Budget 2020: Why focus on wealth creation is good news for Indian economy
The Economic Survey 2019-20 has managed to hit the bullseye by focusing on wealth creation. It now remains to be seen whether the government provides the tools and environment required for the same.
India's economy is as diverse as its vast demography, making it unfeasible for a single document to list all aspects related to development and growth. Past Economic Surveys have tried presenting a holistic outlook of the economy through categorised themes but failed to focus on one key aspect.
The Economic Survey 2019-20 has managed to hit the bullseye by focusing on wealth creation--the key dilemma that plagues three-fourths of India's billion-plus population.
The fact that government is acknowledging the importance of wealth creation is also a good indication for citizens and businesses in the country. Focus on wealth creation could result in further opening up of India's economy and make the economic recovery a less daunting task.
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"As wealth creation happens by design, the overarching theme of Economic survey 2019-20 is wealth creation and the policy choices that enable the same. At its core, policies seek to maximize social welfare under a set of resource constraints," the Economic Survey 2019-20 said.
Highlighting the economic liberalisation of 1991, the Economic Survey said it had a huge impact on enhancing wealth both in aggregate and within sectors. For instance, credit expanded in the banking sector post liberalisation after the sector was opened for competition through licences granted to private sector banks.
"As competition expanded the banking choices available to citizens, the sector experienced strong growth," it said.
INSTRUMENTS TO BOOST WEALTH
The Economic Survey 2019-20 suggests taking up new measures (and follow some old ones) for further enhancement in wealth creation. For instance, the pre-budget survey stresses on creating equal opportunities for all individuals, small and large-scale businesses in the country.
Special emphasis has been laid on grassroot entrepreneurship as it can lead to new ideas, better job creation, resource allocation, trade growth and higher contribution to GDP.
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"Equal opportunity for new entrants in entrepreneurship enables efficient resource allocation and utilization, facilitates job growth, promotes trade growth and consumer surplus through greater product variety, and increases the overall boundaries of economic activity," the Economic Survey said.
It stresses on the importance of creating a "pro-business" economy instead of a "pro-crony" economy. "India's aspiration to become a $5 trillion economy depends critically on promoting pro-business policies that provide equal opportunities for new entrants," it added.
The survey also dots the importance of India's market economy and suggests that "unshackling economic freedom" for any marketplace will lead to higher wealth creation. It, therefore, calls for less government intervention as it leads to "unintended consequences".
IMPROVING EASE OF DOING BUSINESS
The survey also calls for better trade policies as they are the main enables of growth. It explains that India, with its vast population, can create a high number of jobs by incentivising programmes such as "Make in India" and through better export activities.
Though India has made steady progress with respect to 'ease of doing business', the survey suggested that the pace of the reforms need to be enhanced for India to rank within the top 50 economies.
India continues to trail in parameters such as Ease of Starting Business, Registering Property, Paying Taxes, and Enforcing Contracts- Economic Survey 2019-20
"A holistic assessment and a sustained effort to ease business regulations and provide an environment for businesses to flourish would be a key structural reform that would enable India to grow at a sustained rate of 8-10 per cent per annum," it added.
FINANCING WEALTH
The Economic Survey also outlines the importance of having a sound financial sector for enhancing wealth creation.
Highlighting the fact that the top five economies have always been supported by their banks, it said India has to find a solution to improve its banking sector for better growth.
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It explained that India's banking sector is "disproportionately under-developed" with respect to the size of its economy as the country.
For instance, India has only one bank in the global top 100 - same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), Norway (1/7th), Austria (about 1/7th), and Belgium (about 1/6th). Countries like Sweden (1/6th) and Singapore (1/8th) have thrice the number of global banks as India- Economic Survey 2019-20
However, India's economy needs an efficient banking sector to support growth aspiration of such a vast population.
With public sector banks account for 70 per cent of market share in the Indian banking sector, they are required to bear the lion's share of supporting Indian economic growth. "Yet, on every performance parameter, PSBs are inefficient compared to their peer groups," the survey notes.
TRUST FOR WEALTH CREATION
The Economic Survey also mentioned the importance of trust for wealth creation. Therefore, the Survey introduces the idea of "trust as a public good that gets enhanced with greater use".
If there is a high level of trust, economic activity can flourish despite the increased potential for opportunism, adds the survey. It, however, highlights how the missing trust factor has weakened the Indian economy, resulting in nervousness among the country's citizens and financial institutions.
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For instance, the lack of trust turned banks cautious after the NBFC crisis and led to lower lending activity. This resulted in closure of many businesses and a drop in overall economic activity.
To sum it up, the Economic Survey 2020 says wealth creation is the cure for all core issues plaguing the Indian economy. It now remains to be seen whether the government provides the tools and environment required for the same.