Economic Survey 2020 – All India Radio (AIR) IAS UPSC

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  • February 27, 2020
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Economic Survey 2020


Search 31st Jan 2020 Current Affair here: 

Topic: General Studies 3:

  • Government Budgeting.
  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy – Economic Survey

Theme: Enable Markets, Promote ‘Pro-Business’ Policies and Strengthen ‘Trust’ in the Economy

The Economic Survey 2019-20 says India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy that unleashes the power of competitive markets to generate wealth, on the one hand, and weaning away from “pro-crony” policy that may favour specific private interests, especially powerful incumbents, on the other hand.

Creative destruction

The Survey stated that creative destruction has increased significantly after reform. 

  • The liberalization of the Indian economy in 1991 unleashed competitive markets and enabled the forces of creative destruction, generating benefits that we still witness today.
  • Creative destruction brings new innovations in the market that serve people better than the old technologies they displace. It brings new firms into the markets, which compete with existing firms and lower prices for consumers. 
  • Using the lens of Indian equity markets as captured in the S&P(Standard & Poor’s) BSE Sensex, we can clearly see an increase in market dynamism in the pro-business India of the post-liberalization period.
  • After the market reforms of 1991, Sensex has grown at an accelerating pace. Whereas crossing the first incremental 5000 points took over 13 years and was achieved in 1999, the time taken to achieve each incremental milestone has substantially reduced over the years.

Liberalisation caused a spike in the number of firms churned in the years that immediately followed it, but the churn rate did not decline to pre-liberalization level in later years. New sectors like banks and financials entered the index for the first time, eroding the predominance of the manufacturing sector on the index, placing the services sector on the map for the first time, and reflecting the far-reaching changes that the Indian economy was witnessing in the wake of liberalization.

Pro-crony policies, in contrast to pro-business ones, erode wealth in the economy as cronyism fosters inefficiencies by inhibiting the process of creative destruction. The connected firms proxy firms that may benefit from pro-crony policies. Despite impressive progress in enabling competitive markets, pro-crony policies have destroyed value in the economy.

Wilful default, if unchecked, would increase the cost of borrowing for everyone else, including genuine businesses with profitable investment opportunities before them. Adverse selection may force genuine borrowers to exist the market altogether, leaving only cronies in the market and resulting in a market failure that slows economic growth, employment and wealth creation capacity.

Wealth Creation: The Invisible Hand Supported by the Hand of Trust

  • India’s dominance as global economic power for three-fourths of economic history manifests by design.
  • Kautilya’s Arthashastra postulates the role of prices in an economy (Spengler, 1971).
  • Historically, Indian economy relied on the invisible hand of the market with the support of the hand of trust:
    • Invisible hand of the market reflected in openness in economic transactions.
    • Hand of trust appealed to ethical and philosophical dimensions.
  • Post-liberalisation, Indian economy supports both pillars of the economic model advocated in our traditional thinking.
  • Survey illustrates enormous benefits accruing from enabling the invisible hand of the market.
  • Exponential rise in India’s GDP and GDP per capita post-liberalisation coincides with wealth generation.
  • Survey shows that the liberalized sectors grew significantly faster than the closed ones.
  • Need for the hand of trust to complement the invisible hand, illustrated by financial sector performance during 2011-13.
  • Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:
    • Strengthening the invisible hand of the market
    • Supporting it with the hand of trust
  • Strengthening the invisible hand by promoting pro-business policies to:
  • Provide equal opportunities for new entrants
  • Enable fair competition and ease doing business
  • Eliminate policies unnecessarily undermining markets through government intervention
  • Enable trade for job creation
  • Efficiently scale up the banking sector
  • Introducing the idea of trust as a public good, which gets enhanced with greater use
  • Survey suggests that policies must empower transparency and effective enforcement using data and technology

Entrepreneurship and Wealth Creation at the Grassroots

  • Entrepreneurship as a strategy to fuel productivity growth and wealth creation
  • India ranks third in number of new firms created, as per the World Bank
  • New firm creation in India increased dramatically since 2014:
    • 12.2 % cumulative annual growth rate of new firms in the formal sector during 2014-18, compared to 3.8 % during 2006-2014.
    • About 1.24 lakh new firms created in 2018, an increase of about 80 % from about 70,000 in 2014.
  • Survey examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid – over 500 districts in India.
  • New firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture
  • Survey notes that grassroots entrepreneurship is not just driven by necessity
  • A 10 percent increase in registration of new firms in a district yields a 1.8 % increase in Gross Domestic District Product (GDDP)
  • Entrepreneurship at district level has a significant impact on wealth creation at the grassroots
  • Birth of new firms in India is heterogeneous and dispersed across districts and sectors.
  • Literacy and education in a district foster local entrepreneurship significantly:
    • Impact is most pronounced when literacy is above 70 per cent.
    • New firm formation is the lowest in eastern India with lowest literacy rate (59.6 % as per 2011 Census)
  • Physical infrastructure quality in the district influences new firm creation significantly.
  • Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
  • Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.

Pro-business versus Pro-markets

Survey says that India’s aspiration of becoming a $5 trillion economy depends critically on:

  • Promoting ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth.
  • Weaning away from ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents.

Viewed from the lens of the Stock market, creative destruction increased significantly post-liberalisation:

  • Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation.
  • Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.

Despite impressive progress in enabling competitive markets, pro-crony policies destroyed value in the economy:

  • An equity index of connected firms significantly outperformed market by 7 % a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense.
  • In contrast, the index underperforms market by 7.5 % from 2011, reflecting inefficiency and value destruction inherent in such firms.

Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.

Similarly crony lending that led to wilful default, wherein promoters collectively siphoned off wealth from banks, led to losses that dwarf subsidies for rural development.

Undermining Markets: When Government Intervention Hurts More Than It Helps

Government intervention, though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended.

Four examples of anachronistic government interventions:

  • Essential Commodities Act (ECA), 1955:
  • Frequent and unpredictable imposition of blanket stock limits on commodities under ECA distorts:
  • The incentives for the creation of storage infrastructure by the private sector.
  • Movement up the agricultural value chain.
  • Development of national market for agricultural commodities.
  • Imposition of stock limits on dal in 2006-Q3, sugar in 2009-Q1 and onions in September, 2019 spiked up the volatility of the retail and wholesale prices of onions.
  • The Ministry of Consumer Affairs must examine whether the ECA is relevant in today’s India.
  • With raids having abysmally low conviction rate and no impact on prices, the ECA only seems to enable rent-seeking and harassment.
  • Survey suggests there is clear evidence for jettisoning this anachronistic legislation.
  • Drug Price Control under ECA:
  • The regulation of prices of drugs, through the DPCO 2013, led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of an unregulated but similar drug.
  • The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
  • These findings reinforce that the outcome is opposite to what DPCO aims to do – making drugs affordable.
  • Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power.
  • Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilise Government’s bargaining power in a transparent manner.
  • Government intervention in Grain markets:
  • Policies in the food-grain markets led to:
    • Emergence of Government as the largest procurer and hoarder of rice and wheat.
    • Crowding out of private trade.
    • Burgeoning food subsidy burden
    • Inefficiencies in the markets, affecting the long run growth of agricultural sector.
  • The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards.
  • Debt waivers:
  • Analysis of debt waivers given by States/Centre:
  • Full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.
  • Debt waivers disrupt the credit culture.
  • They reduce formal credit flow to the very same farmers, thereby defeating the purpose.

Survey suggests that:

  • Government must systematically examine areas of needless intervention and undermining of markets; but it does not argue that there should be no Government intervention.
  • Instead it suggests that the interventions that were apt in a different economic setting may have lost their relevance in a transformed economy.
  • Eliminating such instances will enable competitive markets spurring investments and economic growth.

Creating Jobs and Growth by Specializing in Network Products

  • Survey says India has unprecedented opportunity to chart a China-like, labour-intensive, export trajectory.
  • By integrating “Assemble in India for the world” into Make in India, India can:
  • Raise its export market share to about 3.5 % by 2025 and 6 % by 2030.
  • Create 4 crore well-paid jobs by 2025 and 8 crore by 2030.
  • Exports of network products can provide one-quarter of the increase in value added required for making India a $5 trillion economy by 2025.
  • Survey suggests a strategy similar to one used by China to grab this opportunity:
  • Specialization at large scale in labour-intensive sectors, especially network products.
  • Laser-like focus on enabling assembling operations at mammoth scale in network products.
  • Export primarily to markets in rich countries.
  • Trade policy must be an enabler.
  • Survey analyses the impact of India’s trade agreements on overall trade balance:
  • India’s exports increased by 13.4 % for manufactured products and 10.9 % for total merchandise
  • Imports increased by 12.7 % for manufactured products and 8.6 per cent for total merchandise.
  • India gained 0.7 % increase in trade surplus per year for manufactured products and 2.3 % per year for total merchandise.

 Targeting Ease of Doing Business in India

  • A jump of 79 positions to 63 in 2019 from 142 in 2014 in World Bank’s Doing Business rankings.
  • India still trails in parameters such as Ease of Starting Business, Registering Property, Paying Taxes and Enforcing Contracts.
  • Survey has numerous case studies:
  • For merchandise exports, the logistics process flow for imports is more efficient than that for exports.
  • Electronics exports and imports through Bengaluru airport illustrate how Indian logistical processes can be world class.
  • The turnaround time of ships in India has almost halved to 2.48 days in 2018-19 from 4.67 days in 2010-11.
  • Suggestions for further Ease of Doing Business:
  • Close coordination between the Logistics division of the Ministry of Commerce and Industry, the Central Board of Indirect Taxes and Customs, Ministry of Shipping and the different port authorities.
  • Individual sectors such as tourism or manufacturing require a more targeted approach that maps out the regulatory and process bottlenecks for each segment.

Golden jubilee of bank nationalisation: Taking stock

  • Survey observes 2019 as the golden jubilee year of bank nationalization
  • Accomplishments of lakhs of Public Sector Banks (PSBs) employees cherished and an objective assessment of PSBs suggested by the Survey.
  • Since 1969, India’s Banking sector has not developed proportionately to the growth in the size of the economy.
  • India has only one bank in the global top 100 – same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.
  • A large economy needs an efficient banking sector to support its growth.
  • The onus of supporting the economy falls on the PSBs accounting for 70 % of the market share in Indian banking:
    • PSBs are inefficient compared to their peer groups on every performance parameter.
    • In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.
    • Credit growth in PSBs has been much lower than NPBs for the last several years.

Solutions to make PSBs more efficient:

  • Employee Stock Ownership Plan (ESOP) for PSBs’ employees
  • Representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.
  • Creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.

Financial Fragility in the NBFC Sector

Survey investigates the key drivers of Rollover Risk of the shadow banking system in India in light of the current liquidity crunch in the sector.

Key drivers of Rollover Risk:

  • Asset Liability Management (ALM) Risk.
  • Interconnectedness Risk.
  • Financial and Operating Resilience of an NBFC.
  • Over-dependence on short-term wholesale funding.

Survey computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and Retail-NBFCs (which are representative of their respective sectors).

The analysis of the Health Score has the following findings:

  • The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened considerably by the end of FY2019.
  • The Score of the Retail-NBFC sector was consistently below par for the period 2014 -19.
  • Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs, the medium size ones had a lower score for the entire period of 2014-19.

Survey suggests that the Health Score provides an early warning signal of impending liquidity problems.

Equity markets react favourably to increase in Health Score of individual HFCs and Retail-NBFCs.

The Survey prescribes this analysis to efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector, thereby arresting financial fragility in a capital-efficient manner.

Privatization and Wealth Creation

  • Survey examines the realized efficiency gains from privatization in the Indian context and bolsters the case for aggressive disinvestment of CPSEs.
  • Strategic disinvestment of Government’s shareholding of 53.29 per cent in HPCL led to an increase of around Rs. 33,000 crore in national wealth.
  • Survey presents an analysis of the before-after performance of 11 CPSEs which underwent strategic disinvestment from 1999-2000 to 2003-04:
    • Financial indicators such as net worth, net profit, return on assets (ROA), return on equity (ROE) etc of the privatized CPSEs, on an average, have improved significantly.
    • Privatized CPSEs have been able to generate more wealth from the same resources.

Survey suggests aggressive disinvestment of CPSEs to:

  1. Bring in higher profitability.
  2. Promote efficiency.
  3. Increase competitiveness.
  4. Promote professionalism

India’s Economic Performance in 2019-20

  • India’s GDP growth moderated to 4.8 % in H1 of 2019-20, amidst a weak environment for global manufacturing, trade and demand.
  • Real consumption growth has recovered in Q2 of 2019-20, cushioned by a significant growth in government final consumption.
  • Growth for ‘Agriculture and allied activities’ and ‘Public administration, defense, and other services’ in H1 of 2019-20 was higher than in H2 of 2018-19.
  • India’s external sector gained further stability in H1 of 2019-20:
  •  Current Account Deficit (CAD) narrowed to 1.5 % of GDP in H1 of 2019-20 from 2.1 % in 2018-19.
  •  Impressive Foreign Direct Investment (FDI).
  •  Rebounding of portfolio flows.
  •  Accretion of foreign exchange reserves.
  •  Sharper contraction of imports as compared to that of exports in H1 of 2019-20, with easing of crude prices.
  • Headline inflation expected to decline by year end:
  • Increased from 3.3 % in H1 of 2019-20 to 7.35 % in December 2019-20 due to temporary increase in food inflation.
  • Rise in CPI-core and WPI in December 2019-20 suggests building of demand pressure.
  • Deceleration in GDP growth can be understood within the framework of a slowing cycle of growth:
  • Financial sector acted as a drag on the real sector (investment-growth-consumption).
  • Reforms undertaken during 2019-20 to boost investment, consumption and exports:
  • Speeding up the insolvency resolution process under Insolvency and Bankruptcy Code (IBC).
  •  Easing of credit, particularly for the stressed real estate and NBFC sectors.
  •  Announcing the National Infrastructure Pipeline 2019-2025.
  • Survey expects an uptick in the GDP growth in H2 of 2019-20:
  • 5 % GDP growth for 2019-20 based on CSO’s first Advance Estimates.
  •  Expeditious delivery on reforms for enabling the economy to strongly rebound in 2020-21

Sustainable Development and Climate Change

India moving forward on the path of SDG implementation through well-designed initiatives

SDG India Index:

  • Himachal Pradesh, Kerala, Tamil Nadu, Chandigarh are front runners.
  • Assam, Bihar and Uttar Pradesh come under the category of Aspirants.

India hosted COP-14 to UNCCD which adopted the Delhi Declaration: Investing in Land and Unlocking Opportunities.

COP-25 of UNFCCC at Mandrid:

  • India reiterated its commitment to implement Paris Agreement.
  • COP-25 decisions include efforts for climate change mitigation, adaptation and means of implementation from developed country parties to developing country parties.

Forest and tree cover

  • Increasing and has reached 80.73 million hectare.
  • 24.56 % of the geographical area of the country.

Burning of agricultural residues, leading to rise in pollutant levels and deterioration of air quality, is still a major concern though the total number of burning events recorded reduced due to various efforts taken.

International Solar Alliance (ISA)

  • ‘Enabler’ by institutionalizing 30 Fellowships from the Member countries.
  • ‘Facilitator’ by getting the lines of credit worth US$ 2 Billion from EXIM Bank of India and 1.5 Billion from AfD, France.
  • ‘Incubator’ by nurturing initiatives like the Solar Risk Mitigation Initiative.
  • ‘Accelerator’ by developing tools to aggregate demand for 1000 MW solar and 2.7 lakh solar water pumps.

Agriculture and Food Management

  • Largest Proportion of Indian population depends directly or indirectly on agriculture for employment opportunities as compared to any other sector.
  • The share of agriculture and allied sectors in the total Gross Value Added (GVA) of the country has been continuously declining on account of relatively higher growth performance of non-agricultural sectors, a natural outcome of development process.
  • GVA at Basic Prices for 2019-20 from ‘Agriculture, Forestry and Fishing’ sector is estimated to grow by 2.8 %.

Agricultural productivity is also constrained by lower level of mechanization in agriculture which is about 40 % in India, much lower than China (59.5 %) and Brazil (75 %).

Skewed pattern of regional distribution of agricultural credit in India: Low credit in Hilly, Eastern and North Eastern states (less than 1 % of total agricultural credit disbursement).

Livestock income has become an important secondary source of income for millions of rural families:

  • An important role in achieving the goal of doubling farmers’ income.
  • Livestock sector has been growing at a CAGR of 7.9 % during last five years.

During the last 6 years ending 2017-18, Food Processing Industries sector has been growing:

  • Average Annual Growth Rate (AAGR) of around 5.06 %
  • Constitutes as much as 8.83 % and 10.66 % of GVA in Manufacturing and Agriculture sector respectively in 2017-18 at 2011-12 prices.

While interests of the vulnerable sections of the population need to be safeguarded, Survey emphasizes on sustainability of food security operations by:

  • Addressing the burgeoning food subsidy bill.
  • Revisiting the rates and coverage under NFSA.

Industry and Infrastructure

  • The industrial sector as per Index of Industrial Production (IIP) registered a growth of 0.6 per cent in 2019-20 (April-November) as compared to 5.0 % during 2018-19 (April-November).
  • Fertilizer sector achieved a growth of 4.0 % during 2019-20 (April-November) as compared to (-) 1.3 per cent during 2018-19 (April-November).
  • Steel sector achieved a growth of 5.2 % during 2019-20 (April-November) as compared to 3.6 % during 2018-19 (April-November).
  • Total telephone connections in India touched 119.43 crore as on September 30, 2019.
  • The installed capacity of power generation has increased to 3, 64,960 MW as on October 31, 2019 from 3, 56,100 MW as on March 31, 2019.
  • Report of the Task Force on National Infrastructure Pipeline released on 31.12.2019 has projected total infrastructure investment of Rs. 102 lakh crore during the period FY 2020 to 2025 in India.

Services Sector

Increasing significance of services sector in the Indian economy:

  • About 55 % of the total size of the economy and GVA growth.
  •  Two-thirds of total FDI inflows into India.
  • About 38 per cent of total exports.
  • More than 50 % of GVA in 15 out of the 33 states and UTs.

Gross Value Added growth of the services sector moderated in 2019-20 as suggested by various high-frequency indicators and sectoral data such as air passenger traffic, port and shipping freight traffic, bank credit etc.

On the bright side, FDI into services sector has witnessed a recovery in early 2019-20.

Social Infrastructure, Employment and Human Development

  • The expenditure on social services (health, education and others) by the Centre and States as a proportion of GDP increased from 6.2 % in 2014-15 to 7.7 % in 2019-20 (BE).
  • India’s ranking in Human Development Index improved to 129 in 2018 from 130 in 2017:
  • With 1.34 % average annual HDI growth, India is among the fastest improving countries
  • Gross Enrolment Ratio at secondary, higher secondary and higher education level needs to be improved.
  • The share of regular wage/salaried employees has increased by 5 percentage points from 18 % in 2011-12 to 23 % in 2017-18.
  •  A significant jump of around 2.62 crore new jobs with 1.21 crore in rural areas and 1.39 crore in urban areas in this category.
  • Total formal employment in the economy increased from 8 % in 2011-12 to 9.98 % in 2017-18.
  • Gender disparity in India’s labour market widened due to decline in female labour force participation especially in rural areas:
  • Around 60 % of productive age (15-59) group engaged in full time domestic duties.
  • Access to health services inter-alia through Ayushman Bharat and Mission Indradhanush across the country has improved.
  • Mission Indradhanush has vaccinated 3.39 crore children and 87.18 lakh pregnant women of 680 districts across the country.
  • About 76.7 % of the households in the rural and about 96 % in the urban areas had houses of pucca structure.
  • A 10 Year Rural Sanitation Strategy (2019-2029) launched to focus on sustaining the sanitation behavior change and increasing access to solid and liquid waste management.

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