indianeconomicpanorama
36 News the Newsbehind JULY 08, 2019India, where social and religious norms
play such a dominant role in infl uencing
behaviour, behavioural economics can
therefore provide a valuable instrument
for change, said the Economic Survey,
2019.
THE GROWTH MODEL
Th e survey has projected that the
Indian economy will grow at 7 per
cent during current fi scal, i.e., 2019-
- Th is is slightly higher than 6.8 per
cent recorded in the last fi scal, and
considered to be lowest during last fi ve
years.
Challenging the traditional theory of
economic growth based on equilibrium
and silo macro parameters, Chief
Economic Advisor Krishnamurthy
Subramanian, outlined a model
based on constant disequilibrium and
complementariness in investments,
savings, job creation, demand, exports,
and economic growth.
Based on this model, Subramanian
explained a strategy to make the
economy grow 8 per cent a year, which
is needed for gross domestic product
(GDP) to touch $5 trillion by 2024-25
as envisaged by Prime Minister Narendra
Modi. For the current fi scal year (2019-
20 or FY20), he pegged growth at 7
per cent, only 0.2 percentage higher
than 6.8 per cent growth in 2018-19
or FY19.
Th e Survey said the economy was
always on disequilibrium — either on
a virtuous or a vicious cycle. When
the economy is in a virtuous cycle,
investment, productivity growth, job
creation, demand and exports feed
into each other and enable it to thrive,
the Survey said. In contrast, when
the economy is in a vicious cycle,
moderation in these variables dampens
each other, thereby dampening the
economy.
Th e Survey made a case for using
investments as the key driver to keep
the economy on virtuous cycle. On
the basis of his study, co-authored with
Rajesh Chakrabarti and Sesha Meka,
Subramanian said this investment can be
from the government, in infrastructure,
besides from private sources. “We
intend to shift gears, by taking the
economy into a virtuous cycle driven
by investment,” Subramanian said at a
post-Survey news meet.
Th e Survey took on the traditional
view which attempts to address
challenges of job creation, demand,
export, and economic growth as separate
problems. Th e Survey said these macro-
economic phenomena exhibit signifi cant
complementarities, and understanding
the “key driver” and enhancing it
enables simultaneous growth.
Quoting studies, the Survey claimed
a positive correlation between savings
and GDP growth was stronger than
investments and growth. This was
because investments were risky and
entrepreneurs were exposed to the
risk of idiosyncratic business failure
leading to loss of the invested capital.
“Therefore, savings have to increase
more than investment to allow for the
accumulation of precautionary savings,”
said the Survey, quoting the study.
It also highlighted the importance
of exports as higher capacities created
by investments cannot be consumed
by the domestic demand alone since
savings would also increase. “Th is is why
an aggressive export strategy must be a
part of any investment-driven growth
model,” said the Survey.
While global trade was currently
facing disruptions, the Survey said India’s
share was so low that it should focus on
market share, and the disruption in fact
provided India with an opportunity.
Th e Survey also debunked the theory
that investments replaced labour and
lead to job losses. Taking the Chinese
example, the Survey said what mattered
most was whether or not investment
enhanced productivity and international
competitiveness. “International evidencealso suggests that capital and labour are
complementary when a high investment
rate drives growth,” Subramanian said.
Less optimistic on the fi scal front:
Less optimistic on the fiscal front,
the Survey lists several challenges
to achieving the fiscal deficit target
of 3% of GDP by March 2021:
the “apprehensions of slowing of
growth” and the implications for
revenue collections; the shortfall in
GST collections and the imperative
that it places on revenue buoyancy this
year; the hunt for resources to fund
the expanded welfare schemes; and the
impact on oil purchase prices due to
the U.S. sanctions on import of crude
from Iran.
STRATEGIC ROAD MAP TO A
$5 TRILLION GDP
Yet, the Economic Survey lays out
a strategic road map to take India to
the $5 trillion GDP league by 2024-- Th e Economic Times outlines the
main points recommended by CEA K.
Subramanian.
Th e virtuous cycle: Th e Survey suggests
raising the investment rate and the
saving rate to improve economic
growth. Going the analogy of China,
the Survey suggests “Investment, is the
key driver that drives demand, creates
capacity, increases labour productivity,
introduces new technology, allows
creative destruction, and generates
jobs.”
A healthy India: The behavioural
insights from the Swachh Bharat
Mission (clean India scheme) can be
used for laying the foundations of a
healthy India.
A UNICEF study found that “on
an average, every household in an open
defecation free village saved about Rs
50,000 per year on account of fi nancial
savings due to lower likelihood of disease
from using a toilet and practicing hand
washing”.
Role of judiciary: The pendency of