Survey busts govt myths, will it help? PDF Print E-mail
Saturday, 01 February 2020 05:03
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Shobhana column

With the Economic Survey forecasting growth at a very modest 6-6.5% in FY21, on the back of an anaemic 5% in the current year, talk of India becoming a $5 trillion economy seems almost audacious. But it is just as well the Survey hasn’t put out an optimistic outlook since, it now turns out the country grew at just 6.1% in FY19, and not 6.8%.

Indeed, while asserting it is better to lean on growth and not worry too much about the fiscal slippage, the Survey highlights several areas where it believes the government’s approach is faulty. For example, it calls for the government to stay away from the foodgrains markets so that these are not undermined and distorted. Not only has competition in the foodgrains market been effectively killed with the government, now the biggest buyer and hoarder, but the subsidy burden has reached unsustainable levels, too, pressuring the fisc. Since MSPs are higher for certain crops, farmers are disinterested in switching to others. The Essential Commodities Act (ECA), the Survey says in no uncertain terms, has disincentivised investments in warehousing since the stock-limits imposed are frequent and unpredictable. Again, the Survey notes that the DPCO 2013 was aimed at making drugs affordable but, instead, led to an increase in the prices of regulated drugs vis a vis that of a similar drug whose price was not controlled.

The Survey debunks the theory that free trade agreements (FTA) have not worked in India’s favour and resulted in a worsening of the trade deficit. This, at a time when the government has refrained from signing the RCEP, batting for local industrialists who want to be perennially protected. An analysis of 14 FTAs shows that manufactured products actually gained from eight of them and lost out only in two. To be sure, imports rose in some instances, but for the most part, the percentage increase in exports has been higher than that for imports.

In fact, the Survey talks of an “Assemble in India for the world” programme that could be integrated with the Make in India plan to create jobs—40 million well-paying ones by 2025. The idea is to get global corporations to set up units, import the components and export the finished goods, much like it has happened in China. The idea is sound except that it is going to be hard to convince MNCs that India is their destination. If MNCs are going to invest large sums, they need the requisite infrastructure, attractive tax breaks and watertight regulation that doesn’t change according to the whims and fancies of the government in power. So, while it is all very well for the government to boast that corporation tax is now at a comparable 15% with much of Asia, the fact is countries like Vietnam are going beyond this to offer special tax rates that are well below the headline rates.

Moreover, while India may have moved up in the EoDB rankings, the ground reality is that doing business is tough and tedious; the Survey points out more permissions are required to set up a hotel than to buy a pistol. If we want MNC capital, we need to provide them with land where they want it and flexible labour laws that allow them to hire and fire at will. As this paper has pointed out, countries such as Bangladesh have stolen a march over India, primarily thanks to their flexible labour laws; we cannot drive up costs by imposing minimum wages and hope to be competitive. The biggest hurdle is reliable regulation, the lack of which has killed Vodafone India and is hurting e-commerce giants like Walmart. And also the reason why Make in India has not taken off. Indeed, what MNCs want most is surety of laws and sanctity of contracts, both of which suffer from a poor track record. So while the opportunity for “specialisation at large-scale in labour-intensive activities” exists, and India has the labour force, it cannot be explored unless there is a sea of change in the government’s stance.

In an exercise aimed at showing how inefficient PSBs are, the Survey points out that every rupee of taxpayer money invested in one fetches a market value of just 71 paise. In constrast, a rupee invested in a new private sector bank fetches Rs 3.70 paise. In 2019, the loss to taxpayers was a staggering Rs 1.4 lakh crore. However, there is no mention of either shutting down PSBs or selling them, so it is not clear how the PSBs are going to become efficient.

However, the authors of the Survey have studied the impact of privatisation to show that companies have gained enormously. In fact, mere talk of privatisation has boosted the market cap of companies. Sadly, however, the government is going to miss its disinvestment target for FY20 by a wide margin, having failed to sell BPCL. The Survey has gone to great lengths to prove that wealth creation isn’t a bad thing, and that it benefits many and not just a few. That may be so, but the government’s policies, unfortunately, have been so status quo-ist and biased, they have resulted in more wealth destruction.


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