The Economic Survey 2020-2021, prepared under the guidance of the Chief Economic Advisor (CEA) of India, Mr. K.V. Subramanian, was tabled in the Parliament on 29 Feb 2021 by the Finance Minister Ms. Nirmala Sitharaman. This was the 3rd survey prepared by the current CEA and was presented 3 days prior to the tabling of the Indian budget for the financial year 2021-22. Economic Survey provides an overview of the Indian economy in the previous year and also recommends future approaches that can be adopted by India to be on a sustained growth path. This Survey covered topics ranging from the reach of the COVID-19 pandemic, public spending on healthcare to the credit rating of India, scope of process reforms to strategies to overcome inequality in India and improving the level of innovation.
Here is a brief summary of Volume 1 of the Economic Survey 2020-2021. I have grouped the chapters in the Survey basis a broad theme that they represent, hence the chapters below will not appear in a chronological order. Note that this is by no means a commentary on the quality of the survey and provides only a brief on the topics covered in volume 1.
COVID-19, Healthcare, Availability of Necessities, Inequality
- The survey discusses the importance of a stringent lockdown in a country like India with high population density, particularly in the initial stages of the pandemic. The survey mentions that an approach of ‘Short-term pain, long-term gain’ was adopted given the absence of a vaccine or a well-defined treatment for COVID-19 in the initial months. In this, a step-by-step approach was adopted wherein, in Q1 and Q2 of FY 2020-21, the Government ensured that funds for essential activities were available despite a sharp contraction in revenue receipts. Once the intensity of the pandemic started to come down, the Government, in a regulated manner, started to focus on investment and consumption through the Atmanirbhar Abhiyaan, phase 2 and phase 3. (Chapter 1)
- In an analysis on ‘what happened’ versus ‘what could have happened’, the survey shows that if such measures were not adopted, India would have had 31.1 lac more cases than it did. At the State level, the analysis illustrates that UP, Gujarat and Bihar were the top 3 states that have seen lower than expected cases, while Kerala and Maharashtra were at the bottom that saw higher than expected cases. In a somewhat interesting finding, it was seen that average balances in Pradhan Mantri Jan-Dhan Yojana (PMJDY) accounts – accounts held by people at the bottom of the pyramid – increased during Q1 2020, which the survey states is indicative of the precautionary savings by the account holders (Chapter 1).
- This survey gives adequate importance to the healthcare sector. This was expected given the context of COVID-19. In this, the Survey comments that an increase in government expenditure on healthcare has more than a proportionate impact on private expenditure. If public healthcare spends increase to 2.5% to 3% of GDP (from the current 1%), it can reduce out of pocket expense by 35 percentage points, from 65% to 30%. The survey recommends that the way of doing so would be by providing rural areas access to healthcare, strengthening health infrastructure and promoting telemedicine. The survey also recommends designing policies that reduce information asymmetry in the healthcare sector. (Chapter 5).
- Moving a step further on the healthcare analysis, the survey shows the type of treatments under Pradhan Mantri Jan Arogya Yojana (PMJAY). The analysis shows that PM-JAY is utilized for high-frequency low-cost treatments. Some examples here include general medicine and dialysis. The chapter uses National Family Health Surveys 4 (2015-16) and 5 (2019-20) to check the impact of the PMJAY program as the same was launched in 2018. Using a difference-in-difference analysis, the survey finds that health insurance coverage increased by 54% in those states that implemented the program while it fell by 10% in states that did not. The survey also shows a greater decline in infant mortality rate and under-5 mortality rate of states that adopted PMJAY versus the ones that did not, thus concluding that PMJAY has had a positive impact on health outcomes. (Chapter 9)
- To see the reach of basic necessities across the country, the survey in this chapter creates a ‘Bare Necessities Index’ which is based on 26 indicators covering 5 areas: water, sanitation, housing, micro-environment, and other facilities. This was created for 2012 and 2018 using 69th and 76th NSO rounds. The index finds that all states have done well on this index between 2012 and 2018. Maximum improvement was seen in Punjab, Haryana, Uttarakhand, Gujarat, Goa, Kerala, Sikkim and Mizoram. The worst performing ones were Odisha, West Bengal, Jharkhand and Tripura. While significant enhancement was seen in rural areas, these positive results were drives primarily by urban areas. Having said this, the survey observed a decline in inter-state disparities over the two years. The analysis also finds that poorer households have shown greater improvement, thus somewhat catching-up with the richer households. (Chapter 10)
- While discussing about rising inequality in the country, the survey shows that there is a convergence between inequality and growth in India, in terms of the impact of these two variables on various socio-economic indicators like health, education, life-expectancy, crimes, fertility rates etc. The Survey also demonstrates that India must continue to focus on growth as it contributes to 85% towards reduction in poverty, while only 15% comes from reduction in inequality. (Chapter 4)
Fiscal Situation, Sovereign Credit Rating, Banking Sector
- While discussing India’s debt sustainability – that is whether GOI will be able to meet its current and future payment obligations without looking for any out-of-routine financial assistance – the survey establishes that in the case of India, growth results in debt sustainability, while the opposite may not be true. This relationship primarily exists as interest rate on debt, paid by GOI has been lesser than the country’s growth rate. Drawing from Blanchard (2019), the survey points that if such a trend is observed, then “intertemporal budget constraint facing the government no longer binds”. (Chapter 2)
- The survey also comments on India’s sovereign credit rating, by taking a historic view of the rating held by the 5th largest economies in the world. This was done as currently, India holds the rank of being the 5th largest economy. The Survey finds that with the exception of China and India, all such economies were rated AAA. The survey shows that for 2 consecutive decades, India was rated lower than the average – a clue to pointing towards the conclusion that such a rating is not reflective of the fundamentals. The survey reaches this conclusion as they show that the sovereign credit rating is nothing but a combination of willingness and ability of a country to pay, and India has done very well on both these pillars. (Chapter 3)
- The Survey attempts to take lessons from the past, learning from the possible mistakes made then to ensure that they aren’t repeated today. In this, the survey looks at the regulatory forbearance that was implemented in India post the Global Financial Crisis of 2008. As the title shows, the chapter draws parallels from the effect of a medicine, which if taken for the prescribed period of time, would be beneficial but if taken over and above would potentially have negative effects. Similarly, taking a retrospective view, the survey mentions that the regulatory forbearance implemented post the crisis should have been discontinued in 2011 when GDP, exports, IIP and credit growth had all recovered considerably. However, its implementation beyond this period allowed banks to take undue advantage of this to restructure loans even for unviable entities, which eventually made them severely undercapitalized. (Chapter 7)
Innovation and Process Reforms
- It is refreshing to see the survey acknowledge the administrative delays and myriad processes that businesses in India have to go through. The survey emphasis that the Indian businesses have to face an environment of ‘over-regulation’. Basis a study by ‘Quality Council of India’, the survey quotes that for a company which has all its paperwork in place and no past disputes, it would still take 1,570 days or nearly 4 years and 4 months for that company to be formally struck off from the records. Over 65% of this time is taken for clearances by Income Tax, Provident Fund, GST departments and in taking back security refunds from various departments. In comparison, it takes about a year in Singapore, 1 to 2 years in Germany and about 15 months in UK. Similarly, India takes (~ 4 years) nearly 2.5 times more time than OECD countries in resolving a commercial contract, as per the World Bank’s “Ease of Doing Business Report (2020). These bulky processes lead to regulations being in-effective even with the companies having a good compliance rate, thus highlighting the need for a more transparent system. (Chapter 6).
- India recently made to the top 50 in the Global Innovation Index. In this context, the Survey looks at where an economy, the size of India should be heading towards. This chapter mentions that India should aspire to be amongst the top 10 countries and in order to be there, it would be important to increase GDP expenditure from the current level of 0.65% to between 1.5% to 3% of GDP- the range in which top 10 countries lie. Survey mentions that for India the business sector contributes less than what is observed in top 10 countries. Contribution from the Indian business sector at was 30% for total R&D personnel and 34% for researchers is the second lowest amongst the top ten economies (over 50% on average). Again as compared to the top 10 economies, Indian government contributes 3 times more (at 56%). (Chapter 8)
While the survey covers a host of topics, what was missing from the Survey was an in-depth discussion on few important macro-economic topics like international trade, import tariffs and approach(es) to strengthen the banking sector. Though the survey touched upon the issue of human development, a more comprehensive analysis on education and skill requirement in the country, greater inclusion of women in the higher education and workforce and strategy for the healthcare sector in the coming few years, keeping in mind the pandemic was in absentia. Further, the survey seemed to lack coherence or flow of thought, thus, appearing to be abruptly jumping from one topic to the next – from pandemic to debt sustainability to inequality. Interestingly, the common theme or solution for all the problems was growth and privatization, whether the topic of discussion was inequality, debt-sustainability, improvement in healthcare or innovation.
Note for the readers: The ones looking for ‘V-shaped’ recovery should read Chapter 1 in Volume II. The readers who haven’t yet reached an advanced understanding of economics could know more about each of these topics by reading the Introduction and ‘Chapter at a Glance’ section provided at the end of each chapter, without getting into the technical details.
Economic Survey of India, 2020-21, Department of Economic Affairs, Ministry of Finance, Government of India