India’s Economic Survey ceased to be a turgid recounting of the past year’s statistics some years ago, with Chief Economic Advisors Kaushik Basu, Raghuram Rajan and Arvind Subramanian transforming the document into bold discussion of policy choices based on rigorous analysis of an ever-expanding array of facets of the Indian economy.
This year’s Survey, under K Subramanian’s stewardship, makes the first volume an extended discussion of eight different vital policy themes, with one coherent message: the government has a big role to play and it must borrow big and spend big, particularly on social and physical infrastructure, never mind protests from global rating agencies or others whining about crowding out of private investment.
The Survey also has a sobering caution. It seeks early exit from regulatory forbearance of credit default. It blames the extended forbearance in the wake of the global financial crisis of 2007-08 for the crippling build-up of non-performing assets that burdens banks today, as bankers and corporate managements threw caution to the wind and splurged on projects, many of them unviable and containing inflated project costs meant to line promoter pockets.
If the government follows the Survey’s advice, it would need to do two things: find a whole lot of additional capital for the banks it owns, and walk the talk on the Fund of Funds for micro, small and medium enterprises (MSME) it has been tom-tomming and supply them with capital that does not require immediate servicing, that is, equity.
It would be unfair to focus on either the projection of a 11% growth rate for the next fiscal or the V-shape of the recovery. Plotting the V shape calls for estimating growth sequentially, quarter over the previous quarter, rather than over the like-quarter of the year before, as is customary in India. It would also be unfair to focus too much on peripheral innovations such as quotes from the Brihadaranyaka Upanishad (Tamaso ma jyotirgamaya) or the de-anglicisation of Rabindranath Tagore to a normal Thakur in a way designed to make the chest of a self-respecting member of the Rajput Sena swell ever so slightly.
The Survey last year was all gung-ho on the markets doing their job if the government stayed out of the way. The recognition that the government is a big and legitimate player in the economy is now universal, in the wake of the pandemic. And this year’s Survey gives it full-throated roar.
It lays out the intellectual case for fiscal expansion, arguing that, so long as the rate of interest is lower than the rate of growth, investment by the government of borrowed cash would leave a surplus after paying the interest and the economy would be a net gainer.
Further, such growth would lead to a declining debt burden as a share of GDP. India, in any case, is well-behaved on debt, either public debt or total debt, including that of the private sector, when compared against the G20, the grouping of the world’s largest 20 economies got together by former US President George Bush to organise a coordinated response to the global financial crisis and has evolved into an institutional grouping, or the Brics grouping of Brazil, Russia, India, China and South Africa. Government debt as a share of GDP in India is 68.2% of GDP, the average for the G20 is 75.2%. India’s total debt as a share of GDP is 123% and the comparable average for the G20 is 236%.
One another objection commonly raised against a large fiscal deficit is that it would crowd out private investment. The Survey debunks this notion, at least in a crisis. Crowding out rests on the assumption that savings are finite and that when the government takes away more than what the private sector can spare, over and above its own planned investment needs, it would lead to both the government and private industry bidding up prices of the same goods and services, resulting in shortage, price rise and additional imports, leading to a wider current account deficit.
The Survey gives theoretical and empirical evidence to counter this. In a situation of full capacity utilisation and inability to increase output in the short run, some crowding out could happen. Otherwise, stepped-up government expenditure would result in additional growth and savings, to meet the additional demand, if at all the demand for savings from the government is in excess of what the private sector has to spare. Empirical studies show no effect of crowding out. For the pre-reform period before 1991, government investment and private investment moved together, in the post-reform period, there was no correlation between the two.
What about the wrath of the rating agencies, S&P, Moody’s and Fitch? A detailed examination shows three things. One, rating agencies are biased against emerging markets in general and India in particular. India, currently the world’s fifth largest economy with huge potential to grow, has been given a rating that just about makes it investment grade. China, when it was number five in global GDP rankings, had been given a superior rating, although not AAA, as its predecessor number fives had been. Two, adverse rating does affect portfolio flows to some extent. Three, it does not deter foreign direct investment. So, the Survey’s recommendation is, just ignore these rating agencies, they will come around when expanded borrowings lead to higher government investment and faster economic growth.
It is difficult to not agree with this. Even with a relatively unimpressive rating, foreign portfolio investors poured $23 billion into India in 2020 and market valuations are overblown. If portfolio flows cool off, that would be no disaster.
The Survey has an interesting discussion on which price index should be the target of monetary policy. Right now, Indian monetary policy tracks the consumer price index, the bulk of which comprises energy and food. The Survey finds that core inflation, which takes food and energy prices out of the consumer price index, and the wholesale price index are better correlated with economic growth, suggesting that when India revises its monetary policy target, it might do well to dump CPI as the target variable.
The Survey has useful discussions on process reforms, the need to step up public expenditure on healthcare (that is positively correlated, in global evidence, with people having to spend less out-of-pocket on healthcare), on the need to expand preventive health, as via the National Health Mission rather than just improve the curative part via the Ayushman Bharat health insurance scheme, on process reform and the vital role of the private sector in raising expenditure on research and development.
The Survey also puts to rest the concerns of a section of Indians who are more in tune with the discourse of the world’s Anglosphere than with the reality on the ground in India, over rising inequality. It argues, sensibly, that raising absolute levels of income at the bottom of the pyramid is more important than keeping the level of income distribution steady. Even if the rich grow richer, as a result of fast economic growth, if the poor grow out of poverty alongside, society as a whole is better off. It draws on evidence from China to make the case.
The Survey omits vital parts of what India needs for a full recovery. India’s debt market remains stunted and that is a major driver of infrastructure investment India needs. The Survey has little to offer on the subject. Another vital omission is the failure to review the experience of a promising government innovation: TReDS or Trade Receivables electronic Discounting System. TReDS is an online factoring platform, which has the potential to solve MSME’s trade credit requirements to a large extent. Its failure to embrace all of industry is something that calls for strong remedy.
On the whole, reading the Survey is a satisfying experience. Its chapters deserve to be treated as course material for any postgraduate programme in economics. That would be a lasting contribution, even if the government chooses, while presenting the Budget, to ignore its own chief economic advisor’s well-considered advice.
(The author is a senior journalist)
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)