The Economic Survey and Budget 2019 rests on a wing and a prayer!

A)      Economic Survey 2019

The Chief Economic Advisor Krishnamurthy Subramanian, in his latest Economic Survey, laid out the Indian government’s Big Hairy Audacious Goal (BHAG) (borrowing the term from Jim Collins) of becoming a $5 trillion economy by 2024-25 from the current level of $2.6 trillions.  This translates to an annualised real GDP growth rate of 8% (at an inflation rate of 4% p.a.).  

It is indeed refreshing and great to set an aspirational goal and ascertaining the required run rate to achieve it.  Equally it is also necessary to map out key initiatives that will enable the drive towards that required pace of growth, if not all the way but at least to the extent possible to assess the gap that will have to be figured out along the way. 

It is perfectly acceptable to have all the answers nor is it realistic to expect to have them at the outset, which is why they are called BHAGs.  But it would be wise to assess the enormity of the challenge so that it can be grappled over a period of time with collective thinking or as the paper says through “creative destruction”.

In that earnest, I expected the Survey to bring together at least a dozen key strategic initiatives to address some of the key sectors such as education, health care, infrastructure, job creation and growth in farm income. Also an assessment of resources required to support those initiatives together with other enablers needed to achieve that could have been spelt out.  Such a blue print is more valuable for policy formulation than any amount of economic theory or myriads of schemes that seek to do something for everyone. The Economic Survey identifies the issues but fails miserbly on creating a blue print for focussed policy making and implementation that would add up to the ask.

The FM also stated in her maiden Budget speech that the economy was at approximately US$ 1.85 trillion when they formed the Government in 2014. Within 5 years it has reached US$ 2.7 trillion. Hence, it is well within their reach the US$ 5 trillion in the next five years.  It is commendable that the economy grew by $1 trn in the last five years but to create a critical mass, it takes decades and hence, to down play the era of economic liberalisation is disingenuous.

Coming back to the BHAG, against the required growth rate of 8%, the past five years growth in GDP was well below 8%, with the exception of the year 2015-16. Further, the GDP growth rate in Q4/2018-19 dropped to 5.8%, making that 8% growth rate that much harder to attain.  And there isn’t much in the Budget either that points towards an acceleration in economic growth and employment. There is an expansion of the current schemes and as Albert Einstein says, you can’t expect different results by doing more of the same.

Source: CSO, Min of Statistics, GoI

With the geo-political situation, rising trade protectionism and crude prices and an expected slowdown in global growth, it puts into question the basis the 8% growth assumption from the current levels of 5.8%. The survey, which is about 225 pages long, delves into economic theory of behavioural economics (Nudge) to influence citizens’ behaviour to achieve its objectives, for e.g. voluntary relinquishing of LPG subsidy.  

The document presents a lots of correlation graphs between several factors such as:

•  Savings rate, gross capital formation and economic growth rate; 
• GDP growth with exports growth and productivity gains;
• Access to toilets and literacy;
• Demographic dividend without assessing the associated risks of large scale youth unemployment;
• Role of job creation and earnings;
• Firms that are Dwarfs vs. Infants (new) and the need to grow the Iinfants

and draws heavily for inspiration on ancient philosophy and mythology and tries to link that with the various schemes.

…but there is no assessment or actions outlined for:

• how to attract private investment of such a large magnitude? Annual investment of $1.5trn is needed over the next 5 years, against the current annual FDI of ~$65bn, leaving a huge gap;
• measures required to increase the Savings rate from 30% to 40%? (perhaps this will be through nudge economics but no concrete measures in the budget to encourage savings)
• required enablers for Exports growth; 
• support required for Productivity gains through simplification of labour codes and other regulations

The economic survey stresses on the demographic dividend citing 50% of the population is of working age, between 20-59 years old, and will increase to 60% by 2040 but fails to acknowledge the acute level of joblessness as noted in the NSSO survey and fails to consider the implications of this. This should be a cause for worry and cannot be glossed over as a strength.

While improving the Savings rate is noted as one of the principal drivers of growth but it does not assess the impact of shift to consumption that resulted in savings rate in India to drop from 40% levels to 30% levels in the last decade. There are no clear suggestions on what approach needs to be adopted now to reverse this trend and boost the Savings rate. 

The Survey analyses data from other economies like Japan, China, and South Korea that grew at a rapid pace in the past few decades to draw some lessons.  It concludes that Savings, Investments and Exports will lead to a blistering pace of growth required to achieve the $5trn economy without quite considering either the changed global economic scenario or the assessing the quantum and feasibility of achieving higher savings, investments and growth in exports.  It also assumes productivity gains will lead to higher exports rather than a weakening in the exchange rate.  This is a lofty assumption to say the least.

The report recognises the challenges of high cost of capital in India which reflects the higher risks for the investors but doesn’t quite address how this will come down in the short term without a change in risk perception or an upgrade to the country’s sovereign rating.

“Nudge” Economics

Chapter 2 elaborates on the idea of behavioural economics to drive “good behaviour”. It begins with a quote in Sanskrit that translates to “We cannot rely total on rational thinking to gain information, as it is not without bias”. The chapter has been dedicated for behavioural economics of “Nudge” to influence citizens’ behaviour. 

This replicates the United Kingdom model which had set up a Nudge Unit in 2010 to apply behavioural economics theory to public policy.  This idea is based on a research by Richard Thaler (An American Economist from Chicago Booth and a Nobel laureate) who built a link between economic and psychological analysis of individual decision making.  He had recommended that the government should pursue ‘nudge policies’ to gently steer people towards desirable behaviour while preserving their choice.

One example of this in the Survey (and the budget speech) is where it implores citizens by saying, “India @75 is envisaged as a ‘New India’ where every individual realises his or her full potential and looks for opportunities to contribute rather than claim entitlements”,  laying out an example for key behavioural change. An example of this is the social change through economics of “nudge” - Give up LPG subsidy for the nation.

The report also cites other examples on how the nudge theory can be used to improve compliance or can influence a change in behaviour.  Beti Bachao Beti Padhao (BBBP), Beti Aapki Dhan Aur Vijay Lakshmi programme (BADLAV - using mythological examples!) have been quoted as examples.

It aims to move from Swachh Bharat to Swasth Bharat and eventually Sundar Bharat and suggests public data for public good where by citizens’ records are proposed to be stored to assist formulation of policies.

Examples of nudge approach in India:

The Survey lays down some high level principles for using behavioural economics and quotes Mahatma Gandhi’s Seven Social Sins to appeal to the conscience of the citizens and gives examples of moral and ethical behaviour from Hindu, Islamic and Christian traditions. 

The Survey has made a good attempt to relate each of the above Principles with Behavioural Economics and suggests its application to appeal to the conscience of the legislators and the people.

But it misses on setting some goals for the first sin.  I would suggest that the CEA can suggest to bring all political parties under RTI and transparency on political donations to address the first sin.  How about some nudge economics on this front? Or this theory is only for the citizens?

The Survey uses religious custom, social norms and cultural traditions to make people pay taxes, keep young people away from alcohol and drugs and engineer gender equality.  For gender equality campaign, the Survey proposes the use the concept of Ardha-nareeshwarar, an amalgam of Shiva and Shakti – and cites examples from Vedic times by mentioning philosophers such as Gargi, and Maitreyi who sought spiritual knowledge and equality with Men in pursuit of knowledge to reinforce the message. It goes further to state that  “Men in ancient Indian society were identified with their mothers, Yashoda-Nandan, Kaushalya-Nandan, Gandhari-Putra, as well as their wives/consorts, Janaki-Raman, Radha-Krishna. Since such positive mythological insights about gender equality are readily available and deeply understood in Indian society, these can be used as part of a revolutionary BADLAV programme.

It contends that given the importance of religion in Indian culture, the principles of behavioural economics need to be combined with this “spiritual/religious norm” to reduce tax evasion and wilful default”, the survey argues. 

Similarly, nudge economics is proposed to be used for better tax compliance and debt repayment by citing evil consequences by quoting religious tenets.  It goes to elaborate that In Hinduism, non-payment of debts is a sin and also a crime. The duty or obligation of a child to repay the debts of the deceased parent is rested upon a special doctrine, known as ‘The Doctrine of Pious Obligation’.  Islam says a person cannot enter paradise until his debt is paid. All of his wealth could be used to pay the debt and if it is insufficient, then one or more heirs could voluntarily pay for him. The survey also quotes the Bible: “Let no debt remain outstanding except the continuing debt to love one another’’ and “The wicked borrows and does not repay, but the righteous shows mercy and gives”. 

Rest of the Survey delves into ways to influence behaviour, mostly motherhood and apple pie, and lists a myriads of correlation of factors to substantiate the hypotheses, cites enabling actions for growth without making an assessment of resourcing needs, expected outcome and its impact on the overall objective.  Needs a building blocks approach to bring all the proposed actions together to show the impact and cohesiveness of the various initiatives.

In Summary, the Survey fails to pull together a coherent plan or a blue print with details of actions, estimates of costs, resourcing plan, expected outcomes, timelines and its impact on GDP growth.

B)      UNION BUDGET 2019

Swiftly moving on to the maiden Union Budget presented by Nirmala Sitharaman who carried the budget laden in a red cloth and called it Bahi Khata (Ledger or accounts), marking a symbolic departure from the Western tradition of carrying the Budget in a brief case. One would have expected with the launch of Digital India, she would have carried a Surface Pro or an Ipad!

But her maiden Union Budget speech was more like an election manifesto and less like a Finance budget.  She enumerated the various schemes administered by the Government and her plans to increase allocations to some of them without getting into the details of the estimates of sums from her various revenue raising measures or giving an account of her revenues and expenditure for the last year.  

It must be made mandatory by law, as part of the Fiscal Responsibility and Budget Management Act (FRBM), for the FM to give account of the actual Revenues and Expenditure for the year and explain the variance much like what one is expected in the corporate world.

As an after-thought she mentioned that the fiscal deficit for 2019-20 would be 3.3% to observe the Fiscal Responsibility and Budget Management (FRBM) Act close to the committed glide path of achieving 3% by 2020.  However, poring through the detailed budget, we get information on both revenue expectations and expenditure allocation, though the impact from revenue raising measures is not clearly set out.

Moving from election mode to governance mode, the Government needs to get out smell the coffee.  There is large scale unemployment, farm distress, creaking infrastructure with the economy slowing to a 5.8% growth.  Not a single smart city has been showcased and pollution, air quality and water situation continues to worsen. With the aspiration of 8% growth, the budget didn’t spell out clear measures on how it’s going to stimulate growth nor did it address the looming issue of youth unemployment.

She has missed a good opportunity to be bold with her measures coming back on a strong mandate.  Instead, the government has resorted to the routine measures for revenue raising by raising taxes on fuel, raised import duty on many items, raised surcharge on higher income earners (which goes against the economic survey which talks about horizontal fairness), and included a series of additional sops to the various segments, increasing social spending that does not result in investment or helps to boost productivity. Basically, she has disregarded the good suggestions in the Economic Survey.

What’s wrong with the approach? 

There are 721 Central Sector Schemes that have an aggregate Revenue spend of Rs 5.69 lakh crores ($81bn), growing from Rs 4.61 lakh crores ($66bn), a growth of 23%!  The single biggest item of growth is in PM Kisan of Rs 55,000 crores ($8bn), a cash subsidy for farmers, rather than implementing the Swaminathan report on assuring a higher Minimum Support Price.  The second biggest increase in allocation is for food subsidy is Rs 14,000 crores ($2bn) to FCI for food security.  The Capital expenditure on these schemes increased to Rs 3 lakh crores ($43bn) from Rs 2.76 lakh crores ($39bn).

There are 31 Centrally Sponsored Schemes that have an aggregate spend Rs 3.32 lakh crores ($47bn), rising from Rs 3 lakh crores ($43bn).  The biggest allocation is for MGNREGA at Rs 60,000 crores ($8,5bn) dropping from Rs 61,000 crores.  There are several other rural development schemes under this section.

With so many schemes, there comes the challenge of assessing eligibility and delivering on each one of them burdensome and comes with friction.

The FM seeks to attract foreign students for higher education in India, the allocation for school and higher education was a paltry Rs 92,000 crores ($13bn), representing 3.7% of the annual expenditure budget.  The total spend on education from both Centre and States is about 3.8% of GDP while most developed countries spend between 5% - 7% of GDP on education.  The Central and State government need to increase their current spend on education by 50%.

Overall, annual expenditure is growing from Rs 21.4 lakh crores ($ 305bn) to Rs 24.5 lakh crores ($ $350bn), a growth of about 14.5% over last year while revenue is expected to grow from Rs 17.6 crores ($251bn) to Rs 19.6 lakh crores ($280bn), a growth of 11.6%, leaving a primary deficit of $70bn.  The fiscal deficit at Rs 7.04 lakh crores ($100bn) represents 3.3% of 2020 nominal GDP, though this does not cover borrowing by public sectors to fund sale of Government’s stake. This is like shifting the deficit from one pocket to another, a poor attempt at financial engineering. For e.g. ONGC buying HPCL stake from the Government. Overall fiscal deficit, including borrowings of States, the position worsens from 6.7% to 6.9%.  The FRBM should mandate the assessment of fiscal deficit at both levels.

Now let’s see the various policy initiatives that the FM lays out in her Budget Speech.

a)      Banking and NBFC

The recapitalisation of Banks with Rs 70,000 crores ($10bn) and the asset protection scheme for NBFC of Rs 10,000 crores ($1,5bn) in the form of credit insurance of 10% of first loss tranche of NBFC loans (up to Rs 1 lakh crores for six months) will be met from expected dividend from the RBI of Rs 80,000 crores!  While this recapitalisation is a necessary move, it is nearly not enough to address credit growth required to support a 8% GDP growth.

b)      Railways

On the transportation sector, the Railways need an investment of 50 lakh crores ($70bn) between 2018 and 2030, which is approximately 3x of current levels. The government is proposing to use Public-Private Partnership to unleash faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services, though much work needs to begin on this front.

c)       Investment

Investment-driven growth requires access to low cost capital. It is estimated that India requires investments averaging 20 lakh crores every year (USD 300 billion a year).  The measures laid out in the Budget speech will in no way bridge the gap between current levels of $65bn p.a. to the required level of $300bn p.a.

d)      Debt Market

There is a recognition that Corporate Debt markets are crucial for the infrastructure sector. Given the need to further deepen bond markets, a number of measures are proposed to be taken up like Corporate tri-party repo market in Corporate Debt securities, Government will work with regulators RBI/SEBI to enable stock exchanges to allow AA rated bonds as collaterals. But the rigour of rating agencies need to be addressed as we saw the sudden downgrade of the securities like that of IL&FS debacle created the NBFC liquidity crisis.

e)      Water (It's the new Oil)

The FM seeks to grapple the Water problem and pronounced her mission of “Har Ghar Jal” (Water to each household).   of ensuring India’s water security and providing access to safe and adequate drinking water to all Indians by making it a priority of the Government. This Mission, under the Department of Drinking Water and Sanitation, will focus on integrated demand and supply side management of water at the local level, including creation of local infrastructure for source sustainability like rainwater harvesting, groundwater recharge and management of household wastewater for reuse in agriculture. The Jal Jeevan Mission will converge with other Central and State Government Schemes to achieve its objectives of sustainable water supply management across the country.

The Budget also makes some attempt at widening the tax base based on consumption of electricity (Rs 1 lakh), overseas travel (Rs 2 lakhs )and deposits in current accounts (Rs 1 crore). 

In Summary, the Economic Survey and the Budget 2019 rests on wing and a prayer!

While laying criticism is easy, I don’t want to stop there and go on make some SUGGESTIONS FOR CONSIDERATION....

Here’s what I would recommend to the CEA and the FM to consider to make it more purposeful:

      A.      Fiscal measures:

While the FM quoted from Sangam literature “Pura Naanooru” by Poet Pisirandaiyar, with some difficulty, to imply that the Government will be sensible in collection of taxes and not trample the taxpayers.  However, the revenue raising measures does quite the opposite by raising taxes of fuel, raising import duty (inflationary) and increasing surcharges on higher earners.

The CEA and FM should evaluate the Laffer’s curve to determine the appropriate rates of taxation that drives greater compliance and improved collections. 

                         i.    Introduce Tax on Agricultural Income on rich farmers with income above Rs 50 lakhs – while it will hurt a lot of politicians, this is the kind of bold measure we would expect from a government that professes transparency and attack on black money.  This also fits with the nudge economic theory of limiting “politics without principle”;

                        ii.   Incentivise Savings – Deductions for investment in Infrastructure bonds – This will improve the savings rate that is essential to drive investments in infrastructure

                     iii.    Simplify GST – 0%, 12% and 20%; Bring fuel within GST.

                     iv.     Surcharges and Cess – Drop all surcharges and cess in the spirit of Cooperative Federalism as the tax collected from Surcharges and Cess is not shared with the States.

                       v.     Simplify the tax code – Remove the numerous deductions (limit it to drive Savings and home ownership) and reduce rates

      B.      Policy Measures

a.       Consolidate the myriads of Centrally sponsored schemes and Central Sector Schemes (about 750 odd schemes in all!) aggregating to Rs 8 lakh crores ($115bn). Do a few things but do it well rather than dabble a bit in everthying!

b.      Have a couple of dozen schemes that are focussed on key areas of:

                                                             i.      Farm distress (implement MSP),

                                                           ii.      Education (build quality government schools, focus on teachers training, e-learning, higher learning and research)

                                                        iii.      Healthcare – build primary health centres and hospitals and not fritter away on insurance schemes;  Standardise pricing for common treatments for private hospitals and legislate stringent actions to deter medical malpractice;

                                                       iv.      Infrastructure (Water, Electricity, Rails, Roads, Swachh Bharat, Broadband, Climate Change et al) and

                                                         v.      Employment – Fill up all existing vacancies

                                                       vi.      Eliminate/Reduce waste in spend to fund investments (e-procurement, warranties and penalties on contracts etc.)

c.     Move from Final Salary Pensions to Savings based pensions like private sector for new hires to reduce fiscal burden

d.   Collaborate with the States for delivery of the Schemes - Practice Cooperative federalism

e.      Rationalise various subsidies and handouts into a simple minimum income support rather than various schemes like LPG subsidy, PM Kisan, MGNREGA etc.

f.      Focus on building primary health care centres and improving access to government hospitals rather than squander it on insurance schemes which only absolves the government of its responsibility to provide quality health care;

g.      Divestment – Accelerate divestments and focus on running public services

h.  Fix the Real Estate Sector – Revive the abandoned projects by auctioning these projects – A combination of increase in FSI, auction to new developers with a haircuts for Banks, small increase in price for buyers and impose total loss on promoters. As Real Estate is a big employer, this will provide some immediate boost.

i.    Recapitalise Banks with a meaningful amount, Rs 70,000 crores or $10bn won’t be enough; modernise the banks and ensure the Board is made up independent professionals and not nominate appointees of the Government;

j.   Public- Private Partnership – Simplify land acquisition, enforcement of contracts, address risk perception to reduce cost of capital etc. It also requires a communal and social harmony as investors are reluctant to bet on markets with social tension or unrest

k.  Tourism – Training of tour guides (starting with cab drivers like in Singapore), Improved security, tourism eco system (good, clean and affordable hotels), and better connectivity; Besides this strict action needs to be taken against vigilantism that is undermining law enforcement and threatening communal harmony.  Tourism cannot thrive whether there is social tension and bad press.

l.     Other enabling initiatives are good and need to be brought together to promote innovation, start-ups and infants e.g. Payment platforms, crowd funding, simplify employment laws, develop debt market etc.

IN CONCLUSION

The BHAG of $5 trillion economy within 5 years is certainly laudable but is a stretching target in current economic scenario.  It is certainly worth trying and with appropriate enablers and a focussed implementation of identified Strategic Initiatives, it may well be possible.

However, a proper assessment of current issues like slow growth rate, high levels of unemployment and a weak banking system needs to be addressed.  Being in denial of problems or suppression of data or manipulating the data will only make it difficult.  Appropriate corrective measures are needed to be initiated quickly.

Finally, CEA needs to identify the key initiatives, dimension their impact and prioritise them, assess the resourcing needs and bring it all together to map it against the stated goal. It may not all add up to the desired goal but it will show what else may be required to get there.

Best wishes to the CEA, FM and the government to deliver on this BHAG! It will require the support from everyone to get there. Sabka Saath and Sabka Vishwas needs curbing of vigilantism and maintain social order and enforcing the rule of law without prejudice!