Economic Survey 2019:  Private Investment Key To Sparking Off A ‘Virtuous Cycle’ For Indian Economy
(Photographer: Udit Kulshrestha/Bloomberg)

Economic Survey 2019: Private Investment Key To Sparking Off A ‘Virtuous Cycle’ For Indian Economy

The government’s Economic Survey 2019, presented a day ahead of Union Budget 2019, pins its hopes on a revival in private investment to help spark-off a ‘virtuous cycle’ for the Indian economy.

India has struggled with a lack of private investment for the last few years due to overcapacity, excess leverage of corporate balancesheets and reduced capacity within the banking system to lend. The Survey, just like the one presented in 2018, suggests an urgent need to revive private investment.

To achieve the objective of becoming a $5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8 percent. International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase.
Economic Survey 2019

The survey hones in on private investment as the “key driver” that supports demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs. It adds that exports must form an integral part of the growth model, because higher savings can limit the ability of domestic consumption demand to drive final demand.

Authoring his first Economic Survey, Chief Economic Adviser Krishnamurthy Subramanian, says that India needs to depart from the ‘Anglo-Saxon’ thinking by following a growth model that views the economy as being either in a virtuous or a vicious cycle, and thus never in equilibrium.

India also needs to move away from attempting to solve key problems, such as job growth, demand, exports and economic growth, separately. Instead, it should find a central catalyst, which pushes the economy into a virtuous cycle.

This catalyst, according to the Survey, is private investment.

Investment Decline ‘Bottomed Out’

The aspirational push for investment comes at a time when fixed capital formation in the economy remains subdued.

The ratio of gross fixed capital formation to GDP climbed from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to 26.4 percent in 2017.

The Survey, however, said that the decline in the investment rate has bottomed out with some signs of recovery in 2017-18. “Fixed investment growth picked up from 8.3 per cent in 2016-17 to 9.3 per cent in 2017- 18 and further to 10.0 per cent in 2018-19.”

The survey pointed out that the decline in fixed investment was mainly due to the household sector, with fixed investment by public sector and private corporate sector remaining almost at same levels. The ‘household’ sector here includes ‘quasi-corporates’ as well. Unincorporated enterprises belonging to households, which have complete sets of accounts, are called quasi-corporates.

Household sector mostly invests in dwellings and other structures and the quasi corporates invest in machinery and equipment. This decline in household sector fixed investment is due to decline in investment in dwellings. This is borne out by a decline in physical savings of household sector as well.
Economic Survey 2019

Where Will The Uptick Come From?

The Survey goes on to the list a diverse set of ingredients, ranging from policy certainty to the use of data as a public good, for the ‘self-sustaining virtuous cycle’ that it hopes India can move into.

According to the Survey, the ingredients include:

  • Presenting data as a public good.
  • Emphasizing legal reforms.
  • Ensuring policy consistency.
  • Encouraging behavior change using principles of behavioral economics.
  • Nourishing MSMEs to create more jobs and become more productive.
  • Reducing the cost of capital.
  • Rationalizing the risk-return trade-off for investments.
By presenting data as a public good, emphasizing legal reform, ensuring policy consistency,and encouraging behaviour change using principles of behavioural economics, the Survey aims to enable a self-sustaining virtuous cycle. Key ingredients include a focus on policies that nourish MSMEs to create more jobs and become more productive, reduce the cost of capital, and rationalise the risk-return trade-off for investments.  
Economic Survey 2019
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