Economic Survey 2020: From Creating 4 Crore Jobs To Thalinomics - Ten Takeaways

The government’s Economic Survey, released a day ahead of the Union Budget, navigates its way through short-term challenges the Indian economy faces while pointing to long-term opportunities it must capture.

The survey pegs India’s growth rate in 2020-21 at 6-6.5 percent in the next financial year 2020-21 and acknowledges that the current year will be a fiscally challenging one. It blames the slowdown on the financial sector and a lag effect of weaker investment and GDP growth on consumption.

Pushing job growth through exports, reducing inefficiencies across government owned banks and reducing government intervention are some of the suggestions made by the survey authored by Chief Economic Adviser Krishnamurthy Subramanian.

1. A Difficult Year For Growth

The survey projects real GDP growth at 5 percent in FY20 with an expectation that growth rates will rise to 6-6.5 percent in FY21. The deceleration in GDP growth can be understood within the framework of a slowing cycle of growth—with the financial sector acting as a drag on the real sector, the survey said.

It added that consumption in the economy is impacted with a lag when GDP growth falls. Some of this reflected in the sharp fall in growth in the second quarter of FY20, when GDP grew at a six-year low of 4.5 percent.

A positive base effect along with the impact of reforms announced by the government will boost growth next fiscal year, the survey suggests.

2. Creating Fiscal Headroom

Considering the urgent priority of the government to revive growth in the economy, the fiscal deficit target may have to be relaxed for the current year.

In order to boost the sluggish demand and consumer sentiments, counter-cyclical fiscal policy may have to be adopted to create additional fiscal headroom, the survey said. The government is unlikely to meet its fiscal deficit target of 3.3 percent of GDP when it announces its budget tomorrow.

While revenue buoyancy of the GST will be key to the resource position of both central and state governments, on the expenditure side, rationalisation of subsidies — especially food subsidies, could help expand fiscal headroom, the survey suggested.

The Fifteenth Finance Commission’s recommendations on tax devolution to states will have implications for central government finances.

3. Change In Inflation Dynamics?

Average inflation has fallen considerably from 2012-13 to 2019-20, the survey noted.

From 2012, it was observed that there is a convergence of headline inflation towards core inflation. Evidence for reversion of core inflation to headline, is muted. This means that secondary effects of higher inflation in non-core components like food are minimal, the survey said.

It used this argument to bat for continued monetary support to the economy. Monetary policy need not become tighter in face of short-term, transitory price shocks in non-core components, the survey said.

Future inflationary prospects and inflation dynamics will depend on the overall macroeconomic scenario as well as the containment of rising prices in certain agricultural commodities, it added.

4. Creating Four Crore Jobs

Making a pitch for large-scale job creation, the Economic Survey for 2019-20 recommends India move aggressively on export specialisation and towards manufacture of ‘network products’ such as computers, electronic and electrical equipment, telecommunication equipment, road vehicles, etc.

By integrating “Assemble in India for the world” into Make in India, India can create four crore well-paid jobs by 2025 and eight crore by 2030, the survey estimated. Exports of network products, which is expected to equal $7 trillion worldwide in 2025, can contribute a quarter of the increase in value-added for the $5 trillion economy by 2025.

Giving instances of China’s export performance, the survey says that it has been driven primarily by deliberate specialisation at large scale in labour-intensive activities, especially network products, where production occurs across global value chains operated by multi-national corporations. Whereas high diversification in India indicates it is “spreading its exports thinly over many products and partners, leading to its lacklustre performance compared to China”.

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5. A New Divestment Model

The survey has proposed a new structure of disinvestment to maximise returns from public sector enterprises. Like Singapore’s Temasek model, the economic survey suggests that the government transfer its holdings in central public sector enterprises to a separate corporate entity, which would be managed by an independent board. This entity can then continue to divest individual units at appropriate points in time.

This entity would be managed by an independent board and would be mandated to divest the government stake in these CPSEs over a period of time, explained the survey report. This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs, it added.

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6. A ‘Health-Check’ For NBFCs

The survey develops a ‘health index’ that captures risks and can be used as an early warning system to anticipate liquidity crisis in an non banking financial company. Policy makers can use this tool to monitor, regulate and avert financial fragility in the NBFC sector, the survey said.

The index, called the health score, ranges between -100 to +100, with higher scores indicating higher financial stability. The health score uses information on key drivers of refinancing risk such as a lender’s asset-liability, short term volatile capital, asset quality, short term liquidity, provisioning policy, operating expense ratio and the capital adequacy ratio.

The index was found to predict troubles being faced by some NBFCs and housing finance companies. HFCs exhibited a declining trend on the health score post 2013-14, which would have proved to be an early warning signal for the troubles being faced by the sector at present.

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7. Improving PSU Bank Efficiency

The economic survey has suggested the use of fintech and stock-option based incentives to improve the functioning of public sector banks, while pointing to large inefficiencies in these lenders.

In contrast, every rupee of investor money invested in “New Private Banks” (NPBs)—banks licensed after India’s 1991 liberalization—on average gained 9.6 paise, stated the survey, making a case for enhancing efficiency of public banks.

The survey focuses on the use of FinTech (Financial Technology) across all banking functions and employee stock ownership across all levels to enhance efficiencies in PSBs. These will make PSBs more efficient so that they are able to adeptly support the nation in its march towards being a $5 trillion economy, the survey said.

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8. New Firms On The Rise

The economic survey claims a big boost to bottom-of-the-pyramid entrepreneurship in recent years. India ranks third in the number of new firms created, the survey said referencing World Bank data on entrepreneurship.

The survey claimed that new firm creation has risen dramatically since 2014—at a compounded annual growth rate of 12.2 percent between 2014 and 2018 versus 3.8 percent from 2006-2014. As a result, from about 70,000 new firms created in 2014, the number has grown by about 80 percent to about 1,24,000 new firms in 2018, the survey said.

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9. Reducing Government Intervention

The survey batted for reduced government intervention in markets.

“Government intervention, sometimes though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended,” it said.

Citing examples of the commodity sector and the pharmaceutical sector, the survey said that government intervention can sometimes have an effect opposite of what is intended. Stock limits under the Essential Commodities Act, for instance, have not reduced prices or price volatility but encourages rent seeking. Similarly, price caps in the pharma sector pushed up prices of more expensive drugs.

“Eliminating such instances of needless Government intervention will enable competitive markets and thereby spur investments and economic growth,” the survey said.

10. Thalinomics

The Economic survey also added to India’s economic lexicon with Thalinomics—or a study of what a common person pays for a thali across India.

The study, similar to the Big Mac index, tracked the cost and affordability of a meal since 2006-07 till October 2019, factoring in prices of ingredients and wages.

It found that absolute prices of both vegetarian and non-vegetarian thalis fell since 2015-16. That’s because of a moderation in the prices of vegetables and dal in the last five years compared with a spike in the previous years, according to the survey. Prices, however, rose in April-October 2020 as the two ingredients again turned costlier.

Thalis were constructed using the average monthly price data used for preparation of Consumer Price Index-Industrial Workers from April 2006 to October 2019.

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