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.

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.

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.

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.