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Mainstream, VOL LVIII No 8 New Delhi February 8, 2020

Economic Survey 2019-20: Fictitious Narratives and Ignored Reality

Sunday 9 February 2020

by Saumen Chattopadhyay

The Economic Survey 2019-20 (ES) which was tabled in Parliament the day before the Union Budget for 2020-21 was presented on February 1, was supposed to take stock of the Indian economy and give a vision for the future and a direction to the government for making policies. This year, the ES, other than taking stock of the economic situation, has also sought to give a policy signal like previous years as to how to revive the economy and restore the growth momentum to become a 5 trillion dollar economy by 2025, as the government continues to be optimistic about the future prospect of the economy.

Free Trade and the Invisible Hand

Invoking Adam Smith’s invisible hand (1776) and Kautilya’s Arthashastra along with Thiruvalluvar’s Thirukural, the ES attempts to garner support for the noble human pursuit of wealth-creation by adopting a pro-business strategy as opposed to the pro-crony one which was apparently the approach before 2014. This plea for wealth creation has to be understood and assessed in the context of both a slump in the growth rate and the prevailing high level of unemployment. However, the socio-economic conditions and structural infirmities even after 30 years of ‘reform’ are still not suitable and conducive for launching a market-based reform relying primarily on entrepreneurship and trade.

It is basic economics that market fails on many counts most of the time. What a market does is to give freedom to the people in making their choices and fosters competition which is supposed to bring the best out of the people. However, market may achieve inclusive growth if there exists a level playing field for all before they take the plunge in their desired pursuits. This optimism is derived from the evidence that the growth of new firms was 12.2 per cent during 2014-18 as compared to only 3.8 per cent during 2006-14.

However, the ES has made an attempt to create a narrative of invisible hand and wealth creation without giving due attention to the challenges the Indian economy is witnessing. The apprehension is therefore, that, in the name of wealth creation through entrepreneurship as the start-ups succeed to generate wealth, the government may undermine raising budgetary allocation for health, education and other basic primary amenities essential for a dignified living. This is exemplified when the ES argues: “Greater wealth creation in a market economy enhances welfare for all citizens.” (Para 1.16) This open advocacy for a market economy lauding the new economic policy which was initiated in 1991 which is claimed to be our ‘traditional legacy’ as is supposed to be in the writings of Kautilya and Thiruvalluvar, does not appear to be nuanced and pragmatic in the current Indian context.

Challenges facing the Economy

The slowdown in the economy, the gradual squeezing of the informal sector, inadequate generation of job opportunities coupled with a relatively stagnant Human Development Index (HDI, which has improved to 129 in 2018 from 130 in 2017) do not augur well for the proposed pursuit of wealth creation on a weak foundation and a fragile fabric of the economy.

The advocacy for wealth creation needs to answer three questions. Who all are creating wealth and why it is possible for them, and, in what manner do the benefits arising out of wealth creation accrue and who are the beneficiaries? This is in a way a policy signalling to the job aspirants and the youth to become ‘self-responsibilising’ by taking initiative and participating in the process of making wealth.

Optimism for growth of the size of the economy

The optimism surrounding the Indian economy growing to a size of $ 5 trillion by 2025, as exuded in the ES, does not appear to be convincing. It is one way of giving a false sense of pride in the growth of the economy among the people who are struggling to earn their livelihood on a daily basis. This envisioning disregards the growing inequality in the economy and the relatively low per capita income which continues to be much below the world average. The question is, should we not be focusing on the growth in the incomes of the marginalised sections instead and in the attainment of better parities in life and society? This is an attempt to create a biased narrative, weak in substance.

Building up Trust

It is generally admitted that a competitive market, with self-interest-driven market participants, has the potential to inculcate immoral values, selfishness and encourage indulgence in unethical practices apart from competitive spirit and freedom. This is where the salience of building trust has been invoked. However, in a non-market set-up, people are supposed to be guided by their intrinsic motivation. A market coupled with the installation of accountability mechanisms is supposed to crowd out ‘intrinsic motivation’. However, the ES appeals while arguing for invocation of market principles to discard all those policies which crowd out intrinsic motivation and undermine trust.

The ES quotes Michael J. Sandel to make the point that trust-building is essential to ensure the efficient functioning of a free market. The argument that the corruption perception index of India published by the Transparency International has improved though the latest report indicates a slippage by two ranks is indicative of a reduction of corruption and an improved level of trust. This is also a false narrative because corruption is systemic, and therefore it has not shown much of a decline as our experiences and evidences would testify.

New forms of unethical practices are proliferating commensurate with digitisation and increasing apparent transparency in the functioning of the institutions. More importantly, the corruption perception index inadequately captures the extent of tax evasion which takes place through accounting manipulation to generate black incomes. The emphasis on trust is also possibly a step to pacify and counter the brewing discontent in society and an appeal to garner support for government policies to improve their effectiveness.

Unlikely that the Growth has been Overestimated

The ES argues with a bit of passion and supposed ‘rigour’, based on statistical and econometric analysis, that the GDP growth of 7 per cent per annum from 2011-12 to 2016-17, as reported in the official data, was not overestimated. A study undertaken by Dr Arvind Subramanian (AS), the predecessor of Dr Krishnamurthy Subramanian, the present Chief Economic Advisor (CEA), claimed that the growth during the period was possibly less by 2.5 per cent and at 4.5 per cent. The argument was based on the mismatch between the high frequency data and the growth being claimed officially.

The ES brings out that the mis-estimation, as per the AS methodology, is a global phenomenon as no single model can explain growth in different countries because of country-specific factors. Presenting an alternative argument, based on a study, the ES argues that a 10 per cent rise in the new firms raised the district-level GDP growth by 1.8 per cent. It is argued that given the acceleration of the pace of creation of new firms after 2014, the resultant impact on district-level growth and eventually on country-level growth must be taken into account while commenting on the credibility of the growth rate. A detailed analysis of such claims is required.

However, given the debate on the GDP growth and the thriving black economy, the ES conveniently ignores the inevitable linkage between the two. Further, data for the unorganised sectors is not available and that leads to mis-estimation but that is neither taken into account by AS nor the ES. In all likelihood, the income growth remains underestimated on a perennial basis, of course, at varying degrees. This needed to be commented upon in the ES. But perhaps the focus was on the international adverse opinion which was fuelled by AS and the real focus was not at getting to a more robust methodology for estimating the GDP.

Creating Opportunities for trade, Creating Opportunities for Employment

The ES argues for grabbing the opportunities that the emerging scenario in trade environment presents by adopting a labour intensive export boosting strategy which requires that ‘Assemble in India for the World’ into the ‘Make in India’. The ES projects that this strategy can potentially generate 4 crore well-paid jobs by 2025 and 8 crore by 2030. This strategy involves focusing on the production of ‘network products’ which are part of the global value chains which are generally operated by the Multi national Corporations (MNCs). This strategy needs deeper analysis of the structural factors in the relevant sectors with a dose of pragmatism in view of the limited success of the ‘Make in India’ programme.

Price regulation is counter productive

The ES appeals for revisiting all those realms of government interventions which seek to regulate prices in the name of countering price volatility and pre-emption of price rise. These regulatory interventions to keep prices under control, the Survey argues,not only have lost their relevance in the transformed situation we face todaybut also these interventions generated adverse effects. The ES identifies four such realms, the price regulation under the Essential Commodities Act, the regulation of drug prices, the intervention in the foodgrains market and full debt waiver schemes. Analytically, letting the government regulate market prices to ensure stability and negotiate with the inherent conflict between the producers and the consumers is better than free determination of market of prices. Given the complexity and possible changes in strategies adopted by the producers, there is a need for thorough investigations for these crucial areas of market intervention by the government. While assessing the efficacy of the full debt waiver schemes implemented by the States and the centre, the ES claims that the beneficiaries of the scheme did not consume less and raised their saving and investment with an associated fall in the share of formal credit as per the expected outcome.

Education has become More Unaffordable

The public expenditure on social services (education, health and others) increased from 6.2 to 7.7 by 1.5 percentage points during the period 2014-15 to 2019-20 (BE). While there has been an increase in the participation in higher education, based on the National Sample Survey 2017-18 (75th Round) the ES notes that ‘In the absence of suitable financial support and high burden of course fee especially in higher education (it) pushes them out of education system” (p. 278: Vol 2). It is heartening that the ES recognises the rising cost of education but as noted by the ES, it is surprisingly more in the rural areas. The growing preference for private education has been attributed to the poor quality of education imparted by the government schools as they do not face any competition (p. 279, Vol 2). But this argument is hardly tenable because the government schools/institutions are indeed faced with competition in view of growing private participation in the education sector. The quality of education is poor not because of absence of competition which the government schools/institutions are facing in any case in the wake of privatisation but because of structural factors including inadequate public funding for the education sector as a whole. When the country needs to look forward to achieve an inclusive growth which entails inclusive expansion of the education sector, the government is expected to act on this rising fee with a good degree of seriousness.

Growing Affordability of ‘Thali’, the ‘Thalinomics’

In order to capture the essence of poverty reduction, a new concept called ‘Thalinomics’ has been coined. A ‘Thali’ represents a plate consisting of basic food items an individual would like to consume. The ES argues that the affordability among the people in terms of buying food has gone up. But for the non-vegetarian, the rise in affordability is somewhat muted. The ES argues based on data on basic food prices collected from 80 centres and on the basis of the rise in only formal sector wages. However, it is not clear how the informal sector has fared when it comes to buy a ‘Thali’ and improve the standard of living. Further, this is a new fad to introduce new terms. In the past the CPI gave a good indication of the overall impact of prices on standards of people and food is only one aspect of the overall consumption. It is hardly indicative of what is happening to the poor or the workers.

Conclusion

The ES propounds application of market principles and competitiveness both in the individual realms and in policymaking to revive the economy. Given the tardy development in human development indicators and growing inequalities in the distribution of income, it is only to be expected that the government does take cognisance of ubiquitous market failure and accordingly a pro-active role of the government is envisaged to help people earn their livelihood with dignity.

The author is a Professor, Zakir Husain Centre for Educational Studies, Jawaharlal Nehru University. He is the author of Education and Economics (2012), Oxford University Press and Macroeconomics of the Black Economy (2018), Orient BlackSwan.

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