Blue-sky visions

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Blue-sky visions

The ambitions of the Economic Survey depend on the implementation of its ideas

Source: https://www.thehindu.com/opinion/editorial/blue-sky-visions-on-economic-survey-2018-19/article28286590.ece

Why in news?

  • Guided by the dictum of “blue sky thinking”, the Economic Survey 2018-19 on 04th July laid out the ambitious agenda of applying principles of behavioural economics to achieve 8 per cent of sustained GDP growth to make India a USD 5-trillion economy by 2024-25.

Blue-sky thinking

  • The Economic Survey for 2018-19 reflects the views of its principal author, Chief Economic Adviser (CEA) Krishnamurthy Subramanian.
    • And the CEA has made bold to use the new government’s first economic assessment-cum-agenda setting exercise to posit a range of ideas that he attributes to “blue sky thinking”.
  • According to the CEA, the cover design of the Economic Survey captures the idea of complementary inter-linkages between these macroeconomic variables using the pictorial description of several inter-linked gears.
  • The CEA further said that given India’s rich cultural and spiritual heritage, social norms play an important role in shaping the behaviour of each one of us.
  • From an embrace of a “world that is in constant disequilibrium”, and the need therefore to adapt to it, to the stress on drawing upon Richard Thaler’s work in the behavioural economics of ‘nudge’ for addressing issues including gender equality, savings and tax compliance, the survey attempts to reset multiple paradigms.
    • Behavioural economics provides the necessary tools and principles to not only understand how norms affect behaviour but also to utilise these norms to effect behavioural change.
    • The Survey, therefore, lays out an ambitious agenda for behavioural change by applying the principles of behavioural economics to several issues including gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.
  • The broad goal is to help drive economic strategy to achieve sustained real GDP growth of 8% so as to enable fulfilment of the government’s grand vision of making India a $5 trillion economy by 2025.

Current economic stock take

  • For that, the first task is to take stock of the economy’s current state. Economic Survey rightly recognises the main challenge: Reviving private investment.
    • The CEA is cautiously confident that the slump in investment, which he rightly identifies as the key driver of growth, jobs and demand, has bottomed out.
  • For an economy in slowdown mode, the key to reviving the growth momentum is private investment, which is a function of the “animal spirits” of entrepreneurs.
    • Setting the huge electoral mandate for the government as an enabler that would “push the animal spirits of the economy”, the survey projects real GDP growth to rebound to 7% in 2019-20.
  • Slump in investments: Although it does not explicitly admit it, the Indian economy is, indeed, today caught in –
    • a vicious cycle of investments not happening on the ground,
    • jobs drying up and,
    • in turn, impacting income and consumption.
  • This is the opposite of what happens in a virtuous cycle, where “investment, productivity growth, job creation, demand and exports feed into each other and enable animal spirits in the economy to thrive”.
  • The Survey is right that the macroeconomic stability indicators — whether pertaining to inflation, external current account or even fiscal balances — are much better than they were five years ago and it is time to “shift gears” to enable an average annual real GDP growth of 8 per cent for India to become a $5 trillion economy by 2024-25. But the key driver for it is investment — more specifically, private investment.
  • Consumption: But the CEA doesn’t shy away from flagging ‘consumption’ as being crucial in determining the growth trajectory in the current fiscal year, and in pointing out its vulnerability to the health of the monsoon-dependent rural economy.
    • With rainfall as on July 3 about 28% less than average and large parts of southern and western India in the grip of a crippling drought, clearly the circumspection appears well warranted.

Boosting private investment?

  • Costs: It basically requires the upfront costs of a project to be less than the present value of the expected rewards from the investment.
  • Interest rates: The Survey has pointed out — which may not be in sync with the Reserve Bank of India’s views, at least till recently — that real rates of interest in India have increased significantly over the years and are high even on cross-country comparison. There is, therefore, need to lower the cost of capital.
    • Further, it has argued that the country only needs a “mildly positive real rate”, which will not necessarily lead to lower savings.
  • Savings: Savings are driven primarily by demographics and income growth: Both of these are favourable for India, given a rising proportion of its working population that will both earn more and save more.
  • Other useful suggestions:
    • Redesign of tax policy, including for start-ups. High tax rates on corporate profits and notices received by new economy companies on angel funding from venture capital investors are certainly not a good idea.
      • They need a complete review, especially in the current context where animal spirits are low.
      • Reviving those spirits will present the biggest and most immediate challenge for the Modi government as it begins its second term.

Fiscal consolidation

  • On the fiscal front, the survey is even less optimistic. It lists several challenges to achieving the fiscal deficit target of 3% of GDP by March 2021:
    • the “apprehensions of slowing of growth” and the implications for revenue collections;
    • the shortfall in GST collections and the imperative that it places on revenue buoyancy this year;
    • the hunt for resources to fund the expanded PM-KISAN scheme, Ayushmaan Bharat and other government initiatives; and
    • the impact on oil purchase prices due to the U.S. sanctions on import of crude from Iran.
  • It is, however, on the policy prescriptions front that the CEA comes into his own.
  • Central to the recommendations is the focus on triggering a self-sustaining “virtuous cycle” of savings, investment and exports.
  • To achieve which, he suggests, presenting data as a ‘public good’, ensuring policy consistency and reducing the cost of capital.
  • Micro, small and medium enterprises must be nourished, especially firms that are most likely to boost both job creation and productivity, and labour laws made flexible.
  • Ultimately, it is the implementation that may well decide how “blue sky” these ideas are.

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