Budget 2019: Surveying India’s economic strategy

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Updated: Jul 17, 2019 6:08 PM

Union Budget 2019: The protectionist aspects of the Budget, with higher tariffs on many goods, seem to be at odds with the kind of economic openness to the world that would support higher growth

Budget 2019, Surveying, India, economic strategy, MSME, growth dynamic, Budget proposals, Economic Survey of India, ESI, policy making.The ESI makes only a beginning in understanding what will make Indian firms more productive.

Budget 2019 India: My last column, on India’s Union Budget, attempted to bring out some general themes underlying the detailed revenue and expenditure proposals of that exercise. Those themes are straightforward: higher growth through higher private and public sector investment, along with concern for equity through continued social protections. The Budget proposals do lack coherence in places, especially when rich individuals, large corporations or foreigners are singled out for higher taxes in ways that undermine the larger growth objective.

Not surprisingly, the Economic Survey of India (ESI) has a similar focus on investment, along with some frills about “virtuous cycles” of investment, demand, exports, growth and jobs. If we compare the two documents, it seems that the ESI emphasises exports in a way that the Budget does not. Indeed, the protectionist aspects of the Budget, with higher tariffs on many goods, seem to be at odds with the kind of economic openness to the world that would support higher growth.

The ESI also differs in emphasis from the Budget by providing a significant chapter on growth dynamics of firms. When a group of prominent economists produced a report on an economic strategy for India, covering all the usual issues of infrastructure, exports, education, agriculture, labour markets, and jobs, I suggested (bit.ly/30tPhS2) that what was missing in this otherwise excellent analysis was a focus on the role of firms and their growth in promoting overall economic growth. The ESI provides evidence that older small firms are less productive than younger small firms, and that policies which distort labour markets and which favour small size lead to firms that are less productive and less likely to grow. The ESI also offers indicators of which sectors are more likely to generate higher numbers of jobs as they grow, in manufacturing as well as in services.

The ESI makes a good start on this issue, though there is much more analysis that needs to be done, and existing analysis that needs to be incorporated into policy making. Issues of economies of agglomeration (clustering), management efficiency, and integration into domestic and global supply chains, among others, all need to be tackled in the context of enabling the growth of efficient firms.

There are more basic issues as well, because it is not clear that the MSME category makes sense from a policy perspective. Lumping together micro, small and medium enterprises under a single policy umbrella does not have sound economic logic behind it. A second issue is that some small firms have characteristics such that their size is going to be limited—the “mom-and-pop store,” for example. Their growth cannot be forced, although they can still become more productive and efficient with improvements in economic structure (such as logistics), or in technology. Finally, firm dynamics is not just about small firms growing, but also efficient large firms becoming larger. And often these large firms will support an ecosystem of small suppliers. The ESI makes only a beginning in understanding what will make Indian firms more productive.

The ESI also offers some innovations in Indian economic policy thinking that cannot be incorporated in a Budget speech. These include designing policies to take advantage of insights from behavioural economics, fixing the problem of judicial delay, and expanding access to certain types of data that has public good characteristics. Each issue is different in nature, but each can have significant positive impacts. Given the current government’s shyness over some of its economic data, the ESI view on data as a public good is especially welcome.
In addition to the above three takes on economic strategy (Budget, expert group and ESI), a fourth essay deserves mention. Rakesh Mohan, one of India’s most seasoned, has produced an analysis for Brookings India that returns to the decades-old metaphor of a “big push” for India to get to a new growth trajectory. Some analysts thought the Budget lacked this kind of big vision and urgency, and Dr Mohan provides a corrective. Of course, investment is central to the projected growth story, and Dr Mohan rightly emphasises labour-intensive manufacturing and exports, much as Arvind Panagariya did while at NITI Aaayog. Some of the special insights provided that may not receive enough attention elsewhere are policies for higher household financial savings, renewed attention to agricultural research and development and extension activities, and infrastructure investment in transport and logistics. On the last of these areas, of course, Dr Mohan headed a committee that produced a major report outlining needed policies in great detail.

Dr Mohan’s report also covers the most challenging area of all, that of governance. Perhaps the most important aspect of his recommendations is to remind everyone of the need to emphasise and incorporate technical competence in policy making. This is something that has been a staple of Indian economic policy making, but may be in danger of being eroded in the current political climate. A more specific recommendation is in the call for NITI Aayog to step up its capabilities and to become a technically competent coordinator for a “big push” economic strategy. That would certainly help if done well: it is still unclear if the government’s economic strategy has the coherence and consistency that is ultimately needed.

Singh is Professor of Economics, University of California, Santa Cruz
Views are personal

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