GDP no longer in a pickle on CEA’s special thali

If you always predict an economic rebound you will sometimes be right. After false predictions for five quarters, which saw GDP growth slide steadily down to 4.5%, the Economic Survey has predicted a big rebound to an annual 6-6.5% in 2020-21. Much will depend on the world economy, which slowed almost everywhere in 2019 and has been hit further by a virus outbreak in China that threatens to disrupt supply chains. If the world economy recovers, so will India’s. If not, the remedies prescribed by the survey, many of which are commendable, may not do the trick.Last year’s survey emphasised the need for major reforms in the police-judicial system and education. The government did not act immediately on that good advice. It remains to be seen whether it will accept this survey’s advice to reduce government intervention in grain markets, drug price controls, trade curbs under the Essential Commodities Act (ECA), and debt waivers. Political populism has long trumped economic sense on these issues.Wealth CreationAs former European Union president Jean-Claude Juncker once said, “We all know what is to be done. What we don’t know is how to get re-elected after doing it.” Maybe the crash in economic growth might galvanise the government into radical action as opposed to the usual incrementalism.Quoting the Thirukkural profusely, hoping this will better convince the Swadeshi Jagran Manch and Bharatiya Mazdoor Sangh than quoting Milton Friedman or Friedrich Hayek, the survey waxes lyrical about an economy focusing on wealth creation, driven by dashing new entrepreneurs in a pro-business atmosphere accompanied by a revival of the government-business trust that broke down earlier this millennium. It hails the invisible hand of the market that Sangh affiliates cannot see, perhaps because it is invisible. Competitive markets are needed to ensure a level playing field that aids the best entrepreneurs rather than the best-connected ones, the survey says, arguing a 10% rise in new firms in a district raises GDP by 1.8%.The document also points to the data that the equity index of politically connected companies significantly outperformed the overall stock market by 7% a year before the CAG’s report on the spectrum sale scam in 2011. After that, politically connected companies underperformed the overall market by 7.5% per year, suggesting a big decline in cronyism. Some old cronies are, in fact, now biting the dust. Transparency International’s Corruption Perceptions Index shows India improving greatly on this front since 2011.Reforms PushOn the survey’s stress on reforms, it should be pointed out that the easiest reform today may be huge cuts in the food buffer stock. Stocking increases the grain price by 40% above procurement cost; so, high stocks are wasteful and costly while becoming politically irrelevant since grain accounts for a decreasing share of food spending.The Essential Commodities Act distorts prices, discourages investment in warehouses and foils a modern commodity market. The survey shows that ECA raids have no impact on prices and have a very low conviction rate. And also that full debt waiver beneficiaries consume, save and invest less and are less productive than partial waiver beneficiaries. They disrupt the credit culture and so unwittingly reduce the credit flow to farmers.The survey wants to repeal or amend the Factories Act, Essential Commodities Act, Food Corporation of India Act, Sick Textile Undertakings Act, Land Acquisition Act (2013) and Recovery of Debts (DRT) Act. That is a brave agenda but will face stiff political hurdles.The same goes for labour reforms. The survey notes that economic growth has been much faster in states that have opted for flexible labour policies (Gujarat, Rajasthan, Punjab) than inflexible states (West Bengal, Kerala, Jharkhand, Bihar and Assam).Private sector companies must get entry into all sectors, ending preferences or monopolies for public sector enterprises. The survey examines the performance of closed sectors with those open for private investment, and finds the latter grow much faster. Examples are minor ports versus major ports, private road transport versus government-owned railway transport, steel and cement versus government-dominated coal.73824541 Assemble in IndiaThe survey makes a brave but not entirely convincing attempt to prove that official GDP growth data are accurate and not inflated, as claimed by critics like former chief economic adviser Arvind Subramanian. The government’s own chief statistician, Pradeep Srivastava, recently penned a newspaper column saying that his consumer surveys were unreliable because people lied to surveyors.Nomiracle economy has been able to sustain 7% growth without buoyant exports. Indian exports have hardly grown at all since 2013. The survey advocates integration of India into global value chains, so that “Assemble in India” becomes a key part of Make in India. It estimates that this approach can create 40 million jobs by 2025 and 80 million by 2030. However, rising import tariffs, price controls, tax disputes and constantly changing rules make India an unattractive final assembly point. The latest World Development Report says that the logistical turnaround cost in India is thrice that of China’s and double Bangladesh’s.The survey implicitly makes a good case for India joining the China-led Regional Comprehensive Economic Partnership (RCEP) that the government recently opted out of. It rebuts claims that existing free trade agreements (FTAs) have been bad for India. After accounting for all confounding factors in FTAs, it finds that India’s manufactured exports increased 13.4% while manufactured imports rose 12.7%. Total merchandise exports rose 10.9% against 8.6% for imports, a net gain in both cases.Privatisation is a powerful instrument to increase productivity and yield funds for fresh investment in essential infrastructure. The survey examines 11 public sector companies that were privatised, comparing their performance with that of their peers in the same industries. Remarkably, the net worth of the privatised companies rose by Rs 2,290 crore, almost double the Rs 1,250 crore registered by their peers. Clearly privatisation works, and that may be one reason for the government decision to push forward boldly on this front.The survey stresses the need for financial sector recapitalisation and reform to step up credit needed by a burgeoning economy. It detects high levels of risk in shadow banks. Its research shows that Indian banks are small compared to peers in other countries, and suggests huge increase in bank size. This may mean further mergers of public sector banks.

from Economic Times https://ift.tt/2GJUBZO