Manas Chakravarty
This year’s Economic Survey makes explicit what has all along been the view of this government -- India should emulate the East Asian growth model, in particular the Chinese one.
The Survey says, “The overwhelming evidence across the globe, especially from China and East Asia in recent times, is that high growth rates have only been sustained by a growth model driven by a virtuous cycle of savings, investment and exports catalysed and supported by a favourable demographic phase.”
The key driver of growth, says the Survey, has to be investment. It “drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs”.
There’s nothing new about this argument. Indeed, the Economic Survey for 2017-18 had said, “Above all, India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines — private investment and exports.” And the East Asian model of export-led growth has been the guiding light for all developing economies.
The problem, of course, is how to get from an economy powered by consumption to an investment-driven one. But first, the Survey brushes aside some objections from the naysayers. Won’t this focus on investment lead to fewer jobs, because investment these days is capital-intensive? No, says the Survey, China has created jobs despite its high rate of investment. Investment increases productivity and competitiveness and therefore, exports and jobs. Aren’t household savings coming down? Savings will rise because we have a demographic dividend. That’s how it happened in China and East Asia.
Won’t the current trade wars affect exports? No, because India’s export share is so small that we can always gain market share – indeed, the current US face-off with China gives us an opportunity to insert our firms into global supply chains.
So, what do we need to do to increase investment? We need a high savings rate, which will come with good jobs. “Jobs that pay meaningful wages become crucial in driving savings rate in the economy,” says the Survey. That will mean increasing formalisation of the economy. Within the formal sector, it is large firms, young and old, that account for the bulk of employment. We need, therefore not only to create conditions that encourage start-ups, but ensure that these firms grow into large ones. Removing the skewed incentives that make them stay small is, therefore, needed. These include ensuring that incentives to small industries lapse after they’ve been operating for a few years. And it includes removing restrictive labour laws.
The virtuous circle -- more investment, more productivity, more exports, better technology, more formalisation of the economy, higher wages, more savings, more investment -- will drive growth.
How do we create a conducive environment for investment? The Survey says we need to lower the cost of capital. It says, “A cross-country comparison shows that the cost of capital remains quite high in India, which affects investment prospects in the country.”
We also need a tax policy that will encourage investment. The post-tax return on investment needs to go up. Investors will cheer its prescription on capital gains tax -- the Survey says, “Capital gains tax can have significant economic consequences for individual investors in terms of its lock-in effects and associated deterring incentives to use capital gains into riskier investments.”
The Survey adds that it has been guided by “blue sky” thinking. The East Asian model, which has been extensively analysed and debated, was perhaps blue sky a quarter of a century ago and is now much more overcast. But then, what other successful model of development do we have?
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