In his first Economic Survey
as India’s chief economic advisor, K V Subramanian has successfully infused a conservative and well-understood set of recommendations with a novel, and even indigenous, air. On the surface, there may appear to be nothing remarkable about suggestions that the government focus on private investment, and those on re-invigorating exports and administrative reform. Such a view would, however, miss the point. The Survey has given these policy directions a new freshness and embedded them in a view of recent economic successes in India that will be persuasive to political decision-makers. And, further, Dr Subramanian has chosen to make these broad, overall recommendations in line with traditional growth strategies at a point when many voices in India and abroad are calling instead for a return to the days of “industrial strategy”. The Survey has also clearly — and correctly — poked a hole in the conventional wisdom that India must rely on consumption-driven growth by putting investment, and particularly private investment, at the centre of its strategy. As a consequence, its strategy also must prioritise export growth — an implicit rebuke to the increasing protectionism visible in some recent actions of the Indian government.
Returning private, fixed investment to the highs of the mid-2000s is indeed a pre-requisite for a sustainable high-growth trajectory. However, this is not easy to manage, as the Survey recognises. An increase in investment has to be paid for with a corresponding increase in savings, unless the current account deficit were again to explode. But in recent years the private corporate sector has essentially closed its internal savings-investment gap; and it is the household sector, which includes small and unincorporated enterprises, that is the primary net saver of the economy. The problem is where this is going. Net borrowing by the public sector — the central and state governments’ budgetary and off-budget borrowing — is estimated to have grown at an average of over 10 per cent a year since 2011-12. It is, at this point, no less than an identity: For private investment to recover, government dis-saving must be reduced. The government will have to spend less or raise more in revenue. An otherwise excellent argument in the Survey could have been improved by making this point.
A granular understanding of the reasons for the crisis in private investment underlies Dr Subramanian’s choice of subjects in the Survey. For one, there is clearly continuing policy uncertainty in the Indian economy, in spite of there being the confidence provided by a stable government with a working majority. This must be addressed — the Survey suggests transparent, independent quality assurance of policy-making processes, but other possibilities exist. Legal and administrative reform, alongside the preservation of institutional independence, will also aid in decreasing policy uncertainty. Crucial also is the long-delayed question of judicial reform, which would make dispute settlement and contract enforcement in India less of a nightmare. Real interest rates are too high, and need to come down.
Regressive policy, which creates perverse incentives for companies and encourage them to stay small and inefficient, must be phased out, and replaced with preferences for newer rather than smaller enterprises — the Survey correctly points out that it is the former and not the latter that generate growth and jobs. Finally, the competitiveness of exporters must be a priority — measured through the average productivity of firms in the economy. This, of course, requires labour law reform, and the Survey makes this point clearly and concisely, embedding it in a defence of the outcomes produced by Rajasthan’s labour reforms in 2014. The one missing piece is rupee depreciation. The Survey, in a footnote, argues that this is unnecessary to boost exports. But fixing an overvalued currency is the simplest and cheapest way to gain a competitive boost.