Economic Survey sees GDP growing at 6-6.5% in FY20-21

01 Feb 2020

Economic growth in India is expected to rebound to 6-6.5 per cent in the fiscal year starting 1 April 2020, as per the pre-Budget Economic Survey 2019-20 tabled by minister of finance and corporate affairs Nirmala Sitharaman in Parliament today.

The Survey says after economic growth bottomed out to below 5 per cent levels in fiscal 20190-20, GDP levels are expected to expand in 2020-21, reaching 6-6.5 per cent.

The low GDP growth in India is a reflection of weak global growth as well as consequent investment slowdown and the financial sector issues arising from these, the Survey points out.

The government has estimated gross domestic product expansion at 5 per cent for the financial year ending 31 March 2020, which would be the slowest pace since the global financial crisis of 2008-09.

Growth slipped to 4.5 per cent in the July-September quarter.

The Survey also said government interventions seem to be ineffective in stabilising prices of commodities such as onions.

For boosting growth, it called for new ideas for manufacturing such as 'assemble in India for the world' which will create jobs.

To further make it easier to do business, the Survey called for removing red tape at ports to promote exports as well as measures for easing the start of business, register property, pay taxes and enforcing contracts.

It also called for improving governance in public sector banks and the need for more disclosure of information to build trust. It also talks about dwarfism in the banking sector.

Economic Survey advocates 10 new ideas that benefit markets as well as the economy.

Survey illustrates the enormous benefits accruing from enabling the invisible hand of the market. The exponential rise in India’s GDP and GDP per capita post-liberalisation coincides with wealth generation.

The Survey says that for wealth to be distributed, it first has to be created and called for looking at wealth creators with respect.

Survey shows that the liberalized sectors grew significantly faster than the closed ones.

Also, according to the survey, there is a need for the hand of trust to complement the invisible hand, illustrated by financial sector performance during 2011-13.

Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:

Strengthening the invisible hand of the market and supporting it with the hand of trust.
Strengthening the invisible hand by promoting pro-business policies like providing equal opportunities for new entrants; enabling fair competition and ease doing business;
Eliminating policies unnecessarily undermining markets through government intervention; enable trade for job creation;
Efficiently scaling up the banking sector; and
Introducing the idea of trust as a public good, which gets enhanced with greater use.

The Survey suggests that policies must empower transparency and effective enforcement using data and technology.

Entrepreneurship and Wealth Creation at the Grassroots

Entrepreneurship as a strategy to fuel growth and wealth creation

India ranks third in number of new firms created, as per the World Bank. New firm creation in India increased dramatically since 2014, recording 12.2 per cent cumulative annual growth rate of new firms in the formal sector during 2014-18, compared to 3.8 per cent during 2006-2014.

The Survey says about 1.24 lakh new firms were created in 2018, which is an increase of about 80 per cent from about 70,000 in 2014.

Survey, which examines the content and drivers of entrepreneurial activity across more than 500 districts in India, says that new firm creation in services has been significantly higher than that in manufacturing, infrastructure or agriculture.

The Survey notes that grassroots entrepreneurship is not just driven by necessity

A 10 per cent increase in registration of new firms in a district yields a 1.8 per cent increase in Gross Domestic District Product (GDDP).

Entrepreneurship at district level has a significant impact on wealth creation at the grassroots.

Survey says that literacy and education in a district foster local entrepreneurship significantly and that its impact is most pronounced when literacy is above 70 per cent.

Physical infrastructure quality influences new firm creation significantly while the Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.

Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.

Pro-business versus Pro-markets

Survey says that India’s aspiration of becoming a $5 trillion economy depends critically on promoting ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth and weaning away from ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents.

Viewed from the lens of the stock market, creative destruction increased significantly post-liberalisation. Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation. Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.

Despite impressive progress in enabling competitive markets, pro-crony policies destroyed value in the economy. An equity index of connected firms significantly outperformed market by 7 per cent a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense.

In contrast, the index underperforms market by 7.5 per cent from 2011, reflecting inefficiency and value destruction inherent in such firms.

Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.

Similarly crony lending that led to wilful default, wherein promoters collectively siphoned off wealth from banks, led to losses that dwarf subsidies for rural development.

Undermining markets

Government intervention, though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended.

Four examples of anachronistic government interventions like the Essential Commodities Act (ECA), 1955 that imposed frequent and unpredictable stock limits on commodities destroyed incentives for the creation of storage infrastructure by the private sector.

Survey suggests there is clear evidence for jettisoning this anachronistic legislation.

The regulation of prices of drugs, through the DPCO 2013, led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of an unregulated but similar drug.

The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.

These findings reinforce that the outcome is opposite to what DPCO aims to do - making drugs affordable.

Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power.

Government intervention in grain markets only resulted in the emergence of government as the largest procurer and hoarder of rice and wheat, besides crowding out of private trade, burgeoning food subsidy burden, inefficiencies in the markets and affecting the long run growth of agricultural sector.

The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards.

Debt waivers

According to the Survey, an analysis of debt waivers given by states and the centre showed that full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.

Debt waivers disrupt the credit culture. They reduce formal credit flow to the very same farmers, thereby defeating the purpose.

Survey suggests that the government must systematically examine areas of needless intervention and undermining of markets; but it does not argue that there should be no government intervention.

Creating jobs

The Survey says India has unprecedented opportunity to chart a China-like, labour-intensive, export trajectory. By integrating “Assemble in India for the world” into Make in India, India can raise its export market share to about 3.5 pe cent by 2025 and 6 per cent by 2030; create 4 crore well-paid jobs by 2025 and 80 million by 2030.

Exports of network products can provide one-quarter of the increase in value added required for making India a $5 trillion economy by 2025.

Survey suggests a strategy similar to one used by China to grab this opportunity by specialization at large scale in labour-intensive sectors, especially network products; laser-like focus on enabling assembling operations at mammoth scale in network products; and export primarily to markets in rich countries.

Trade policy, according to the Survey, must be an enabler. On an analyses of the impact of India’s trade agreements on overall trade balance, the Survey has found that India’s exports increased by 13.4 per cent for manufactured products and 10.9 per cent for total merchandise.

Imports increased by 12.7 per cent for manufactured products and 8.6 per cent for total merchandise.

India gained 0.7 per cent increase in trade surplus per year for manufactured products and 2.3 per cent per year for total merchandise.

Ease of Doing Business

While a jump of 79 positions to 63 in 2019 from 142 in 2014 in World Bank’s Doing Business rankings is a great achievement, the Survey says, India still trails in parameters such as Ease of Starting Business, Registering Property, Paying Taxes and Enforcing Contracts.

For individual sectors such as tourism or manufacturing, the Survey said thes4 sectors require a more targeted approach that maps out the regulatory and process bottlenecks for each segment.

Finally, the Survey says, a large economy needs an efficient banking sector to support its growth. The onus of supporting the economy falls on the PSBs accounting for 70 per cent of the market share in Indian banking.

PSBs are inefficient compared to their peer groups on every performance parameter. In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.

Credit growth in PSBs has been much lower than NPBs for the last several years.

For making PSBs more efficient, the Survey suggests Employee Stock Ownership Plan (ESOP) for PSBs’ employees; employee representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.

It also suggested creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.