It is not often that an Economist and a government one at that is able to bring energy and passion in a speech. But India’s Chief Economic Advisor K V Subramanian managed the impossible when he presented the highlights of Economic Survey 2020-21 on 29 January 2021. Using stories to put across complex economic concepts, the desire to reach out to the non-economists of the country was obvious.
There were two narratives in the presentation. One looked back. The other looked ahead. Subramanian used the example of India’s covid response to make the point that India was an outlier in its covid strategy both with a hard lock-down and with muted fiscal spend at the front of the pandemic. 10 months later, India is emerging with a low case load and a low death rate as compared to the developed countries. India is also seeing a V-shaped recovery as the financial year is winding down and the de-growth number has fallen further to about 7.5%.
What I heard the CEA not say but imply is this: India has its own story; its own stage of development and it cannot cut paste the solution set used by countries with very different demographics and per capital incomes. What a country with $40,000 per capita income with a tax to GDP ratio of 30% to 50% can do is very different from what India, with a per capita income of $ 2,000 with a tax to GDP ratio of about 11% can do. He said that there is no point in pressing the accelerator when the brakes are down to justify back-ending the fiscal spend.
Using this as a back drop, he then argues for similar bold India-specific policy solutions on the road ahead. He argued for a big fiscal push to go for growth. Let’s not worry too much about inequality at the moment, because growth will lift all boats. Dealing with the issue of inequality, his prescription is to grow the pie rather than try and cut the same pie into smaller pieces. There is need for the government to push fiscal spends till the private sector investments begin again. This spend is needed till GDP growth recovers to the pre-covid trend line. After that the government should gradually withdraw the spend and let the virtuous cycle of private sector investments take over.
He also made a case to ignore the global credit ratings. His advice is to ignore the noise that the credit ratings will make when the Indian fiscal deficit bloats to higher levels. Data shows a racial bias against India and China in credit ratings over time and India has never defaulted on its debt payments – we even shipped gold as collateral in 1991. The stock, bond and currency markets ignore these ratings, he says, so should we.
All this points to a big fiscal push in Budget 2021 to target aggressive growth.
Monika writes on household finance, policy and regulation.