The Survey’s recasting of economic growth as “wealth creation” can be appealing, given the positive imagery conjured up by the more materialistic term.
In the new millennium, as economists with distinguished academic careers began to hold the post of chief economic adviser in the finance ministry, the Economic Survey of India (ESI) began to display conceptual innovations that had been less prominent in earlier years. What does this year’s survey yield in terms of insights into policies that may rescue India’s economy from its current floundering?
The Survey’s recasting of economic growth as “wealth creation” can be appealing, given the positive imagery conjured up by the more materialistic term. There are some hints of a retreat from distributional concerns, which were nicely captured in the popular term “inclusive growth,” but perhaps that is partially substituted by “grassroots entrepreneurship.” It was a decade ago that economists such as Ejaz Ghani began to quantify the spatial patterns and determinants of formal entrepreneurship in India, and this year’s Economic Survey takes an important step forward in updating that research and making it more visible. New firms boost growth, and their formation is aided by physical infrastructure and human capital. The policy implications that are drawn are straightforward—more education and better regulation (related to the now hackneyed phrase, “ease of doing business”). Regulation touches on land and labour, and involves state and city governments. But, what is perhaps missing from the analysis of entrepreneurship are policies to reform and strengthen urban governance, where this reform project has to go beyond simply creating a few “smart cities.”
The Economic Survey also innovates with its focus on trust, though one must acknowledge that former chief economic adviser Kaushik Basu has been writing about the importance of trust for economic performance for some time. Of course, Basu’s focus includes the mistrust created by divisive social policies whereas the Economic Survey concentrates on the crony capitalism and corruption, which emerged most starkly in the period shortly after the global financial crisis. Both aspects are important, and India has been a low trust economy for a long time. Bureaucrats have not trusted business people, business people have not trusted each other, and so on. Personal connections and kinship ties have been the trust-builders in Indian society. The survey emphasises the importance of intrinsic motivation (preferences that abhor cheating, for example), and better regulation. But, intrinsic motivation may not be strong enough in situations of concern—a few bad apples can bring down a system. Areas that need attention, but do not get much mention in this document—although, in some cases, appeared in the previous economic surveys—are the need for judicial reform, organisational reform (in areas such as banking), and, most simply, greater investment in systems and expertise for preventing bad outcomes. Most critically, a well-functioning legal system adds a vital backstop for trust. One can also argue that greater equality and attitudes of respect for others are important in creating societal trust.
The Survey’s discussion of public corruption is welcome—novel in its forthright acknowledgment in a government document, if not in conceptual insights. Of course, what is missing are the policy implications of the analysis, which would require restrictions on how politicians and their families interact with and influence the private sector, and reforms in campaign finance mechanisms, which allow illegal flows of funds from the “cronies” who are criticised in the Economic Survey to the politicians who are their enablers. One also has to recognise more clearly that successful cronies are as much of a problem as the unsuccessful ones who make headlines for stealing money and escaping to other jurisdictions. The question of what the systemic structural defects in India are, and how they need to be fixed remains unanswered.
Much of the Survey consists of new takes on old problems: poorly conceived and designed government interventions, obstacles to doing business (whether new or old), the failure to integrate into the world trading system in a manner that would permit gains from comparative advantage in international trade, the growing problems of the financial sector (banks and non-banks), and the need for privatisation. What is innovative in this year’s Survey are the types of questions asked, and the solutions offered. Much of the focus is on what makes for-profit organisations function well, rather than on treating them as black boxes that are effectively invisible in economic policymaking. Perhaps, it is not unreasonable to distinguish between a business school perspective on the economy and the more traditional economic modelling approach.
If that change in perspective takes hold, and begins to influence policy formulation and implementation, this Economic Survey may mark a positive conceptual shift that helps put India on an accelerated growth path (or more rapid wealth creation). Of course, there will be a need for thinkers who argue for the interests of the disadvantaged, promote broader ideas of welfare, and so on. And, in some cases, human rights should take precedence over material gains. But, a focus on, and detailed analysis of how to promote the success of more and more businesses in India from the grassroots up is novel, and necessary.
The writer is Professor of Economics, University of California, Santa Cruz