Economic Survey on India's economic growth

Syllabus subtopic: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Prelims and Mains focus: on the suggestions and observations made in the survey related to India’s economic growth

News: The Economic Survey, authored by the Chief Economic Adviser (CEA), said that the government must use its strong mandate to deliver expeditiously on reforms which will enable the economy to strongly rebound in 2020-21.

Background

• Earlier this month, the International Monetary Fund projected India’s growth to accelerate to 5.8% in 2020-21 from the estimated 4.8% in the preceding year, after sharply paring its earlier projections “owing to stress in the non-bank financial sector and weak rural income growth".

• The Economic Survey said its own projection is fraught with downside risks such as continued global trade tensions, worsening US-Iran geopolitical situation, increase in short-term interest rates in advanced economies, slow progress in implementation of the insolvency and bankruptcy code, and stagnation in the gross domestic savings rate.

• The overarching theme of the survey this year is wealth creation and the policy choices that enable this.

Observations made in the survey

• China’s remarkable export performance vis-à-vis India is driven primarily by deliberate specialization at a large scale in labour-intensive activities, especially ‘network products’, where production occurs across global value chains operated by multinational corporations.

• Government intervention hurts more than it helps in the efficient functioning of markets. Giving the example of the pharmaceutical industry, the survey said government interventions often lead to unintended consequences such as price increases, when compared to markets that are unregulated.

• The survey said the economy is set to revive in the second half of 2019-20 mainly on account of ten positive factors. It listed them as:

1. picking up of Nifty (National Stock Exchange’s Nifty index) for the first time this year,
2. an upbeat secondary market,
3. higher foreign direct investment inflows,
4. a build-up of demand pressure,
5. positive outlook for rural consumption,
6. rebound of industrial activity,
7. steady improvement in manufacturing,
8. growth in merchandise exports,
9. the higher build-up of foreign exchange reserves, and
10. the positive growth rate of GST revenue collection.
11. growth in merchandise exports,
12. a higher build-up of foreign exchange reserves, and
13. positive growth rate of GST revenue collection.

Suggestions given in the Survey

• Reducing spending on subsidies, especially on food, to create fiscal space for additional spending in areas such as infrastructure development.

• Reforms in land and labour markets may further reduce business costs. As the proportion of small and marginal holdings is significantly large, land reform measures like freeing up land markets can help farmers in improving their income.

• Upside risks, such as bottoming out of global trade, a turnaround in housing, favourable global sentiment toward India, and better implementation of the goods and services tax, are expected to boost economic growth.

• It proposed a new programme, “Assemble in India", to be integrated with “Make In India" and focusing on labour-intensive exports that could potentially create 40 million well-paid jobs by 2025 and 80 million by 2030.

• India’s aspiration to become a $5-trillion economy, depends critically on strengthening the invisible hand of markets together with the hand of trust that can support markets. The invisible hand needs to be strengthened by promoting pro-business policies to

1. provide equal opportunities for new entrants, enable fair competition and ease of doing business,
2. eliminate policies that undermine markets through government intervention even where it is not necessary,
3. enable trade for job creation, and
4. efficiently scale up the banking sector to be proportionate to the size of the Indian economy.

Way ahead

The survey’s projected FY21 growth of 6-6.5% may prove to be optimistic unless backed by a strong fiscal stimulus in the budget and the meeting of investment targets specified in the National Infrastructure Pipeline, both by the central and state governments.

Economic Survey on entrepreneurship

Syllabus subtopic: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Prelims and Mains focus: on the remarks made in the survey regarding entrepreneurship

News: The Economic Survey said that India currently ranks third globally in the number of new firms created with about 1.24 lakh new entities coming up in 2018.

Entrepreneurship scenario in India

• As per the Survey, new firm creation had gone up dramatically since 2014.

• While the number of new firms in the formal sector grew at a cumulative annual growth rate of 3.8% from 2006 to 2014, the growth rate from 2014 to 2018 had been 12.2%. As a result, from about 70,000 new firms created in 2014, the number has grown by about 80% to about 1,24,000 new firms in 2018.

• However, on a per-capita basis, India had low rates of entrepreneurship in the formal economy. Between the 10-year period from 2006 to 2016, the mean number of new firms registered per year per 1,000 workers was 0.10. In contrast, the mean entrepreneurial intensity for the U.K. and the U.S. was 12.22 and 12.12, respectively.

• The Survey also pointed out that in contrast to the other countries, a large number of India’s enterprises operate in the informal economy which was not captured in the data.

• The data showed that new firm creation in services sector (at around 85,000) was significantly higher than that in manufacturing (a little less that 15,000), infrastructure (about 5,000) or agriculture (less than 5,000).

• The entrepreneurship at the bottom of the administrative pyramid — a district — had a significant impact on wealth creation at the grassroots level. “... a 10% increase in registration of new firms in a district yields a 1.8% increase in GDDP (gross district domestic product). Thus, entrepreneurship at the bottom of the administrative pyramid — a district — has a significant impact on wealth creation at the grassroots level.

• Enhancing ease of doing business and implementing flexible labour laws in job-creating sectors, such as manufacturing, can create the maximum number of jobs in districts and thereby, in the States.

• Literacy, education and physical infrastructure are the other policy levers that district and State administrations must focus upon to foster entrepreneurship and thereby, job creation and wealth creation.

Economic Survey on Privatisation

Syllabus subtopic: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Prelims and Mains focus: about the suggestions/observations made in the survey regarding the disinvestment of CPSEs

News: The Economic Survey has aggressively pitched for divestment in public sector undertakings (PSUs)

Observations and suggestions made in the survey

• The government can transfer its stake in listed CPSEs to a separate corporate entity. 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.

• This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs.

• The survey analysed the data of 11 PSUs that had been divested from 1999-2000 and 2003-04 and compared the data with their peers in the same industry.

• Analysis shows that these privatised CPSEs, on an average, performed better post-privatisation than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee.

• More importantly, the ROA and net profit margin turned around from negative to positive, surpassing that of peer firms, which indicates that privatised CPSEs have been able to generate more wealth from the same resources. The analysis clearly affirms privatisation unlocks the potential of CPSEs to create wealth.

• Interestingly, according to the government document, the recent approval of strategic disinvestment in Bharat Petroleum Corporation Limited (BPCL) led to an increase in the value of shareholders’ equity of BPCL by 33,000 crores compared to its peer Hindustan Petroleum Corporation Limited.

• Aggressive disinvestment, preferably through the route of strategic sale, should be utilised to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in CPSEs.

• The focus of the strategic disinvestment needs to be to exit from the non-strategic business and directed towards optimising the economic potential of these CPSEs, it added, highlighting there were about 264 CPSEs under 38 Ministries or departments.