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A Survey of Hope and Realism

The economy paints the picture of an economy on the mend, but one in which the glass is more than half empty

A new government, and not only a new economic survey, but a new kind of economic survey. This year, the government's Economic Survey, which comes out the day before the Union Budget, follows a different pattern than it has till now.

The Economic Survey is, as the name indicates, a survey of the economy as it is today. Apart from an introductory chapter, it doesn't dabble in conceptual issues. In other words, the survey is about what is. It doesn't have much to say about what should be, and why it should be that way. There are numbers that project into the near future, but that's all.

This year, we have a different pattern. The survey is divided into two volumes. Volume 1 is entirely about what should be, being a analytical and conceptual framework, the problems before the economy and what direction should be taken. Volume 2 is the traditional survey, in which each sector of the economy is reviewed. This new pattern is the work of Arvind Subramanian, the new Chief Economic Advisor to the Ministry of Finance that the NDA government chose. The survey is produced by Subramanian's department with inputs from other parts of the government and a number of external experts from different areas.

The headline of the survey is that the macroeconomic situation of the economy has improved remarkably over the recent months. There are huge improvements in inflation, growth, balance of payments and foreign exchange reserves. GDP is up by 7.4 per cent, driven by both industry and services. On inflation, Raghuram Rajan's relentless campaign to control inflation has resulted in wholesale inflation being down to just 3.4 per cent and consumer inflation being down to 6.2 per cent. The current account deficit--which reflects forex flows--has declined from alarming levels of 2013--4.7 per cent of GDP--to less than two per cent.

On each of these yardsticks, projections for next year are big additional improvements over the current levels. The survey says that GDP growth is likely to be above 8 per cent, perhaps as high as 8.5 per cent. Inflation is likely to stay within 5 to 5.5 per cent. Most interestingly, the current account deficit is projected to be in the range of just 1 per cent.

Of course, the fact remains that a good part of this economic performance is the result of low oil prices. This is especially true of the current account deficit and the fiscal deficit, the latter because of the lower subsidy bill. However, fortune favours the brave. Had oil prices been the only positive thing, then none of the other improvements have happened.

Let's now take a look at Volume 1, the conceptual part of the survey. Up front, right at the beginning of the first chapter, the survey tackles an interesting question, which is that of 'Big Bang' reforms. This Big Bang is being talked about a lot nowadays, with many in the media and among other commentators saying that there should be some big eye-catching measure in the budget, something that causes a sensation about what massive reforms are being done.

Arvind Subramanian puts paid to these expectations. He discusses this Big Bang and thinks that instead of an eye-catching Big Bang, " India needs to follow what might be called 'a persistent, encompassing, and creative incrementalism' but with bold steps in a few areas that signal a decisive departure from the past and that are aimed at addressing key problems such as ramping up investment, rationalizing subsidies, creating a competitive, predictable, and clean tax policy environment, and accelerating disinvestment."

Among a sea of immediate positives, the survey points out that fast growth which pulls a large number of people out of poverty can come only with a massive spread of manufacturing. The survey is clear-eyed that little of what is needed for this is in place. From skilled workers to finance to a big reduction in bureaucracy, it'll all take a lot of doing.

We also have a brand acronym, thanks to the survey: JAM. JAM is Jan Dhan Yojana + Aadhar + Mobile phones. The survey foresees a huge push to convert almost all subsidies to Direct Benefits paid in cash to people's bank accounts. The maths is simple. The total cost of all subsidies is about Rs 378,000 lakh crore. It says, "P. Just to give a sense of how large this amount is: ` 394,000 is roughly how much it would cost to raise the expenditure of every household to that of a household at the 35th percentile of the income distribution (which is well above the poverty line of 21.9 percent)".

The problem is misdirection and leakages, and the cure for that is JAM. I'm sure one can add a joke about butter and bread here, but the message of the survey is too important. The economy is on the right path, but the destination is very far away. This will be a long and hard journey.