1. Surveying the Economic Survey

Surveying the Economic Survey

The next Economic Survey must combine strategic vision with the nuts and bolts of how business is best done

By: | Published: April 15, 2015 12:06 AM

It seems to me that the Economic Survey of India has continued to grow in sophistication over recent years. For many years, Chapter 2 of the Survey provided an intellectual and conceptual overview to frame the actual stock-taking of all facets of the Indian economy, this being the central purpose of the document. This year, the conceptual overview has been expanded into an entire volume, Volume I, providing deeper insights than ever before into a range of issues facing the economy. Volume I includes analyses of the banking sector’s health and regulatory structure, the overall structure of credit markets, the state of infrastructure projects (including reasons for their stalling), the growth-contributing potential of the railways, the need for and pathway to a nationally-integrated market for agricultural commodities, and the central issue of what to “make in India”.

All of this is excellent, and, besides the broad scope, Volume I includes analysis as well as description, trying to understand causes as well as consequences, and bringing in knowledge from the frontiers of academic research. In the case of the discussion of manufacturing and services, in the context of what to “make,” the Chief Economic Advisor has drawn heavily on his own important work on the larger global trends in manufacturing, and how those frame the understanding of what has happened in India. Rather than just praise all that is good in the Survey, however, I want to focus on what is missing.

At one point, the Survey reminds us of the most glaring issue that faces India’s rulers: How to generate enough productive employment for India’s demographic bulge, so that it does provide a dividend. It is difficult to formally model or quantify the impacts of inadequate employment generation (and ‘inadequate’ can mean in quality as well as quantity) but I think there is sufficient historical and contemporary evidence to support a view that growth without meaningful opportunities for the large majority of the working-age population will not be sustainable, both because of its shaky internal dynamics and because of the external force of social unrest. The Survey notes very early on the low and possibly falling employment elasticity of economic growth in India. Later on, it discusses the need to provide the population with skills. However, there is something missing from the overall conceptual framework.

The Schumpeterian framework of creative destruction provides the missing link in thinking about what the India economy needs in order to achieve high sustainable growth. Skilling the population more successfully is certainly a necessary condition for this to happen. But whatever the level of skills, there is often a further level of productivity gains from combining and organising different skills in ways that are innovative, or achieve economies of scale. The notion of entrepreneurship is sometimes overly glamorised, and perhaps part of India’s problem is that too many workers are forced to be entrepreneurs, in small, marginal enterprises that have little potential to grow or create employment for others who are not entrepreneurial. So, what one is talking about here is the dynamics of creation of new firms that can grow in ways that increase employment and the productivity of those employed.

It would have been good to see a more in-depth analysis of the current state of India’s “formal sector,” where the growth has come, where employment growth has occurred, and the underlying causes. Several studies have started to emerge, providing these detailed analyses for India, going down to the level of states, cities and sub-state regions. We have some understanding now of the ways in which physical infrastructure, regulatory infrastructure and concentrations of human capital work to generate innovation and new businesses. The national leadership has spoken about moving India up the rankings in the World Bank’s “Ease of Doing Business” index, but a policy roadmap to identify how this will occur has not yet been developed, to my knowledge.

I think the abstract and general process of improving the industrial dynamics of the Indian economy also has to acknowledge that the world now is substantially different from that which faced the East Asian industrialisers after World War II. In some ways, China was at the tail-end of that long industrial revolution-cum-evolution. The new factor, which has overlapped with the old for the latest industrialisers, is the introduction and development of digital technology. India’s software boom was a lucky fallout of the digital revolution in its relatively early stages. Information technology is now becoming ubiquitous, and the information-sharing capabilities of the internet, in particular, have been barely harnessed in the Indian context.

It would be nice to see a strategic vision of how India’s economy is going to take advantage of the continued evolution of information technology. For example, digital tools for education, which have come in a late stage of development for the West, can be a core component of India’s push for skilling its population. This is just one example: another is a broader use of information technology for better governance, beyond the improvement of the efficiency of transfer programmes. I hope the next Economic Survey combines strategic vision with the nuts and bolts of how business is best done.

The author is Professor of Economics, University of California, Santa Cruz

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