Indian Economic Survey 2018-19

1. PRELIMINARY

1.1 The finance ministry presents the economic survey (“ES”) of India in the parliament every year before the union budget. This document is prepared by the finance ministry and the chief economic adviser. The ES presents the finance ministry’s views on the annual economic development of India. This post highlights major observations from chapters 1, 4, and 6 of the ES. The complete ES of India is available is here.

2. IMPORTANT TAKEAWAYS FROM KEY CHAPTERS

Chapter 1 – Shifting gears: private investment as the key driver of growth, jobs, exports, and demand

1. India needs to grow steadily at 8 percent per annum to achieve the USD 5 trillion economy objective.
2. India attained its lowest inflation rate since independence in the last five years. It was half the inflation level of the preceding five years.
3. The current account deficit remained within manageable levels. Foreign exchange reserves touched an all-time high.
4. 90 percent of India’s population has an Aadhaar card.
5. The Jan Dhan, Aadhaar, Mobile (“JAM”) trinity played an instrumental role in securing direct benefit transfers (“DBT”) for its beneficiaries. Approximately INR 1 lakh crore has been deposited in 35 crore bank accounts opened under the Pradhan Mantri Jan Dhan Yojana. JAM has enabled cumulative transfers amounting to INR 7.3 lakh crores. DBT is currently being undertaken by 55 central ministries via 370 cash-based schemes.
6. Approximately 70 million Pradhan Mantri Ujjwala Yojana – LPG connections have been set up for women residing in over 700 districts of India.
7. The Ayushman Bharat Yojana was launched in 2018 to provide an insurance cover of INR 5 lakhs (for cashless treatment) to all 100 million below poverty line families at a nominal premium of INR 100 per month. The scheme has empanelled over 15,000 hospitals which have admitted over 2.6 million persons out of the 346 million enlisted beneficiaries.
8. Construction of physical infrastructure accelerated between 2014-19. Electricity reached every village in India in April 2018. The UDAN scheme was launched in 2017 to foster regional connectivity by extending flight connectivity to Tier-3 and Tier-4 towns in the country. Over 30 unserved and underserved airports have been mainstreamed under UDAN to create additional seating capacity of 40 lakh passengers.
9. The share of states in the divisible pool of central taxes has increased from 32 percent to 42 percent, which has strengthened fiscal federalism.
10. Numerous non-performing assets have been reviewed after the operationalization of insolvency and bankruptcy code in 2017.
11. Evidence showed that high growth rates have only been sustained by growth models driven by the virtuous cycle of saving, investment and exports, catalysed by a favourable demographic phase. Private investment is identified as the “key driver” that “drives demand, creates capacity, increases labor productivity, introduces new technology, allows creative destruction and generates jobs.”
12. As noted in the case of China, the shares of, gross capital formation, savings, and exports in the gross domestic product (“GDP”) evolved in relation to the log of GDP per capita. It was also observed that all these macro-variables increased as countries became richer. High growth economies, such as China and East Asian countries, have shown a rise in savings, investment and GDP as part of this virtuous cycle.
13. The high-level advisory group, chaired by Dr. Surjit Bhalla, submitted its report on how India can enhance its exports in June 2019. The ES suggested that the report’s recommendations be implemented wherever possible.
14. The ES pushed for the integration of behavioural economics with policymaking to foster productivity and economic growth. The ES also suggested keeping ‘real people’ as the focus of policymaking.
15. The Beti Bachao, Beti Padhao campaign has helped improve the child-sex ratio in many states. The Swachh Bharat mission has increased the number of villages within the ‘open-defecation free’ category.
16. At the sanctioned strength of staff, productivity will need to increase by 24.5 percent, 4.5 percent and 18 percent for lower courts, high courts, and supreme course respectively to clear backlogs. The ES believes these goals can be achieved by the use of technology, increasing working days and administrative reforms.
17. Compared to the performance of global firms, Indian firms do not grow enough to create the required jobs and productivity for the economy.
18. Cost of capital has remained high in the country, which has affected investment prospects.
19. An increasing number of Indian start-ups are focusing on solving urban challenges. Business-to-customer start-ups concerned with easing public service delivery and driving efficiency, such as in waste, water, and energy are slowing emerging. Private investments into business to customer start-ups are much higher than into business to business start-ups.
20. India needs to nurture MSMEs to create more jobs, increase their productivity, reduce cost of capital, and rationalize the risk-return trade-off for investments to have a sustained growth.

Chapter 4 – Data “of the people, by the people, for the people”

1. The electronic national agriculture market (“e-NAM”) has enabled farmers to make sales online. This facility allows them to increase their revenue since e-NAM integrates national markets and cuts middlemen.
2. The commercial sector has not exploited data’s potential in social sectors, such as education and healthcare. It is so because the private sector cannot internalize the social benefits of this data.
3. Data can be democratized and put to best possible use by promoting the open data government initiative, amongst others. Moreover, the government needs to increase its efforts to reap all the benefits of treating data as a public good.
4. Data collection in India is highly decentralized since different ministries are responsible for collecting different indicators of social data. Datasets need to be linked to derive their full potential.
5. The Telangana government’s Samagra Vedika initiative combined 25 existing datasets using common identifiers such as name and address of individuals giving us a flavour of the benefits of combined datasets. Seven categories of information about each individual were linked in this aggregation exercise namely crimes, assets, utilities, subsidies, education, taxes, and identity information.
6. Each department in the government is responsible for making available the data they hold in their capacity as ‘data providers’. This data can be provided through a data fiduciary to the data requestor, who can access data only upon acquiring user consent. Such a model does not allow data fiduciaries to access any data contents due to end-to-end encryption and effectively puts the user’s consent at the center of the government’s initiative.
7. The ministry of Panchayati Raj has developed an application that provides a comprehensive list of all local administrative units. This application links different land regions, such as villages, with their respective government bodies, such as gram panchayats. The application also assigns these land regions a code that links to their respective records in census 2011. This is a great example of the benefits that may be derived from using data as a public good.
8. The Digitize India initiative crowdsources data from physical documents. This is undertaken to convert information printed on paper into a machine-readable format. This is a citizen driven activity where all contributors received a cash rewards in return for their service.
9. The ES identified access to real-time data through a dashboard as crucial to improving agricultural productivity and farmer incomes. The largest scheme for women and child in India, ICDS Anganwadi service scheme, still does not have access to any such dashboard.
10. The ES suggests that the government at all administrative levels should invest in building internal capacity to exploit data in real time, perform analyses and translate data into meaningful information.
11. Many states such as Andhra Pradesh, West Bengal, Madhya Pradesh, and Chhattisgarh have instituted district-level dashboards based on management information systems for various programs.
12. The ES suggests selling datasets to analytics agencies hoping that insights generated by these agencies could be used by corporates to predict demand, discover markets or innovate new products. It also suggests that the private sector should be allowed to benefit from this data at a charge.

Chapter 6 – How does policy uncertainty affect investment?

1. The ES suggests the following three key points:
2. “Policymakers must make their actions predictable, provide forward guidance on the stance of policy, and reduce ambiguity/arbitrariness in policy implementation.”
3. ““What gets measured gets acted upon”. So, the economic policy uncertainty index (defined below) must be tracked at the highest level on a quarterly basis.”
4. “Quality assurance of processes in policy making must be implemented in Government via international quality certifications.”
5. Investors would flock to invest in environments that provide certainty. Baker et al. (2016) developed an Economic Policy Uncertainty (“EPU”) index for various countries including India to help quantify uncertainty in economic policy. EPU index measures uncertainty by quantifying newspaper coverages of policy-related economic uncertainty.
6. The ES notes, “[T]he Capital Asset Pricing model postulates that the required return on investment correlates positively with the systematic risk underlying the investment. An increase in uncertainty in the economy increases this systematic risk and thereby increases the rate of return required to justify the investment. As a result, projects that generate a return lower than this required return become unviable when uncertainty increases in the economy. Also, as a fixed investment is irreversible, uncertainty exacerbates risk-aversion, increases the premium demanded for assuming risk, and eventually dampens investment. Consistent with this thesis, the analysis indicated that an increase in economic policy uncertainty dampens investment growth in India for about five quarters. One standard deviation increase in uncertainty leads to about one percentage point decline in investment growth rate. Thus, economic policy uncertainty materially impacts the investment climate in the country.”
7. India’s EPU was highest in 2011-12 which coincided with the phase of policy paralysis. India’s economic policy uncertainty has significantly declined over the last decade. Though this overall decline has seen intermittent episodes of rising uncertainty such as in 2013 during the taper tantrum, when the US Federal Reserve’s decision to reduce the amount of money in its economy which affected the Indian policy uncertainty index.
8. The EPU index and exchange rate volatility have a correlation of 0.7, which is on the higher side. The EPU index is also observed to be strongly correlated to the inflation rate and repo rate.
9. Cost of borrowing majorly influences investment.
10. Greater investments are likely to be triggered by a rise in prices since businesses would find it profitable. This is possible as long as consumption demand is strong enough to overcome the impact of inflation.

(This post has been authored by Vihang Jumle, with inputs from Nehaa Chaudhari, Public Policy Lead)