Economic Survey 2019 presents good overview, but should not be read as precursor to Sitharaman's maiden Budget

The Economic Survey has been a commentary on the performance of the economy in the previous year with a chapter on the prospects which tended to be general. Over the last decade or so ever since Kaushik Basu took over as the Chief Economic Advisor (CEA), there were sections on intellectual issues which could be interpreted as prescriptions. The number of chapters kept multiplying over time with every CEA imposing his stamp in terms of ideology and analysis of the economic issues. These sections were data driven with strong hypotheses and recommendations that were compelling. The present Economic Survey comes in two volumes with the first one having 11 chapters or subjects that are discussed threadbare followed by Volume 2 which has the conventional chapters on all the sectors. The second volume does not have any new headline numbers to present as all the data is already known and hence the areas of interest are in the micro numbers within every section that is meant for the specialist. There are some interesting points or takeaways from these sections which deserve mention. First is that growth in FY20 is to be 7 percent which is slightly higher than 6.8 percent last year which is not much of an improvement. Therefore, economic conditions would remain at best stable during this period as the economy recovers from the financial sector challenges and gets support from the rural economy. [caption id=“attachment_6932881” align=“alignleft” width=“380”]  Finance Minister Nirmala Sitharaman in Rajya Sabha on Thursday. (Pic courtesy: Rajya Sabha TV)[/caption] Second, the government has done well in terms of fiscal deficit control at 5.8 percent for FY19. This means that the states were able to rein in their fiscal deficit at 2.4 percent which is commendable as their balances appeared to be strained with the burden of Ujjwal DISCOM Assurance Yojana (UDAY) loans and in some cases loans waivers. Third, there is some warning on future growth in revenue as in FY20 on account of fiscal consolidation in FY19 when overall expenditure was pruned by 0.4 percent of Gross Domestic Product (GDP) with 0.3 percent being in revenue account and 0.1 percent in capital. If growth were to be moderate in FY20, then there would be limited scope for buoyancy in tax revenue which will drive the edifice of the budgetary ability to spend this year. Fourth, the survey is specific in highlighting the non-banking finance company (NBFC) crisis and the pain caused to the system not just in terms of the sector but also funding companies as they had stepped in when banks were not able to lend. Addressing their issues would be important. The survey also highlights the major step taken by the government in non-performing asset (NPA) resolution and the progress made has been commended. Fifth, the survey quite curiously points out that the current account deficit (CAD) pressure can be eased if consumption slows down and investment improves. This can have a contradictory impact on growth as slowdown in consumption has been the main reason or growth not picking up. The CAD consumption is based on oil consumption which may be hard to control. Slowdown in non-oil imports would be reflective of low industrial activity and hence not supportive of growth. Therefore, there is some ambiguity here. Last, the survey does make an observation that 89 percent of groundwater is used for irrigation and that paddy and sugarcane use 60 percent of the total. This is really high and needs to reduce which can be done if farmers are weaned away from these crops to allied activities like dairy farming, fisheries and livestock. The first volume provides the CEAs fix for the economic problems. Here, the view taken is that instead of addressing different issues like industry, consumption, and productivity etc, the single point agenda should be investment because it forges a virtuous circle link with other segments and can accelerate growth. Theoretically, this is sound and worked in East Asian economies but this has been an issue we have been grappling with. In fact, one can say that the government and Reserve Bank of India (RBI) have been continuously working towards lowering rates and enabling the business environment to spur investment but this has not happened precisely because consumption has not picked up. Here, one may differ with the Survey. The survey also takes a view that the NPA issue is behind us and hence banks can now lend. However, this will take time as while NPA recognition is complete, banks would be working towards reducing the ratio from 9.3 percent to at least 5 percent or so before lending. Further, several sectors in infra would not have too many players that would be seeking loans as there is considerable uncertainty in the models to be pursued. Power, telecom, roads and aviation have their share of problems that have to be addressed first. Therefore, investment can be one of the cylinders to be fired and not the only one. The survey commends various initiatives taken in the last few years like better delivery of services for the poor which has been a major saver in expenditure and made money work better. The Direct Benefit Transfer (DBT) which is used for the National Rural Employment Guarantee Act (NREGA) and public distribution system (PDS) have been success stories. Second has been the progress in federalism, which was actually imitated by doing away with the Planning Commission and having the Finance Commission mandate the transfer of resources to states. This has obviated the need to move around the red tape and has empowered the states. These two achievements are significant as ours is a federal structure where a lot of implementation happens at the state level. There are recommendations made on minimum wage which will not be an easy proposition as companies are already trained by labour laws when the business cycle is down. Having an additional constraint of minimum wage can come in their recruitment operations. Hence, while from the social point of view a minimum wage makes sense, in terms of implementation may be hard to achieve especially when labour is unskilled. In fact, the move to make cheque payments would also militate against such operations. The Economic Survey is hence a good overview of the state of the economy and the issues that have been/to be addressed. It may not be read as a precursor to the Budget and does not even talk of what it should be as it would be the prerogative of the finance minister based on how the priorities are placed on 5 July. (The writer is chief economist, CARE Ratings)