‘Thalinomics’ is the new formula to prop up sagging economy: Economic Survey tries to instil hopes for FY21

The first Economic Survey presented in the first year of the 2020s, the decade which has been termed as the ‘key to India’s growth’ by the President of India in the Parliament of India today, presents a very disturbing picture of the state of economy in 2019-20 where we have landed at under the leadership of our Prime Minister Narendra Modi, who has expected this first Budget Session of the decade ‘should ensure to lay strong foundation for a bright future of the country in this new decade’.

Even when the document is based on the theme of ‘Wealth Creation’, and has been claimed as a ‘synthesis between old (ancient) and new (modern)’, its projections and recommendations may not go well with the country especially in the present social, political, and economic scenario. One may suspect how something can be both old and new at the same time! Its ‘Thalinomics’ a part of buying support from the common man for furthering the capitalist aspirations of wealth creation or real synthesis of both is a debatable question.

The Survey identifies several levers for furthering wealth creation: entrepreneurship at the grassroots as reflected in new firm creation in India’s districts; promote “pro-business” policies that unleash the power of competitive markets to generate wealth as against “pro-crony” policies that may favour incumbent private interests. The Survey makes the case that the churn created by a healthy pro-business system generates greater wealth than a static pro-crony system.

Note that the Survey contrasts two systems; the arguments are not directed at any individual or entity. Instead, it argues for eliminating policies that undermine markets through government intervention even where it is not necessary; integrate “Assemble in India” into “Make In India” to focus on labour-intensive exports and thereby create jobs at large scale; efficiently scale up the banking sector to be proportionate to the size of the Indian economy and track the health of the shadow banking sector; use privatisation to foster efficiency. Consistent with the hand of trust supporting the invisible hand, the Survey tries to provide careful evidence that India’s GDP growth estimates can be trusted.

The Survey has said that the GDP is growing at 5 per cent, which lower than the previous year’s 6.8 per cent, its own projected growth rate of 7 per cent in July 2019 for the current year, and estimated growth rate of 12 per cent in the Budget 2019-20. Last year’s Economic Survey has stated if India is to become $5 trillion economy by 2024, the country needed at least a growth rate of 8 per cent. It is now clear that the goal of becoming $5 trillion economy is too difficult to achieve.

Can the country achieve even the projected economic growth between 6 and 6.5 for the year 2020-21? This question requires a probing finger on the Economic Survey which has projected this level of growth in the backdrop of 5 per cent of growth rate for the current fiscal, especially when on its own estimation the year ahead will pose challenges on the fiscal front. We have already seen how the expectations for 7 per cent growth rate went wrong even at the time when our economy was performing at 6.8 per cent in the previous year.

While the Survey expects a strong rebound in growth in FY21 on a low base, it noted that government cut in Capex may “adversely hurt growth”. It says that tax collections will be lower than estimated and high non-tax revenue growth would not be sustainable year-on-year. Hoping buoyancy in GST revenues, the Survey says that it would be “key to Centre, state revenue position” while adding that the pace of GDP growth would impact revenue collection. Growth is expected to begin in the second half of the financial year 2020-21, and industrial activity is picking up. However, the global trade tensions could hit export, which is elevated on protectionist tendencies of US, China. US-Iran tensions may also weaken FDI inflow. In this scenario it says that the government must “deliver expeditiously on reforms.”

With many challenges on the economic front, the Survey suggests government may need to relax fiscal gap target to revive growth while suggesting a need for counter-cyclical fiscal steps to boost demand.

On the realty front, Survey suggests greater home sales can clean up banks and NBFC balance sheets. It also recommends that the realty companies “must cut home prices to clear unsold inventory.”

On infrastructure, the Survey has cautioned that private investments may get crowded on higher government infrastructure spends, and also that banks may remain risk averse unless the IBC process speeds up. It finds that low tax to GDP ratio has constrained the government’s infrastructure spending.

Rationalization of subsidies could be important to expand fiscal headroom, and there are still scopes to “further rationalise subsidies, especially food”. It sees a progress in this direction, albeit slow.

While there is a case for government intervention when markets do not function properly, the Survey says, excessive intervention, especially when the market can do the job of enhancing citizens' welfare perfectly well, stifles economic freedom and creates deadweight loss. On divestment, it noted that the government can transfer its stake in the listed central public sector enterprises (CPSEs) to a separate corporate entity, which would be managed by an independent board.

Continuing the modest endeavour of Economic Survey 2018-19 to use principles of behavioural economics as instruments of economic policy and as an easy prism to have insights about human behaviour, the Economic Survey 2019-20 presents, as it is claimed “Thalinomics”- an attempt to relate economics to the common person using something that he or she encounters every day – a plate of food i.e. a Thali.