSB’s performance. The CEA also devoted a chapter to seeking to refute the finding of his predecessor, Arvind Subramanian, that India’s GDP was overstated.