Chapter 02 – The Economic Vision for Precocious, Cleavaged India – Highlights of Economic Survey 2016-17

The Chapter 02 of Economic Survey 2016-17 briefly discusses the growth performance of the nation over decades, focuses up on serious challenges that impede further rapid progress and concludes by providing a possible explanation to these challenges.

Important points to remember in chapter 2 of economic survey 2016-17 for Civil Services Examination

Economic Survey 2016-17 categorises India’s growth performance into two phases:

1. Nearly half a century of socialism, where the guiding principles were economic nationalism and protectionism.
2. After 1991: when India’s transformation into an “open economy”.

The repudiation of socialism into the latter has been justified as something resembling the “Washington Consensus” – A STANDARD DEVELOPMENT MODEL, which in simple terms mean: open trade, open capital, and reliance on the private sector. This is particularly evident with the type of reforms introduced since then and till date including the efforts to ease doing business, create investment friendly environment and passing of following Bills such as Aadhaar Bill, The Bankruptcy Code, and the GST constitutional amendment.

The result of all these reforms over the past 25 years:

“A remarkable transformation of India from a largely closed and listless economy to the open and thriving economy.”

How is this progress measured?

The author uses the following standard measures to quantify the development of Indian economy over the past quarter century.

• Openness of Indian economy to trade
• Openness to foreign capital
• Extent to which public sector enterprises dominate commercial activities;
• The share of government expenditure in overall spending.

The openness of Indian economy to trade:

India is equally competent in world trade as is the case with domestic trade.

Openness to foreign capital:

• India’s foreign capital flows as a share of GDP reveals that despite significant capital controls, India’s net inflows are, in fact, quite normal compared with other emerging economies.
• India’s FDI has risen sharply over time. In fact, in the most recent year, FDI is running at an annual rate of $75 billion, which is not far short of the amounts that China was receiving at the height of its growth boom in the mid-2000s.

The extent to which public sector enterprises dominate commercial activities:

• Compared to other countries, India’s public sector undertakings (PSU) are exceptionally large. That may have been true in the past.
• India has allowed the private sector entry into, amongst others, civil aviation, telecommunications, and financial services. These have all served to reduce the share of the public sector even if there has not been many exits of the PSU enterprises themselves. India is now squarely in the middle of the emerging market pack.

The share of Government expenditure in overall spending:

On the basis of per capita GDP, India is understood to spend as much as can be expected given its level of development.

These standard measures suggest that India is now a “normal” emerging market, following the “STANDARD DEVELOPMENT MODEL”.

However, this progress is faced with new challenges as mentioned below :

• Ambivalence about property rights and the private sector
• Deficiencies in state capacity, especially in delivering essential services.
• Inefficient redistribution.

Ambivalence about private sector and property rights.

“The ambivalence in India seems greater than elsewhere”, especially with regard to the private sector -whose objective is – maximising profits. The symptoms of this ambivalence toward the private sector manifest in multiple ways:

• Difficulty of privatizing public enterprises, even for firms where economists have made strong arguments that they belong in the private sector. Eg: Civil Aviation sector, disinvesting the government’s majority stake in the public sector banks,fertilizer sector.
• Initially, the right to property was inscribed as a “fundamental right” in the Constitution. But during the socialist era, the 44th Amendment removed Articles 19 (1) (f) and Article 31 and replaced them with Article 300-A, thereby downgrading property to that of a “legal right”.

Deficiencies in state capacity, especially in delivering essential services.

• The weakness of state capacity, especially in delivering essential services such as health and education.
• At the level of the states, competitive populism (with few goods and services deemed unworthy of being handed out free) is more in evidence than competitive service delivery.

The above weakness in State’s capacity has heavily hindered the decision-making process of the government.

Inefficient redistribution.

• Redistribution by the government is far from efficient in targeting the poor.
• The welfare spending suffers from considerable misallocation.

What explains these three distinctive challenges of the Indian development model?

According to the Economic Survey, India has followed a unique pathway to economic success, what might be called “Precocious, Cleavaged India”. This means, and includes:

• India attempted economic development while also granting universal franchise from the very beginning. This is unlike other advanced economies like US and UK, were the political rights were restricted initially and after attain a certain level of economic development, the voting rights were granted to all.
• India, at independence, was  one of the poorest nations, regardless of political system, with a per capita GDP of just $617 measured in purchasing power parity prices.
• India was also a highly cleavaged society regarding language and scripts, religion, region, caste, gender, and class.

Implication of India’s precocious, cleavaged democracy

Weak State capacity and early redistribution in the development process.

Insufficient investment in human capital. – for instance, public spending on health was an un unusually low 0.22 per cent of the GDP in 1950-51 World average is 5.99% today, whereas India stands at ~1.3%, which is abysmally low.

Inefficient Redistribution, using blunt and leaky instruments.

Concluding remarks

To conclude, it is erstwhile to say that all of these features, explanations, and implications are lessons for inefficient redistribution, and the legitimacy of the private sector and the state that may prove crucial as India moves along on the next stage of its economic journey. Further reforms are not just a matter of overcoming vested interests that obstruct them. Broader societal shifts in underlying ideas and vision will be critical.

Also Read : Top 10 Key Highlights of Economic Survey 2016-17 for UPSC Aspirants

Also Read: Chapter wise highlights of Economic Survey 2016-17

Chapter 01 – Economic Outlook and Policy Challenges

Chapter 02 – The Economic Vision for Precocious, Cleavaged India

Chapter 03 – Demonetization: To Deify or Demonize?

Chapter 04 – The Festering Twin Balance Sheet Problem

Chapter-05 – Fiscal Framework: The World is Changing, Should India Change Too?

Chapter 06 – Fiscal Rules: Lessons from the States

Chapter 07 – Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Chapter 08 – Review of Economic Developments

Chapter 09 – Universal Basic Income

Chapter 10 – Income, Health, and Fertility: Convergence Puzzles

Chapter 11 – One Economic India

Chapter 12 – India on the Move and Churning

Chapter 13 – The ‘Other Indias’ – Highlights of Economic Survey 2016-17

Chapter 14 – From Competitive Federalism to Competitive Sub-Federalism