How to build a $5 trillion economy

“Economy@5trillion,” or how India can leapfrog into a $ 5 trillion economy by 2025 is the very essence of Volume 1 of the Economic Survey 2019, penned by the new chief economic advisor (CEA) Krishnamurthy Subramanian. As he points out in the preface itself, he has provided a strategic blueprint for fructifying Prime Minister Narendra Modi’s vision through what he terms as “blue sky thinking.”

But what is more important is that Subramanian sees an investment-led model of growth as the panacea for many of the problems that are plaguing the economy today like falling GDP growth and investment, reduced consumption, and job stagnancy.  Higher investments, whether it is by the government or by the private sector, argues Subramanian, is the key driver that can create a self-sustaining virtuous cycle in India.

For Subramanian greater investments in the economy can start of a cycle of higher growth, which is turn can lead to more job creation, greater demand for goods and services, and boost exports because there are a host of complementary inter-linkages among these macroeconomic variables. Here, Subramanian takes a different approach to growth from his predecessors, who viewed these issues of growth, jobs and investment in different silos and tried to find a separate solution for each.

To begin with, Subramanian wants the India economy to “shift gears to accelerate and sustain a real GDP growth rate of 8%”. But the survey does not mention why India should grow only at 8% and not a tad higher 9% or even clock double digit growth. Perhaps, an 8% growth per annum will lead India to a $5 trillion economy by 2025.

The 8% growth can be achieved, says the Survey, by nourishing MSMEs so that they can become internationally competitive and create more jobs. The survey also talks of enhancing legal reforms, ensuring “consistency of policy with the vision and the strategic blueprint, reducing the cost of capital, and rationalizing the risk-return trade-off for investments”.

In its 11 chapters, the Survey not only provides policy prescriptions based on various case studies picked up from different countries, but also talks about the problems faced by various sectors in the current socio-economic environment.

However, what is unique about it is that it has used advances made in behavioural economics in the last few decades to “nudge”—a term made famous by Noble Prize winner Prof Richard Thaler—to effect behavioural change in individuals. In the chapter —Homo Sapiens, Not Homo Economicus: Leveraging the Behavioural Economics of Nudge—Subramanian says that the government’s flagship initiatives like Swacch Bharat Mission, Jan Dhan Yojana and Beti Bachao Beti Padhao have already resulted in some kind of behavioural change in India.

No wonder then, the Survey lays out an ambitious agenda for behavioural change by applying the principles of behavioural economics to several issues including gender equality, health, savings, tax compliance. Similarly, the importance of data and data analytics in the modern world has not escaped the attention of the CEA. Hence, the Survey foresees countless opportunities in creating data as a public good "of the people, for the people, and by the people”.

Subramanian, quoting examples from high-growth East Asian economies, maintains that a high-growth trajectory can only be sustained by a “virtuous cycle” of savings, investment and exports, and supported by a favourable demographic phase. “Investment,” he argues “especially private investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs”. Exports must form an integral part of the growth model because higher savings preclude domestic consumption as the driver of final demand. Similarly, job creation is driven by this virtuous cycle.

The Survey also tries to end the general apprehension that a high investment rate will lead to labour substitution and end the debate about labour-intensive versus capital-intensive modes of production. The Chinese experience has already illustrated how a country with the highest investment rates created the most jobs. “What matters most is whether or not investment enhances productivity and thereby international competitiveness,” says the Survey.

The other focus of the Survey is on the middle and small enterprises, which it believes should achieve a certain size to become globally competitive and generate more unemployment. While calling for deregulations of restrictive labour laws that force many companies not to employ more than 100 people, the Survey argues that those companies, which deliberately remain small for tax and other reasons, should have a sunset clause of less than ten years.

However, an investment-led growth model calls for a rapid expansion in the financial system by both banks and capital markets. But such an expansion can also be disrupted by a major financial crisis that derails the savings-investment dynamic, like the Asian crisis of 1997-98, which destroyed the economy of many countries. However, the Survey says that the important foundation for such an expansion has already been achieved through the banking clean-up and the implementation of the Insolvency and Bankruptcy Code, the challenge now is to bring down the cost of capital, which is one of the highest in the world.

Policy uncertainty, says the Survey, is one of the biggest roadblocks in the investment growth story. While it may not be possible to contain certain global and domestic events, “policymakers can reduce economic policy uncertainty to foster a salutary investment climate in the country.” Hence, policymakers’ must make their actions predictable, provide forward guidance on the stance of policy, and reduce ambiguity, arbitrariness in policy implementation. Second, “what gets measured gets acted upon”. So, economic policy uncertainty index must be tracked at the highest level on a quarterly basis. Finally, quality assurance of processes in policy making must be implemented in government via international quality certifications.

The Survey also wants a common minimum wage act for blue collar workers. “An effective minimum wage policy is a potential tool not only for the protection of low-paid workers but is also an inclusive mechanism for more resilient and sustainable economic development. However, what is interesting about India is that minimum wages has a “lighthouse effect”. It acts as a benchmark that pulls up wages in the low-paid and informal sector by enhancing the bargaining power of vulnerable workers.

The Survey also highlights the benefits of careful and effective targeting of government programmes by demonstrating that direct-benefit transfer-enabled MGNREGS has indeed helped to alleviate distress of workers. “Post DBT payment delays in the payment of wages, under MGNREGS, has reduced significantly thereby providing livelihood security to people in distress.” Thus the skillful use of technology when combined with an unwavering commitment to monitoring effectiveness of government schemes can make a substantial difference on the ground, says the Survey.

Thus the groundwork for a $5 trillion economy has been laid. Now, for its proper implementation.