The wilting economy and widespread economic distress set the stage for this year’s presentation of Economic Survey 2019-20 a day before the Union Budget. The Survey, prepared by Krishnamurthy V. Subramanian, Chief Economic Adviser to the Finance Ministry, was so underwhelming that it las lowered the bar on expectations from such reports in the future. It was a shocker to long-time followers of economic policymaking in general, and to professional economists in particular. The lackadaisical approach to the use of data set a new low, calling into question the integrity of official publications on the economy. Even more distressing was the manner in which it completely sidestepped the deeply worrisome crisis that has engulfed the economy. Instead, the key document gave the impression that the policy mandarins at North Block were living in a delusional world of their own, as if evading the woes would resolve them.
The Economic Survey is generally expected to address two sets of issues. Its foremost task is to function as a status report on the Indian economy, setting the stage for the Union Budget that follows it. Moreover, in recent times, the Survey has been seen to provide some idea of how the government plans to deal with key focus areas, which may also reveal new ways of addressing critical areas of the economy. In the process, the Survey may also provide some idea of the government’s thinking on these key challenges.
The Indian economy is clearly slowing down, as is evident from six consecutive quarters of slackening growth. After initially refusing to acknowledge, let alone admit, the fact, Finance Minister Nirmala Sitharaman conceded grudgingly that there were problems but asserted that they were temporary in nature. Subramanian strenuously labours on this diagnosis in his report as he tries to establish that the economic slowdown is “cyclical,” rather than structural, in nature. Here, like elsewhere, the data that he summons to buttress his contention are selectively used in order to suit what look like the presupposed conclusions. While it is sometimes the case that a patient recovers even with the wrong medicine—maybe because of the immune system getting its act together—the treatment would still not establish the competence of the doctor. To ordinary citizens, the tussle over whether the ongoing crisis is structural or cyclical may appear esoteric, but the nature of the crisis is more than a matter of semantics: the nature of the diagnosis reflects a mindset on all matters relating to the economy.
Investment & consumption
If the slowdown is cyclical, as Subramanian’s Survey would like us to believe, it is only a matter of time before the economy gets back on track. He labours strenuously to make the point that investment, especially private investment, affects consumption with a lag. He does not dwell much on the nature of the fall in consumption—caused by job losses, stagnant wages in urban areas and a fall in rural wages, and an all-round squeeze on incomes, worsened by the recent spiral in prices of essentials, particularly food-related articles of mass consumption. But even more curious is his assertion, based on a selective use of data, that private investment is not picking up because of the squeeze from the financial sector, particularly banks. This is preposterous, for several reasons.
First, the boom in lending, especially for projects in the infrastructure and core sectors—power, roads, ports, steel, and so on—by especially public sector banks was unsustainable not just for the banks but for private enterprise. While it is true that banks have cut down lending, it is equally evident that Indian industry has been going through an unwinding process—“deleveraging”, in business parlance—by reducing the mountains of debt it was drowned in.
Second, it is not clear how the “animal spirits” will be awakened merely by a reopening of the credit tap. A table in the Survey (Chapter 1, Volume II) shows that while overall gross domestic product (GDP) in the second quarter of 2019-20 was 4.5 per cent, compared with 6.8 per cent in the fiscal year 2018-19, the growth of fixed investment had slowed down to an alarming 1 per cent, compared with 10 per cent in the previous year. The same table also shows a 3 percentage point drop in private consumption. What do the figures show? Subramanian’s Survey moves on without drawing the obvious conclusions.
Third, as his own chapter on banking reveals, if the banks are to be privatised—or at the very least made to behave like clones of their private sector counterparts—how would they be forced to let credit rush in a torrent to feed the animal spirits? Fourth, it raises the urgent question of how to address what is evidently an all-round collapse of demand in the Indian economy. Subramanian’s diagnosis of the ongoing crisis in which the economy finds itself that the financial sector is acting as a drag on the real sector is not just without basis but fatalistic.
Real estate
Referring to the real estate sector, Subramanian observes, interestingly, that “residential property, in particular, has been reeling with issues of delayed project deliveries and stalled projects leading to a build-up of unsold inventory over the years”. He notes that home prices have “fallen sharply since Q1 of 2015-16 and remained muted since then”. While Subramanian seeks causality in unconnected variables, as demonstrated elsewhere in the Survey, he refuses to acknowledge that the slowdown in dwelling prices should be attributed to the biggest economic calamity in independent India, the demonetisation move of 2016.
This is striking because correlations of a spurious nature abound in the Survey. For instance, in one section, in order to show that things are improving and demonstrate the awakening of entrepreneurial zeal, he makes the rather ill-founded point of correlating registration of new firms with GDP emanating at the district level. This would be regarded as strange by not only economists but even statisticians for the simple reason that there are any number of reasons why GDP may be moving up or down. There is little evidence to show that there is a direct and corresponding relationship based on causality between the emergence of new firms and a rise in economic output.
Every statistical correspondence does not imply that a causality has been established. For instance, if one plots rainfall in the Andaman Sea and the number of runs Virat Kohli scores in Test Matches, one may find a correlation, but that does not mean that one can draw a causal link between the two sets of events. Thus, new firms may be emerging simply because they are drawn to a part of the country that is already showing economic dynamism; in fact, this is the reason why industries are still concentrated in the more industrially advanced States. Moreover, an increase in the number of registrations of firms may arise not from economic dynamism but from the illicit motive of setting up dud companies in order to plug loopholes in the goods and services tax (GST) regime. Since the GST system rests on the principle of claiming input tax “credits” by firms along the production chain, reports from across the country indicate a sharp increase in the use of dud companies established purely for making such claims.
While Volume II, which focusses on the state of the economy, was awaited with expectation, especially for its diagnosis of the economic slowdown, Volume I was expected to shed some light on the “thinking” on economic policy. If Volume I is evasive on the key issues plaguing the Indian economy, Volume II gives even less room for optimism that the Narendra Modi government has any fresh ideas. To give one example, the Survey suggests that India get into the export of manufactured products such as network products. In effect, it is suggesting that India get onto a bus it has missed by several decades; countries of South-East Asia and China are already entrenched in these markets. Moreover, as the experience of Huawei with 5G technology has shown, China, unlike India, exploited its enormous domestic market to build significant economies of scale that enabled it to stride on the global stage and take on the multinationals in the telecom sector. The critical role of the state—accepted as critical in the economic literature on the subject—is completely absent in the Survey.
Just one instance of the utter disregard for standard economic methodology will illustrate how the Survey, in the name of being innovative, is vacuous in the extreme. An entire chapter in Volume I is devoted to “Thalinomics” to demonstrate how food prices have been beneficial for Indians. It details the methodology by which thali (plate of food) prices have been worked out—separately for a vegetarian and a non-vegetarian thali . This is accompanied by a series of charts showing thali prices across States. Finally, these prices are compared with wage rates to show that Indian consumers have been better off in recent years. But this is so utterly wrong, for basically two reasons.
First, any Indian would know that the wage rate is for a day’s work. What a worker earns depends not just on her wage rate but also on how many days she is able to work. In other words, income is what matters, not the wage rate for a single day. That this escaped the wisdom of the North Block mandarins tells us much about how serious they are about the lives of ordinary people.
The second question that the painstaking analysis of thali s and their prices raises is this: why bother with this when economists (and those in government) already have access to the simple device of price indices to gauge how real incomes are faring?
This Survey will be remembered for the new lows that have been reached. The lackadaisical approach to data and methodology is evident throughout the report consisting of three voluminous volumes (the last being a statistical appendix). Several charts fail to mention what is being plotted on the x- and y-axes. Most preposterously, it cited Wikipedia as a “source” of data (pages 150-151, Volume I). Perhaps that will be the abiding memory of this Survey.
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