Insights into Editorial: Inappropriate template for a legitimate target
The recently-released Economic Survey 2018-19 either glosses over or ignores many acute challenges faced by the Indian economy like:
- The severe agrarian crisis;
- The troubles of loss-making and debt-ridden public sector units; and
- The issues plaguing public sector banks.
According to author, Odd points highlighted now in Survey have been discussing since decade:
The Economic Survey is not incorrect in highlighting the importance of incorporating insights from psychology into economics, it is odd that this has been done so late in the day.
Many other countries like the U.K., Australia and Singapore have for long being applying such points to policy design and implementation areas and the issue has been discussed in India over the last few years as well.
One issue that the Survey rightly underlines is the need for India to revive private investment if it is to achieve the magical $5-trillion economy status by 2024-25.
However, what is odd here is that to stress this, the document invokes the age-old comparison between India and East Asian countries.
It is rather strange that the Survey brings up something that has been taught in economic development classes over the last two decades.
Newly Industrialised Economies (NIEs): The East Asian Economies Success model:
In the 1970s and 1980s, examples of newly industrialized countries included Hong Kong, South Korea, Singapore and Taiwan.
A newly industrialized country is one whose economic development is between developing and highly developed classifications.
The primary sign of a country’s transition is substantial growth in gross domestic product.
Highly developed countries may see substantial opportunities in newly industrialized countries.
How Financial Inclusion happened in the East Asian Economies:
- While these East Asian economies were generally successful in encouraging savings, the cost of capital was rather high, not unlike the problem in India today.
- To tackle this, the East Asian economies undertook financial repression conventionally understood as a ceiling price keeping lending rates lower than market equilibrium.
- The central banks of these economies maintained tight oversight, and selective capital controls ensured that the low-yielding savings did not leave their countries of origin, while limited financial development forestalled the possibility of people looking for savings alternatives.
- The governments undertook sophisticated industrial policies to promote domestic investment, much of which was export-led (though not necessarily free-market based).
- The governments understood that a vertical industrial policy (of ‘picking winners’) would not work without a sound horizontal industrial policy (dealing with labour and land reforms, bringing about basic literacy and raising women’s participation in the labour force).
- Besides, incentives also had clear guidelines and sunset clauses and mechanisms were in place to phase out support. Thus, winners prospered while losers were allowed to fail.
India must spend $200 billion on infra annually; harnessing pvt. investment a challenge: Economic Survey
- India needs to almost double its annual spending on infrastructure at $200 billion and the real challenge lies in harnessing private investment.
- Private sector investment has been tardy as private investors are interested in short term investments.
- But while NHAI and NHIDCL were looking for long-term borrowing arrangements keeping in view long gestation period of road projects.
- Indian railways, has initiated a major electrification programme for electrifying 100% of its broad gauge network which will reduce the nation’s dependence on imported diesel oil.
- About the civil aviation sector, in 2018-19, a total of 107 airports provided scheduled airline operations and based on the performance of joint ventures in the airport sector.
- The government has decided to lease out six brown-field airports of the Airports Authority of India (AAI) at Guwahati, Lucknow, Jaipur, Ahmedabad, Mangalore and Thiruvananthapuram via public private partnership (PPP) mode for enhanced revenue.
- The Economic Survey mentioned that the demand and supply trends in civil aviation shows that passenger demand is higher than seat supply.
- Stating that shipping and ports sectors play a pivotal role in trade dynamics, the survey said to meet the ever-increasing trade requirements, expansion of port capacity has been accorded the highest priority with implementation of well-conceived infrastructure development projects like Sagarmala and Unnati.
Way Forward for present Indian Context:
Financial inclusion should be encouraged, though the focus was on actual use of the deposit accounts rather than just their opening.
While the manufacturing sector was viewed as a growth engine and open to export competition, the banking sector, in all economies, remained tightly regulated and closed to foreign banks.
To ensure that the private savings were actually intermediated into the formal financial system, failing which the cost of capital would remain high and the availability of capital for investment would be low.
To achieve this, importance was given to the establishment of a safe and secure public sector banking system (usually in the form of postal savings networks) where deposits were guaranteed by the central bank and interest incomes was taxed lightly, if at all.
The state-owned banks were tightly regulated as financial stability was the cornerstone of overall macroeconomic stability.
To achieve the target of $10 trillion economy size by 2032, a robust and resilient infrastructure system is required, supported by adequate private investments.
As the country has only been able to put $100 to 110 billion annually into infrastructure development, this huge investment gaps of about $90 billion in the space needs funding through “innovative approaches”.
The key document said, underlining the strong relations between the economy and infrastructure as “the correlation of investments in inland, road, rail and airport infrastructure to GDP are higher than 0.90.”