30 years later, Economic Survey lays down the ground for Liberalisation 2.0

Embracing capitalism in a new avatar

Nearly 30 years after economic liberalisation started in 1991, an official document doesn’t just praise the private sector but recommends that the government embrace capitalism in a new avatar.

Taking a cue from Adam Smith (who in the 18th century talked of the invisible hand of the market, in the book The Theory of Moral Sentiments), the Economic Survey bats for making the “invisible hand” take charge of the economy, to enter the next phase of rapid economic growth.

But while the theory says that an individual deciding what is best for him or her is ultimately best for society as a whole, the Survey says that this has to be complemented with “trust” as a public good, suggesting that the government would take up the role of trustworthy institutions, to ensure that greed does not take over.

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“India’s aspiration to become a $5 trillion economy depends critically on strengthening the invisible hand of markets together with the hand of trust that can support markets,” Chief Economic Advisor Krishnamurthy Subramanian wrote in the Survey.

More importantly, Subramanian has taken a direct reference from Prime Minister Narendra Modi’s Independence Day speech on August 15 last year, when the latter had said that wealth creators should not be seen with suspicion.

Toeing the line, and underlining India’s “dalliance” with socialism, the Survey tries to shun the scepticism that gets associated with the benefits accruing from a market economy, giving evidence from data.

Analysing data on core and transport sectors, the Survey shows that areas such as steel and cement, which are privatised, have shown a higher growth of 7 per cent compared to coal, which remains in the hands of the government to date, at 5 per cent.

It also compares the road sector and railways and underlines the faster growth in the former, compared to the latter, where the passenger footfall has been languishing at a level for a long time.

But in paving way for structural liberalisation reforms, the Survey recommends that this should happen with enabling and incentivising the formation of new firms. In doing so, it bats for giving favourable grounds for the new entrants, and enabling a fair competition between them and the incumbents.

The government has already taken a step in that direction, by slashing the corporate tax for new manufacturing companies in certain sectors to 15 per cent, the lowest in India, ever.

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The Survey says that a 10 per cent increase in new firms in a district adds 1.8 percentage points to its economy. But it specifies, using data, that the government should focus its efforts on the manufacturing sector.

“As the manufacturing sector has the potential to create the maximum jobs, states must focus on enabling ease of doing business and flexible labour regulation to foster job creation,” it says.

Critically, the very same sector is undergoing the brunt of the current economic slump. Value added in manufacturing has contracted in the first half of FY20, with the growth in the full financial year set to be at 2 per cent, according to advance estimates.

In its defence of the “invisible hand, the Survey underlines the performance of the BSE Sensex, its “exponential rise” post liberalisation.