Economic Survey 2019: ‘Cut investor risks, cost of capital and judicial backlog; fix policy uncertainties’

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Published: July 5, 2019 6:06:05 AM

‘Force MSMEs to grow by phasing out size-based sops’; fiscal space of states allows short-term stimulus

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The Economic Survey 2018-19 tabled in Parliament on Thursday expounded on the imperative of a China-like “self-sustaining virtuous cycle” for India, where private investments will be the key driver of demand, productivity and job creation, but remained guarded in its estimate of the GDP growth for the current financial year — a modest improvement to 7% from a five-year trough of 6.8% in FY19.

While many circles believe the economy has run out of puff and is crying for wholesale structural reforms, chief economic adviser Krishnamurthy Subramanian stressed in the survey the way forward is investment-led growth, where exports are catalysed and domestic consumption would, at best, be a force multiplier. India needs to grow at 8% a year to become a $5-trillion economy by FY25, as envisaged.

Flagging the notion of economies in perpetual dis-equilibrium, Subramanian called for policies that nourish infant firms — rather an aged ‘dwarfs’ that are neither significant job creators, nor contributors to productivity. His growth mix also included a few other ingredients like policies to reduce the cost of capital and rationalise “the risk-return trade-off for investments”.

The survey also pitched for tax policies conducive for start-ups and seemed to argue against capital gains tax, when it said it “could have significant economic consequences for individual investors in terms of its lock-in effects and associated deterring incentives to use capital gains into riskier investments”.

It also advised the government to take cue from the West to hike retirement age in a phased manner, as the working-age segment of India’s population would peak at 59% in 2041 and an ageing society would follow.
“If the impact of stress in the non-banking financial company (NBFCs) sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending,” it cautioned.

The survey endorsed fiscal prudence by the Centre, but was silent on the recent years’ spurt in public expenditure via extra-budgetary resources, which has impinged on the quality of fiscal consolidation efforts.

Subramanian alluded to the fiscal space available with several state governments to boost public capex. Utilisation of this space could provide considerable stimulus to the economy in the short term.
At a time the Narendra Modi government is facing flak for 45-year-high unemployment rate (6.1% in 2017-18), the survey postulated that unemployment rates decrease with greater gross capital formation and cited East Asian and Pacific examples to argue that “labour and investment complement each other.” “When examined in the full value chain, capital investment fosters job creation as capital goods production, research and development, and supply chains also generate jobs,” Subramanian wrote.

While being effusive in his praise for the Modi government’s assorted welfare programmes such as Swatchc Bharat, the CEA highlighted judicial delays as the ‘biggest constraint’ to ease of doing business in the country and suggested specific remedial steps. “Experience shows that every other field of economic reform, be it property rights, taxes and insolvency, eventually flounders because it gets entangled in the legal system. This is why the legal sector reforms must be a top priority,” he wrote.

Subramanian also lamented about adverse effects of policy uncertainties and proposed “consistency in actual policy with forward guidance,” while also advocating continuous, tactical recalibration of policies to achieve the broad objective of sustainable high growth. The policymakers must eschew (short-term) loss aversion (as exhibited by them during GST roll-out) and introduce bold reforms, he opined.

The last Economic Survey (2017-18), authored by then CEA Arvind Subramanian had proposed “shrinking unviable banks”and privatisation of Air India, but the latest edition has refrained from recommending such specific policy steps.

According to the new survey, a gradual investment recovery could materialse with the monetary policy turning accommodative (the previous survey had denounced the “decoupling” of India’s monetary policy from the rest of the world), improvement in capacity utilisation, and progress in resolution of stressed assets. “The investment-led growth model implies a rapid expansion in the financial system by a factor of magnitude, both banks and capital markets. In this context, recent efforts to clean up the banks and establish a bankruptcy process should be seen as valuable investment that must be completed.”

There was a need for “systematically lowering “the risks faced by investors, the survey stressed. According to the survey, the extent of recovery in the farm sector and farm prices will decide the push to rural consumption. It added that some regions are expected to receive less than normal rains, which could hit kharif crop production.

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