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

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 (considered the father of economics who in the 18th century talked of the invisible hand of the market), the Economic Survey batted for making the “invisible hand” take charge of the economy, to enter the next phase of rapid economic growth.

But while the theory said an individual deciding what was best for her or him was ultimately best for society as a whole, the Survey said this had to be complemented with “trust” as a public good, suggesting that the government take up the role of a trustworthy institution, to ensure that greed did not take over.

“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 Adviser Krishnamurthy Subramanian wrote in the Survey.

Underlining India’s “dalliance” with socialism in the pre1990s, the Survey shunned the scepticism that got associated with the benefits accruing from a market economy, giving evidence from data.

However, it made a marked difference in its approach: India’s economic policy must move from being “pro-crony”, which might favour specific private interests, especially powerful incumbents, to “pro-business”, which converted the competitive spirits of markets into growth.

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

It also compared the road sector and railways and underlined the fast growth in the former, compared to the latter, where the passenger footfall had been languishing at a level for a long time.

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

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

The Survey said a 10 per cent increase in new firms in a district added 1.8 percentage points to its economy. But it specified, using data, that the government should focus on manufacturing.

“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 said.

Critically, the very same sector is bearing the brunt of the current economic slump. Value added in manufacturing has contracted in the first half of FY20, with 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 underlined the performance of the BSE S ensex, its “exponential rise” post-liberalisation.