National champions vs championing policy | The Financial Express

National champions vs championing policy

The Adani saga comes at a good time—just when India is gathering itself for another growth push—and provides an important lesson for policymakers about the risks of relying on one or two business groups.

budget, budget 2023
Much of the Budget’s focus has been on public investment, with the aim of “crowding in” private sector investment as well. (IE)

The Economic Survey of India painted an optimistic picture of the nation’s economic prospects, emphasising a relatively broad-based recovery from the pandemic shock, increased investment, stabilising private and public sector finances, and improvements in physical and digital infrastructure. At times it is difficult to disentangle plans from accomplishments, but the tone is one of quiet confidence. In terms of form, the Survey continues a recent trend of presenting a wider variety of data, especially financial data, then would have been the case in years gone by. At the same time, this year’s Survey does not have the conceptual innovations (or quirks) of many recent editions of the document. Instead, it reads like a corporate document, going from one sector and issue to the next with evenness and fluidity. That reflects the ethos of the government in the economic dimension, and the themes of “ease of doing business” and “ease of living” capture this mindset and marketing as well.

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Reflecting the way in which this government functions, the Economic Survey is exceptionally well-aligned with the provisions of the Union Budget. The Budget’s financial projections are reasonable and realistic, with some room for optimism with respect to buoyant demand and GST revenues. The government’s calculations have allowed it to provide some income tax relief to what are referred to as the middle classes, but most of the benefits seem to be more at the upper end of the income distribution. Arguably, some of this relief is to compensate for high inflation, and this may approach may be justified by concerns about ensuring that demand is resilient. Retreating from what had seemed to be protectionist trends, there was nothing in the Budget that seemed to increase customs duties in any significant manner, although sometimes consequences of tariffs on the value chain can be difficult to forecast. Indirect taxes are now the purview of the GST Council as well, but the Budget and subsequent Council meeting have ratified continuing streamlining of administration and enforcement.

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Much of the Budget’s focus has been on public investment, with the aim of “crowding in” private sector investment as well. Steps to directly smooth the path for private investment are also part of the government’s strategy. While the World Bank’s Ease of Doing Business Index collapsed because of political manipulation, the government has persisted with the idea, and operationalized it in greater depth and disaggregation for the Indian case. The approach of the Budget is conceptually sound as well as having empirical backing. In 2007, Kunal Sen, in a classic paper, “Why Did the Elephant Start to Trot?,” showed from the data that India’s growth acceleration growth was mostly driven by the rate of private equipment investment, which in turn was driven by financial deepening and public fixed investment, among other factors.

High inflation and the welfare of the poor remain large issues for India, and, while the government continues to provide some relief for smaller firms, the imbalances in India’s economy remain as concerns, not just because they are ethically unacceptable, but because they can be major obstacles to growth. Emblematic of this problem is the Adani saga, where just a little bit of light being shined on that business group’s operations led to over $100 billion in wealth reduction. While this was only “on paper,” it is accurate financial accounting of assets and liabilities that drives a successful financial system, one in which savings are channelled to productive investments, rather than being wasted or stolen.

If Adani, Ambani and others like them are supposed to be “national champions” in marshalling the capital and expertise to meet India’s investment needs over the coming decade, then the Adani problem is worrying. But the problem may be deeper and different in nature. In a recent article in Bloomberg Quint, Akshay Jaitly and Ajay Shah calculate that India would need a dozen national champions for its coming investment requirements. But the problem with this model is that it is inherently risky and subject to corruption and things going wrong. There are too many eggs for even a multiplicity of national champion baskets. The authors note that a better model is rule of law, sound regulatory mechanisms, and predictability of contracts and policy for everyone, large and small, domestic and foreign. India has a long way to go to get close to anything like those preconditions for long-term growth, but it is not unimaginable.

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So, the Budget does many of the right things, in a global economic environment that is not ideal. The Economic Survey of India says many of the right things, and displays a clear grasp of India’s economy and where it can go from here. And the Adani saga comes at a good time, to provide an important lesson for policymakers about the risks of relying on one or two business groups, just when India is gathering itself for another growth push, after the difficulties of the past few years. A buzzword that emerged from the pandemic was “resilience,” and resilience requires spreading risks as well as building capital of all kinds. It will be interesting to see if India’s political system will allow the right combination of economic policies to emerge.

The writer is professor of economics, University of California, Santa Cruz

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First published on: 25-02-2023 at 04:15 IST
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