Addressing the joint sitting of the Parliament on January 31, President Ram Nath Kovind said that the fundamentals of Indian economy were strong despite global challenges. The country is committed to attain the goal of becoming a $5-trillion economy, in line with Prime Minister Narendra Modi's vision, he added.
But, what are the prerequisites to attaining that goal? As per the Economic Survey 2019-20, promoting a "pro-business" policy that unleashes the power of competitive markets to generate wealth is critical to the achievement of the aforementioned goal.
At the same time, the survey adds that weaning away from "pro-crony" policy that may favour specific private interests, especially powerful incumbents, also needs to be addressed. It notes that despite the progress in enabling competitive markets, a "pro-crony" business approach has destroyed much value in the economy.
Events since the liberalisation of the Indian economy in 1991 substantiate these points. The post-liberalisation period saw a clear increase in market dynamism, one example being the accelerated growth of Sensex in that period following market reforms. The period also saw a rise of new sectors such as financials and information technology. One can say that a pro-business policy approach was accompanied by creative destruction in the economy.
Creative destruction enables innovation in the market which serves
people better than the old technologies they displace. It brings new firms into the markets, which compete with existing firms and lower prices for consumers. It adds dynamism to the marketplace, thus keeping firms on their toes, always on the lookout for the next big way to serve consumers. It has only one prerequisite – a pro-business policy stance that
fosters competitive, unfettered markets.
"When creative destruction is fostered, sectors as a whole will always outperform individual companies within the sector in creating wealth and maximizing welfare. Therein lies the motivation for India to pursue
pro-business, rather than pro-crony, growth," the Economic Survey notes.
"Before liberalization, a Sensex firm expected to stay in it for 60 years,
which decreased to only 12 years after liberalization. Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy," the survey points out.
However, the opposite is the effect of "pro-crony" policy which has destroyed value in the economy over the years. The survey adds, "For example, an equity index of connected firms significantly outperformed the market by 7 percent a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense. In contrast, the index underperforms the market by 7.5 percent from 2011, reflecting the inefficiency and value destruction inherent in such firms."
Pro-crony policies can also add various indirect costs. Also, when opportunities for crony rent-seeking exist, businesses shift their focus
away from growth through competition and innovation towards building political relationships, thus undermining the economy’s capacity for wealth creation.
It also adds that pro-crony policies as reflected in discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same resources post 2014 have put an end to
such rent extraction.
Crony lending that led to wilful defaults, wherein promoters have collectively siphoned off wealth from banks, led to losses that
dwarf subsidies directed towards rural development, the survey added.
"Every rupee lent to a wilful defaulter constitutes an erosion of wealth. Money lent to a genuine business creates assets, which generate profit and employment," according to the survey.