NEW DELHI [Maha Media]: The Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2019-20 in the Parliament today. The Key Highlights of the Economic Survey 2019-20 are as follows:
Wealth Creation: The Invisible Hand Supported by the Hand of Trust
* India’s dominance as global economic power for three-fourths of economic history manifests by design.
* Kautilya’s Arthashastra postulates the role of prices in an economy (Spengler, 1971).
* Historically, Indian economy relied on the invisible hand of the market with the support of the hand of trust:
* Invisible hand of the market reflected in openness in economic transactions.
* Hand of trust appealed to ethical and philosophical dimensions.
* Post-liberalisation, Indian economy supports both pillars of the economic model advocated in our traditional thinking.
* Survey illustrates enormous benefits accruing from enabling the invisible hand of the market.
* Exponential rise in India’s GDP and GDP per capita post-liberalisation coincides with wealth generation.
* Survey shows that the liberalized sectors grew significantly faster than the closed ones.
* Need for the hand of trust to complement the invisible hand, illustrated by financial sector performance during 2011-13.
* Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:
* Strengthening the invisible hand of the market.
* Supporting it with the hand of trust.
* Strengthening the invisible hand by promoting pro-business policies to:
* Provide equal opportunities for new entrants.
* Enable fair competition and ease doing business.
* Eliminate policies unnecessarily undermining markets through government intervention.
* Enable trade for job creation.
* Efficiently scale up the banking sector.
* Introducing the idea of trust as a public good, which gets enhanced with greater use.
* Survey suggests that policies must empower transparency and effective enforcement using data and technology.
Entrepreneurship and Wealth Creation at the Grassroots
* Entrepreneurship as a strategy to fuel productivity growth and wealth creation.
* India ranks third in number of new firms created, as per the World Bank.
* New firm creation in India increased dramatically since 2014:
* 12.2 % cumulative annual growth rate of new firms in the formal sector during 2014-18, compared to 3.8 % during 2006-2014.
* About 1.24 lakh new firms created in 2018, an increase of about 80 % from about 70,000 in 2014.
* Survey examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid – over 500 districts in India.
* New firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture.
* Survey notes that grassroots entrepreneurship is not just driven by necessity.
* A 10 percent increase in registration of new firms in a district yields a 1.8 % increase in Gross Domestic District Product (GDDP).
* Entrepreneurship at district level has a significant impact on wealth creation at the grassroots.
* Birth of new firms in India is heterogeneous and dispersed across districts and sectors.
* Literacy and education in a district foster local entrepreneurship significantly:
* Impact is most pronounced when literacy is above 70 per cent.
* New firm formation is the lowest in eastern India with lowest literacy rate (59.6 % as per 2011 Census).
* Physical infrastructure quality in the district influences new firm creation significantly.
* Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
* Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.
Pro-business versus Pro-markets
* Survey says that India’s aspiration of becoming a $5 trillion economy depends critically on:
* Promoting ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth.
* Weaning away from ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents.
* Viewed from the lens of the Stock market, creative destruction increased significantly post-liberalisation:
* Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation.
* Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.
* Despite impressive progress in enabling competitive markets, pro-crony policies destroyed value in the economy:
* An equity index of connected firms significantly outperformed market by 7 % a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense.
* In contrast, the index underperforms market by 7.5 % from 2011, reflecting inefficiency and value destruction inherent in such firms.
* Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.
* Similarly crony lending that led to wilful default, wherein promoters collectively siphoned off wealth from banks, led to losses that dwarf subsidies for rural development.
* Undermining Markets: When Government Intervention Hurts More Than It Helps
* Government intervention, though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended.
* Four examples of anachronistic government interventions:
* Essential Commodities Act (ECA), 1955:
* Frequent and unpredictable imposition of blanket stock limits on commodities under ECA distorts:
* The incentives for the creation of storage infrastructure by the private sector.
* Movement up the agricultural value chain.
* Development of national market for agricultural commodities.
* Imposition of stock limits on dal in 2006-Q3, sugar in 2009-Q1 and onions in September, 2019 spiked up the volatility of the retail and wholesale prices of onions.
* The Ministry of Consumer Affairs must examine whether the ECA is relevant in today’s India.
* With raids having abysmally low conviction rate and no impact on prices, the ECA only seems to enable rent-seeking and harassment.
* Survey suggests there is clear evidence for jettisoning this anachronistic legislation.
* Drug Price Control under ECA:
* The regulation of prices of drugs, through the DPCO 2013, led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of an unregulated but similar drug.
* The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
* These findings reinforce that the outcome is opposite to what DPCO aims to do - making drugs affordable.
* Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power.
* Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilise Government’s bargaining power in a transparent manner.
* Government intervention in Grain markets:
* Policies in the food-grain markets led to:
* Emergence of Government as the largest procurer and hoarder of rice and wheat.
* Crowding out of private trade.
* Burgeoning food subsidy burden.
* Inefficiencies in the markets, affecting the long run growth of agricultural sector.
* The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards.
* Debt waivers:
* Analysis of debt waivers given by States/Centre:
* Full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.
* Debt waivers disrupt the credit culture.
* They reduce formal credit flow to the very same farmers, thereby defeating the purpose.
* Survey suggests that:
* Government must systematically examine areas of needless intervention and undermining of markets; but it does not argue that there should be no Government intervention.
* Instead it suggests that the interventions that were apt in a different economic setting may have lost their relevance in a transformed economy.
* Eliminating such instances will enable competitive markets spurring investments and economic growth.
Creating Jobs and Growth by Specializing in Network Products
* Survey says India has unprecedented opportunity to chart a China-like, labour-intensive, export trajectory.
* By integrating “Assemble in India for the world” into Make in India, India can:
* Raise its export market share to about 3.5 % by 2025 and 6 % by 2030.
* Create 4 crore well-paid jobs by 2025 and 8 crore by 2030.
* Exports of network products can provide one-quarter of the increase in value added required for making India a $5 trillion economy by 2025.
* Survey suggests a strategy similar to one used by China to grab this opportunity:
* Specialization at large scale in labour-intensive sectors, especially network products.
* Laser-like focus on enabling assembling operations at mammoth scale in network products.
* Export primarily to markets in rich countries.
* Trade policy must be an enabler.
* Survey analyses the impact of India’s trade agreements on overall trade balance:
* India’s exports increased by 13.4 % for manufactured products and 10.9 % for total merchandise.
* Imports increased by 12.7 % for manufactured products and 8.6 per cent for total merchandise.
* India gained 0.7 % increase in trade surplus per year for manufactured products and 2.3 % per year for total merchandise.
Targeting Ease of Doing Business in India
* A jump of 79 positions to 63 in 2019 from 142 in 2014 in World Bank’s Doing Business rankings.
* India still trails in parameters such as Ease of Starting Business, Registering Property, Paying Taxes and Enforcing Contracts.
* Survey has numerous case studies:
* For merchandise exports, the logistics process flow for imports is more efficient than that for exports.
* Electronics exports and imports through Bengaluru airport illustrate how Indian logistical processes can be world class.
* The turnaround time of ships in India has almost halved to 2.48 days in 2018-19 from 4.67 days in 2010-11.
* Suggestions for further Ease of Doing Business:
* Close coordination between the Logistics division of the Ministry of Commerce and Industry, the Central Board of Indirect Taxes and Customs, Ministry of Shipping and the different port authorities.
* Individual sectors such as tourism or manufacturing require a more targeted approach that maps out the regulatory and process bottlenecks for each segment.
Golden jubilee of bank nationalisation: Taking stock
* Survey observes 2019 as the golden jubilee year of bank nationalization
* Accomplishments of lakhs of Public Sector Banks (PSBs) employees cherished and an objective assessment of PSBs suggested by the Survey.
* Since 1969, India’s Banking sector has not developed proportionately to the growth in the size of the economy.
* India has only one bank in the global top 100 – same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.
* A large economy needs an efficient banking sector to support its growth.
* The onus of supporting the economy falls on the PSBs accounting for 70 % of the market share in Indian banking:
* PSBs are inefficient compared to their peer groups on every performance parameter.
* In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.
* Credit growth in PSBs has been much lower than NPBs for the last several years.
* Solutions to make PSBs more efficient:
* Employee Stock Ownership Plan (ESOP) for PSBs’ employees.
* Representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.
* Creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.
Financial Fragility in the NBFC Sector
* Survey investigates the key drivers of Rollover Risk of the shadow banking system in India in light of the current liquidity crunch in the sector.
* Key drivers of Rollover Risk:
* Asset Liability Management (ALM) Risk.
* Interconnectedness Risk.
* Financial and Operating Resilience of an NBFC.
* Over-dependence on short-term wholesale funding.
* Survey computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and Retail-NBFCs (which are representative of their respective sectors).
* The analysis of the Health Score has the following findings:
* The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened considerably by the end of FY2019.
* The Score of the Retail-NBFC sector was consistently below par for the period 2014 -19.
* Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs, the medium size ones had a lower score for the entire period of 2014-19.
* Survey suggests that the Health Score provides an early warning signal of impending liquidity problems.
* Equity markets react favourably to increase in Health Score of individual HFCs and Retail-NBFCs.
* The Survey prescribes this analysis to efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector, thereby arresting financial fragility in a capital-efficient manner.
Privatization and Wealth Creation
* Survey examines the realized efficiency gains from privatization in the Indian context and bolsters the case for aggressive disinvestment of CPSEs.
* Strategic disinvestment of Government’s shareholding of 53.29 per cent in BPCL led to an increase of around Rs. 33,000 crore in national wealth.
* Survey presents an analysis of the before-after performance of 11 CPSEs which underwent strategic disinvestment from 1999-2000 to 2003-04:
* Financial indicators such as net worth, net profit, return on assets (ROA), return on equity (ROE) etc of the privatized CPSEs, on an average, have improved significantly.
* Privatized CPSEs have been able to generate more wealth from the same resources.
* Survey suggests aggressive disinvestment of CPSEs to:
* Bring in higher profitability.
* Promote efficiency.
* Increase competitiveness.
* Promote professionalism.
Is India’s GDP Growth Overstated? No!
* GDP growth is a critical variable for decision-making by investors and policymakers. Therefore, the recent debate about accuracy of India’s GDP estimation following the revised estimation methodology in 2011 is extremely significant.
* As countries differ in several observed and unobserved ways, cross-country comparisons have to be undertaken by separating the effect of other confounding factors and isolating effect of methodology revision alone on GDP growth estimates.
* Models that incorrectly over-estimate GDP growth by 2.7 % for India post-