For those who read every line, the latest Economic Survey is alarming. For those who read in-between the lines, it is disturbing. Certainly, there is some good news. FDIs, for instance, are still on the rise (while foreign portfolio investment is declining) and the current account deficit has been reduced, in spite of the diminution of remittances, largely because of a contained trade deficit. Growth remains high at 7.2 per cent, but its rate is declining and its composition is worrying. Services continue to grow at 8.8 per cent and agriculture is back at 4.1 per cent because of a good monsoon, but industry registers a setback, from 7.4 per cent in 2015-16 to 5.2 per cent in 2016-17.
The Economic Survey asks: “What went wrong?” and offers the following explanation: In the 2000s, “economies all over the world were booming”, Indian firms “made plans accordingly. They launched new projects worth lakhs of crores”, their “investment financed by an astonishing credit boom”. Naturally, “projects that had been built around the assumption that growth would continue at double-digit levels were suddenly confronted with growth rates half that level”. Firms stopped investing and banks, mostly public, which have accumulated a huge amount of bad loans, stopped lending. The growth of credit to industry became negative during the last fall, making SMEs suffer even more than big companies.
What to do? This is where the Economic Survey needs to be read in-between the lines. A few pages after celebrating the liberalisation of the economy and the end of socialism, the authors admit that while “Most economic problems are best resolved through market-based mechanisms”, “in this case, this mechanism doesn’t seem to be working” — more, “a centralised approach might be needed”.
Which means that “the bulk of the burden will necessarily fall on the government” and that it may even imply “forgiving some burden on the private sector”. In other words: Businessmen have not strategised properly, but they should not be held accountable, and the taxpayer has to help them. In this market economy of some kind, benefits can be private, but losses have to be socialised.
To be fair, this is only the short-term solution the Economic Survey is suggesting. The authors do not content themselves with this quick-fix perspective because they know that “unless there are fundamental reforms, the problem will recur again and again”. Why? Because, as Atul Kohli has already demonstrated, India is not market-friendly but business-friendly (As the Economic Survey says on page 42, “India is not quite what it appears to be”): Even if crony capitalists have bad projects in mind, politicians will twist the arm of the public bank managers to lend them the necessary amount — in exchange for the funding of some election campaign.
Hence, this suggestion: “Structural reform aimed at preventing this can take many forms but serious consideration must also be given to the issue of government majority ownership in the public sector bank”. Why is the suggestion not more precise and so hesitant, because the authors know (and say!) that it is in the domain of reform that “the least amount of progress has occurred” under the Modi government. While the prime minister has reached the middle of his term, the Economic Survey points out that “Perhaps the most important reforms to boost growth will be structural”, like strategic disinvestment, tax reform and subsidy rationalisation. This is long overdue for those who supported the BJP in 2014 and for whom reforms were the mandate. These reforms have not really taken place yet, according to the Economic Survey.
In fact, the epithet “structural” is repeated 18 times in the Survey, to say that structural reforms are needed, to suggest they are on their way and to say that they have happened already. The chapter on demonetisation illustrates this fundamental hesitation.
The Economic Survey offers the first official detailed analysis of demonetisation. The reasons it mentions are standard: “to curb corruption”, counterfeiting, the use of high denomination and especially, the accumulation of “black money”, generated by income that has not been declared to the tax authorities. The authors admit that the impact of this decision on the growth rate is underestimated because the evolution of the informal sector — that has been the most directly affected — is not measured precisely in the national income accounts. Yet, the graphs shown by the Economic Survey are telling: Sales of two-wheelers and cars have dropped by 10-20 per cent after the November 8 announcement; the real estate market has sunk, etc. The Survey candidly admits that the most badly affected have been the poor, a category coterminous with the 350 million people who have no cellphone. These “digitally excluded” cannot easily go cashless. (Paradoxically, the Survey considers that demonetisation has been popular in India on the basis of a “phone survey across households in five states (that) shows that approval rates for demonetisation have remained high, over 75 per cent on average”).
While the short-term damage is obvious, the most disturbing conclusions pertain to the long-term gains. The authors of the Economic Survey do not conceal that the long-term effects are conditional: Demonetisation will only bear fruit economically if it is accompanied by structural reforms, including an ambitious GST. Speculating that “GST will probably be implemented later in the fiscal year”, the authors conclude: “The fiscal gains from implementing the GST and demonetisation, while almost certain to occur, will probably take time to be fully realised”.
The many doubts that are pervasive in the Economic Survey are refreshing in the present era of post-truth democracy, when facts are often conveniently overlooked. But they are disturbing too because the rulers’ sense of direction does not seem to be as firm as public discourse would like citizens to believe.
P.S.: One of the main issues for Indian society, jobs, is mentioned in passing — in contrast to the detailed study of the labour market in last year’s Survey. One of the few indirect references made to it concerns the loss of India’s competitive advantage in the textile and leather industries vis-à-vis Vietnam and Bangladesh — one more reason for asking for structural reforms.