Wealth creation takes centre stage Creative destruction gathers speed after liberalisation

Invisible hand of market, trust can create wealth

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Placing wealth creation as its central theme, the Economic Survey of 201920 lauded the role played by the country’s top entrepreneurs in creating wealth that benefit the masses. The survey says a combination of the invisible hand of the market, supported by trust, creates wealth.

Picking up relevant points from Arthashastra and Thirukkural and reminiscing the centuries-old economic dominance of the country, K. Subramanian, Chief Economic Advisor to the Government of India, batted for more economic freedom.

“We looked at the top 100 entrepreneurs measured using the Forbes list, looked at the wealth they created in the last 10 years, applied necessary filters to ensure the wealth was created in the right way and co-related it with various other aspects of the society and found that the wealth benefitted the employees and their suppliers,” he said. He finds that citizens benefit from the direct taxes and indirect taxes paid by these entrepreneurs.

The survey found that 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

K. Subramanian support markets. The invisible hand needs to be strengthened by promoting pro-business policies to provide equal opportunities for new entrepreneurs, removing anachronic government intervention, supporting job creation by ‘Assembling in India for the world’ and improving Ease of doing business. Scaling the banking sector proportionately to the size of the Indian economy will also help in creation of wealth.

The survey advocated freeing up of the economy and compared the growth of the economy pre- and post-liberalization. Several sectors, including banking and mutual funds, have benefitted after they were opened up for private players.

A third of Sensex firms gets out of index every five years

The Economic Survey said India’s aspiration to become a $5 trillion economy depends critically on promoting “probusiness” policy that unleashes the power of competitive markets to generate wealth and weaning away from “pro-crony” policy that may favour specific private interests, especially powerful incumbents, on the other hand. The economic events since 1991 provide powerful evidence supporting this crucial distinction.

Viewed from the lens of the stock market, which captures the pulse of any economy, creative destruction has increased significantly after reform. Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation. Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.

Despite impressive progress in enabling competitive markets, pro-crony capitalism has destroyed value in the economy. For example, an equity index of connected firms (companies with political dependence and connectivity) significantly ‘outperformed’ the market by 7 per cent a year from 2007 to 2010, reflecting abnormal profits extracted at common citizens’ expense. In contrast, the index ‘underperforms’ the market by 7.5 per cent from 2011 (when the CAG audit report on 2G spectrum allocation named private companies that benefited from the collusion), reflecting the inefficiency and value destruction inherent in such firms.

Giving a political colour to the data, the survey said, “pro-crony policies as reflected in discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same resources post 2014 have put an end to such rent extraction.”