Five Trillion Dollar Economy yes, but not this way

Bharat Jhunjhunwala
The Prime Minister has set the target of making India a Five Trillion Dollar economy. The task is achievable, but not with the policies being advocated by the Chief Economic Advisor of his Government. The Chief Economic Advisor is the author of the Economic Survey which is tabled in the Parliament before the Budget session. It suggests the path for the Government to follow.
The Economic Survey advocated low interest rates and “investment-led” growth. The argument is that lower rates of interest will encourage businesses to make investments in factories which will establish a virtuous cycle of investment, demand, and more investment. The Government has provided capital gains exemptions to startups to jumpstart such investments. The difficulty is that a businessperson will invest only to make profits; and he will make profits only if there is demand in the market. Think of a businessperson investing in a factory to make clothes. He will pay wages to his workers. But can the factory survive on the clothes bought by his workers alone? There has to be external demand for clothes for the factory to make profits. Similarly, can the investments proposed by the Government create demand to buy the goods? No. There has to be an external demand which would prompt investments. One has to first generate demand. Investment will automatically follow. The Government is putting the cart before the horse. High interest rates did not prevent the economy from growing at near 10 percent rates in the past. The interest burden can be borne if there is demand in the market.
The reference to economic growth in China and East Asia is equally misplaced. The economy of those countries grew on the back of export demand. The Industrial Countries were growing on the back of technological developments such as personal computers and the internet in the nineties. The Multinational Corporations shifted their manufacturing base to East Asia at that time. They brought investments to China. That was actually an export-led growth strategy, not investment-led strategy. The demand for goods in the Industrial Countries was the driver of growth. That demand is no longer existent for two reasons. One, robotics has shifted some manufacturing back to the Industrial Countries. Two, the economy of the Industrial Countries is slowing down in the absence of new technological innovations.
The problem is compounded by the push for formalization of the economy. Whether demonetization and GST will actually lead to formalization is yet to be seen. The fact that GST collections have remained flat though the number of returns has multiplied only means that black economy is continuing. I had written earlier that GST will lead to more evasion because the evader will have to make adjustment with only one GST system instead of the two Excise and Sales Tax systems earlier. The bigger problem is that the Government is trying to smuggle in an anti-SME stance under the garb of formalization. A number of studies across the world show that the compliance burden of GST is heavy on SMEs. GST also provides free movement of goods across the states. This is more beneficial for the large businesses who have greater capacity to undertake interstate trade. Lastly, the Compounding Scheme of GST has killed the small businesses by not allowing setoff of the GST paid on inputs. The result is that SMEs are down, job creation is down, demand in the market is down, and investment is down. I am not against formalization. But this should be undertaken in a way that shifts the economy in favour of SMEs-not against them as being done at present. . We must realize that at the present time we are reaping a demographic dividend. Our elders have produced more children. Large numbers of youth are entering the work force today. We are converting this asset into a liability by killing SMEs. The slowdown in job creation will push the young into crime.
The Economic Survey had made an even more sinister suggestion that SMEs should have a “sunset” clause. The “infant” industries should be given a time of, say, 10 years to outgrow the SME size. An infant should not remain an infant forever. The example is misleading. The correct example is of an athlete. An athlete who cannot run fast must be allowed to run slow throughout his life. Many SME entrepreneurs do not have the capacity to outgrow but they have the capacity to continue making a living as SME. These large numbers should be protected. An Ola driver was running a micro business of embroidery for the last 30 years. Demonetization led to drying up of his payments. He had to close down and eke out a living as an Ola driver. Would we drive such persons out of their businesses? The Economic Survey wants micro entrepreneurs to be pauperized and hand over their business to large companies. This will only lead to further shrinking of demand and slowdown the economy.
The Economic Survey suggested that we tap into foreign savings since domestic savings were less. The unfortunate part is that the Government is squandering away the nation’s own savings in supporting the corrupt and inefficient bureaucracies of the Public Sector. The Government plans to provide a sum of Rs 70,000 crores to infuse capital into Public Sector Banks in this year alone. It plans to once again try for privatization of Air India, which is a welcome step in the right direction but too small for the task at hand. The alternative was to privatize not only all the Public Sector Banks but also other even profit-making PSEs. We could raise, perhaps, a whopping amount of Rs 30 lakh crore-equal to the entire annual budget of the Central Government. Instead, the Government is crying hoarse about lack of savings and investments. Here is a case of a person hiding his family silver and going around with a begging bowl. The Government wants to use the surplus land with PSEs to start housing projects. But why not privatize the PSEs and let the buyer do the housing project? The only reason is that the bureaucracy does not want to let go of the public sector goodies.
The target of making India into a Five Trillion Dollar economy will not be attained with the policies proposed by the Chief Economic Advisor. The target can be attained by (1) Providing protection to SMEs from large industries and imports-, and relief from GST. (2) Privatizing PSBs and PSEs and using the money to invest in research for the next generation technologies in space, data analysis, artificial intelligence, online medicine, and the like.
(The author is formerly Professor of Economics)