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Realism and idealism rolled into one

The annual Economic Survey should ideally be combining realism with idealism. Realism to credibly assess near-term prospects, appreciate the trade-offs and discuss the efficacy of different policy interventions. But idealism is important, too. To shake up the marketplace of ideas, challenge the status quo and, hopefully, capture the imagination of policymakers so that ideas that may not be necessarily feasible now can be conceived at some point in the future. Towards that end, this year’s Economic Survey does a masterful job.

First, the realism. The Survey acknowledges that – even as 2016 witnessed several large-ticket reforms (GST, Bankruptcy Law, Aadhar, Monetary policy framework) – challenges abound. The oil windfall will disappear, and with the twin balance-sheet problem (banks and firms) still unaddressed, private investment is likely to remain sluggish.

Consequently, it pegs growth in 2017-18 at 6.75-7.5%. More importantly, much of this is predicated on a recovery in exports. But recent weeks have shown that protectionism in advanced economies is casting its long shadow, which could accentuate the de-globalisation and result in renewed export pessimism. The Survey, therefore, acknowledges that given these cyclical conditions, especially post demonetization, the economy would need policy support. Equally, however, it argues that some monetary policy support is already underway and fiscal policy would need to balance its near-term counter-cyclical stance, with medium-term prudence and credibility. We will know, soon enough, what this implies for the Budget.

But the real value of the Survey is in questioning the economic vision that India should set itself. While the Survey doesn’t explicitly state so, India will need to find new growth drivers. The inconvenient truth is that India’s 9% growth in the mid-2000s was propelled by a 17% growth in exports. We were in the midst of “hyper-globalisation,” as the Survey calls it. Those days are long gone, replaced instead with de-globalization, maturing supply chains and increasing protectionism. So where will the growth come from? In the words of the Survey, “…ideational shifts will be critical to ensuring that India’s sweet spot is enduring not evanescent.” What does this mean? That, the legacy of India being a “precocious democracy” – attempting economic development even while granting universal franchise from the beginning – while very admirable has fructified in (1) ambivalence about private sector and property rights; (2) improving but inadequate state capacity; and (3) inefficient redistribution. And the combination of these attitudes and capabilities is impeding India attaining its true potential.

But while the Survey portrays these are ideational shifts in the medium term, one can argue there are very real near-term macroeconomic consequences. Everyone agrees that – given the slump in private investment – a large public investment thrust is needed. Equally, the consolidated fiscal deficit is very elevated, and there is little fiscal space. How do policymakers square the circle?

What if the government was less diffident about divesting assets to the private sector? Selling low-productivity assets – that would be managed more efficiently in the private sector to raise firm value – and using those resources for a large physical and human capital thrust. This would effectively be an “asset swap” on the balance sheet, and boost investment and growth without consuming any fiscal space. Or what if all leaky product subsidies (PDS) were replaced by a cash transfer to generate fiscal savings? Easy?

Not quite because it would require (a) a fundamental re-thinking of the role of the state versus the market; (b) require much greater state capacity to execute the asset transfer; and (c) overcome the vested interests that perpetuate the inefficient distribution. In short, even the near-term macro outlook is impacted by the three features that the Survey rightly identifies, despite the considerable progress that has otherwise been made.

The Economic Survey has masterfully balanced the do-able with what needs to be done. The hope is the Budget will follow suit.

(The writer is chief India economist, JP Morgan. All views are personal.)