UPSC Civil Services Exam: Topic-Wise Summary Of Economic Survey 2019 For IAS Aspirants - Part II

Continuing our series on summary of Economic Survey for UPSC Civil Services Exam aspirants, here is the second part where we cover major factors of an investment-led growth as provided in Chapter 1 of the Economic Survey. You can read Part I here.

In this part, we cover the major factors of the investment-led growth that Economic Survey mentions.

Major Factors in growth- Demographics

• India will remain in “demographic dividend” zone for two more decades
• Increase in working-age population along with decline in fertility increases per capita income as number of dependants decline- there are “fewer mouths to feed”.
• The decline in the number of children by the working generation promotes saving, especially in Asian/Indian cultural context, as they must rely more on savings for retirement in comparison to previous generations
• Saving also increases as a result of a composition effect as most of the savings occur between ages of 40 to 65
• As demographics and wages are the major factors that drive savings, policy-makers can keep the interest rate low enough to promote investment.

Major Factors in growth- Job creation

• The survey says that Indian Economy is dominated by “dwarf” firms, that never grow beyond their small size
• “Dwarfs” account for half of all the firms in organised manufacturing sector, yet their share in employment is only 13.3 per cent, and share in NVA is a miniscule 4.7 per cent.
• Firms that are able to grow over time to become large are the biggest contributors to employment and productivity in the economy
• The Survey makes policy-suggestions to end the incentivisation of remaining a “dwarf” in Indian economy

Major Factors in growth- Financial Sector

• Investment-led growth requires expansion in financial sector- both banks and capital markets
• This quantitative expansion poses the risk of misallocation of capital, as seen in the case of Asian Tigers and even 2008 crisis.
• Our own experience of rapid credit expansion from 2006 to 2012 illustrates the same risk, where the quality of credit sharply deteriorated when the quantity was expanded.
• In this regard, the survey states that banking sector clean-up and IBC are significant reforms whose benefits India will reap during investment-led growth
• It also says that now the foundational reforms are in place, it is time to significantly lower the cost of capital.

Major Factors in growth- Incentive structure for risk-taking

• Policy ambiguities that create collateral damage for genuine risk-takers can affect investments by dampening the animal spirits in the economy
• Systematically lowering the risks faced by investors in India is critical for the success of the investment-driven model for economic growth.
• IBC plays a crucial role in this regard by putting in place a process for reconfiguration of assets following business failure
• Another significant factor is tax policy. Tax on startups, capital gains tax, etc must be rationalised. An optimum tax policy should balance revenue generation with encouraging bonafide tax-payers and punishing malafide ones.

This marks the end of summary of Chapter 1 of the Economic Survey. We will continue with the remaining chapters in later parts.