Economics Prelims cum Mains

Economic Survey sets out blueprint for $5 tn economy

In News

  • The Economic Survey for 2018-19 unveiled a blueprint for India to become a $5-trillion economy by 2024-25.
  • The goal is challenging but achievable and the states have to play their part in achieving the target.
  • The survey states that, with the micro and macro foundations laid over the last five years, the economy is ready to shift gears so that economic growth, jobs and exports can be pushed up to the next level.

 

Path to a $5-trillion economy

 

Sutained Economic Growth

  • The country needs to sustain a real GDP growth of 8% to achieve the goal and identified private investment as the key driver of this plan.
  • International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase.

Investment

  • Investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates jobs.
  • The Chinese growth model, remains an investment driven economy with its investment and savings rate nearly 45% of GDP in 2017.
  • Enhanced focus on productivity and exports to strengthen investment revival.

Private Investment

  • Private investment should especially be promoted, while assuring that there is no crowding out of private investment because of the government.
  • A higher share of private investment would also give government the space to stick to its path of fiscal consolidation.

Employment

  • There is a general apprehension that a high investment rate would mean labour would be substituted out by capital. Alluding to the Chinese model, the survey claims that the said assessment is incorrect.
  • The Chinese experience illustrates how a country with the highest investment rates also created the most number of jobs.
  • When the full value chain is examined, then it becomes clear that capital investment fosters job creation since capital goods production, research and development, and supply chains also generate jobs.

 

MSME

  • Another key ingredient includes a focus on policies that nourish small and medium enterprises to create more jobs and become more productive, reduce the cost of capital, and rationalise the risk-return trade-off for investment.
  • ‘Dwarf’ firms (with less than 100 workers), account for more than 50% of all organised firms in manufacturing by number.
  • Despite this, their contribution to employment was just 14% and to productivity a mere 8%. Large firms, on the other hand, are just 15% in number but account for 75% employment and close to 90% of productivity.
  • Therefore, there is a need to “unshackle” MSMEs and enable them to grow into larger firms

Labour reform

  • The Survey also points to the need for widening and deepening the labour reforms.
  • Factories in States that have flexible labour markets are much more productive than those in States with rigid laws.

Legal system

  • The Indian legal system, with its pending cases, is perhaps the single biggest constraint to doing business in the county and acts as an obstacle to attract investment.
  • Hence, it is of utmost importance to unclog the legal system which is burdened by 3.5 crore pending cases, in order to improve the business environment.

Policy making

  • The survey also calls for consistency in policy-making and an economic uncertainty policy index, which must be tracked at the highest level on a quarterly basis.
  • As data of societal interest is generated by the people, it can be created as a public good within the legal framework of data privacy, and should be given due importance in devising public policies.

 

 

Improve Tax compliance

  • Boost tax morale: convince citizens they pay tax commensurate to benefits received and correct any perception of unfairness
  • Offer privileges: offer recognition to highest tax payers in a district, create exclusive membership clubs to honour honest tax payers; give them faster boarding, clearances at toll gates and special lanes at immigration counters
  • Use the default route: Automatic deduction of tax and directing refunds into savings accounts
  • Repeated reinforcements: Send fairness driven messages in addition to standard reminder letters
  • Make it easy: Remove barriers to filing taxes such as hassle and complexity in filling forms
  • Social Norms: Information on peer behaviour can influence tax payers to report income
  • Disclose outcomes: Public shaming of individuals who don’t pay taxes can reduce non compliance
  • Appeal to loss aversion tendencies: Tax withholding followed by refunds at time of tax filing may increase compliance levels

 

 

Increase non tax revenues

  • Non tax revenues can be increased by monetising idle PSU assets and increasing disinvestment.
  • The non-tax revenues have a significant potential to expand, especially because the PSUs are sitting on large pools of land which can be monetised.

Divestment

  • There is also an opportunity for greater returns from divestment. The government can reduce its holdings in some PSUs to below the majority stake of 51% of direct control.
  • Instead of looking at it as 51% only of the government, it can be converted to say, 40% of the government and 11% of LIC, which would also effectively be 51%.
  • The divestment targets are expected to fill in some of the gaps that the tax revenue is creating.

 

 

Behavioural economics

  • It alludes to the “Nudge” theory, of the Nobel prize winning economist Richard Thaler.
  • The nudge theory encourages better economic and social behaviour based on a study of how people often do not opt for better choices, sometimes despite being aware of the better option.
  • The insights from behavioural economics needs to be integrated into policymaking to foster productivity and economic growth.
  • Every programme or scheme should be subjected to behavioural economics audit so that even small changes enhance positive perceptions and the efficiency of an initiative.
  • It suggests a “Nudge unit” in NitiAayog to study its policy implications.

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