In India two annual publications present the assessment of the economy for the policy makers’ hindsight – Economic Survey (prepared by the Chief Economic Advisor of the Ministry of Finance) and RBI Annual Report (prepared by the Governor of the Reserva Bank of India). Actually both these reports are prepared by the expert group of economists working in the two government bodies. However, not long ago, the general public perception was that in terms of analytical rigour the RBI Annual Report was better reading than the other one. But in the recent years that perception is bound to change. Economic Surveys have been scoring high in the parlance of professional and academic economists in terms of its coverage and analytical rigour. Therefore the Surveys have been rated at par with the RBI Annual Reports. This has opened up a new window of assessing the economy for the general public from the perspective of fiscal authority in addition to the perspective of monetary authority. This year’s Economic Survey has continued with that high standard and provided an excellent commentary on the present state of the economy along with future prospects and risks.
Particularly the articulation of short-run and medium-run growth phenomena in the economy is praiseworthy. The ‘decoupling’ phenomena – India’s growth plummeted while the rest of the world has been surging ahead - in the first half of the current fiscal year has been attributed to the negative shock of the demonetization and teething problems of implementation of Goods and Services Tax (GST). However, it should be kept in mind that GST will be streamlined in future and the adverse effects from its implementation would be gradually corrected. This would provide the scope for recovering the economic losses which have been plaguing the economy now. On the other hand, demonetization being a one-time shock to the economy such scope for recovering losses is far less. In short, the deadweight losses from demonetization are greater than those from GST.
Relating to challenges to the growth story over the medium term the Survey has pointed out that the issue of the stressed assets in the form of non-performing assets in the banks and the twin deficits – fiscal and current account – might put up stumbling blocks in the path of high growth. The Survey has hoped that the new Indian Bankruptcy Codes would go a long way in reducing the intensity of the problem but it also calls for further action from the exchequer in terms of recapitalization of the public sector banks. The Survey is aware of the moral hazard problem associated with the recapitalization drive by the government apart from the huge fiscal burden on the government. However, it has failed to show any better way to address this mammoth problem. Perhaps people would expect more clarity on policy directions in this respect from an important policy document like the Survey at this juncture.
The movement in the government’s give-away programmes from subsides to provision of private consumption goods at a cheaper rate to the poor has been noted by the Survey. However, many economists have cautioned that such policy moves might jeopardise the growth of the economy in the future. The subsidies might support investments whereas the provision of consumption goods would surely end up in consumption.
To counter the threat to the current account balance the Survey suggested the path of export-led growth and competitive exchange rate policy. However, it is well-known that the competitive exchange rate regimes are many times fraught with impossible trinity problems where competitive exchange rate cannot go along with large capital inflow. The Survey has mentioned it but it is mute about alternative policy choice.
The other part silence is about unemployment. This problem has great social and political implications. The Survey has only mentioned that the current coverage of unemployment surveys are rather poor and therefore the unemployment situation is not that bleak. The Survey has expressed the hope that GST regime would draw a larger fraction of the workforce in the fold of formal sector and would thus show a brighter picture of the problem. While the above expectation might be true still it is just a statistical solution to the surmounting problem of unemployment. One would have expected a few more ponderings on this issue in the pages of the Survey.
The Survey has drawn our attention to another structural problem afflicting the economy at present - the low savings and the investments rates. The downward movement of the rates have been continuing in spite of the fact that the economy has been growing steadily. The question is whether these two rates should be raised simultaneously through policy actions or some short of sequencing should be put in effect. In this context the Survey, relying on the cross-country studies by eminent economists, advocated for higher importance on the investment rather than saving. The logical sequence is that the higher investment would bring higher growth which would be ultimately translated into higher saving. So one may hope to see more investment, particularly public investment, in future.
At the end, thumbs up for the Survey.