The Economic Survey – Food for Thought..

The Economic Survey 2019-20, presented in the Parliament today, seeks to give respectability to the process of wealth creation and to the wealth creators. This looks contradictory to the focus of the government on rooting out corrupt business practices over last five years. However, looked closely, the entire narrative of the Economic Survey is interspersed with discourse on ethical wealth creation so that it leads to, as stated by Adam Smith, “universal opulence which extends itself to the lowest ranks of the people.” Here is a look at some of the dimensions of Indian economy and their impact on growth.

While volume II of the survey looks at the recent performance of the economy, volume I provides unique insights on a number of untouched facets of the economy with ethical wealth creation as the underlying theme. Among the first is the role of entrepreneurship in wealth creation at the grassroot level. The survey states that a 10% increase in registration of new firms leads to 1.8% increase in GDP of the district. However, there is a sharp divergence in growth of service sector firms vis-à-vis manufacturing and agriculture sector firms although the survey doesn’t deliberate on this issue. While number of new firms in the services sector has risen from about 16,000 in 2006 to 80,000 in 2018, the same for manufacturing and agriculture has remained nearly the same at 6,000 and 1,000. The declining role of manufacturing sector is also evident from the fact that market capitalization of manufacturing sector firms in Sensex has declined from as much as 96% in 1991 to 45% in 2019. Further, there is no agriculture sector company in Sensex, neither now nor even in 1991. (Can we bring global agriculture giants into India and integrate local farmers in global value chain?)

Thus, while the role of entrepreneurship in enhancing economic activity is laudable, it also reveals the paradox of India’s growth story – growth without jobs and growth without rural welfare. The criticality of manufacturing sector and inability of service sector to provide large scale employment is brought out by another statistic. Increase in entrepreneurial activity in manufacturing sector from index value of 0.25 to 2.0 brings down the unemployment rate sharply from 10% to 5%. However, the correlation is negative in case of service sector (higher service sector activity leading to loss of jobs) which means that higher service sector activity is not leading to percolation of wealth to the grassroot level. While higher service sector entrepreneurial activity appears to add a dash of glamor, it is high time, governments formulate policies and provide a concerted push to entrepreneurial activity in manufacturing and agriculture sector. These policies can also take clue from the fact that formation of new firms decline from index value of over 3.0 to about 1.8 as the distance from large centres go up from 0-42 km to 122-154 km. A policy measure could to be identify some ten such areas and provide incentive to set up mega factories creating a credible trickle-down impact.

Another important theme of the survey is the role of cronyism and their destructive impact in process of wealth creation. The survey cites the difference in transaction with related parties in case when the company has won a coal block through auction versus when the coal block has been ‘allotted’ to it. As per the survey citing a study by Abraham, Chopra, Subramanian & Tantri (2018), amount of money paid to related parties rose from just about Rs 400 crore during three years before coal block allocation to over Rs 1,000 crore in the three year after the allocation. However, in case of auction, the figure remained more or less the same. The related parties, thus, possibly act as a conduit to siphon-off the surplus.

The cronyism is not restricted to corporate level but is deeply entrenched at the grass root level illustrated by contracts for construction of rural roads. The survey cites a study of bidding process of 88,000 rural roads and its correlation with over 4,000 elections results built between 2001-13 done by Lehne, Shapiro & Eynde in 2016. As per the study, around 26% of roads marked as completed in Pradhan Mantri Gram Sadak Yojna (PMGSY) are actually missing from the Census data of 2011! This means these roads have not been constructed and the money, most likely, pocketed by the local political leaders and contractors.

While the space available does not permit delving further, the article doesn’t do justice to the voluminous insights provided by the Survey. More from the survey, in later articles..

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