Economic Survey 2018-19 presents a window for Narendra Modi to live his China dream

Presented a day ahead of the budget by convention, the Economic Survey is a technocratic review of the state of the economy. While the budget is about political economy and carries a strong imprint of the political realities of the day, the Survey is a blueprint free from the constraints of the next election, and hence charts a potential ideal path. The one tabled by Finance Minister Nirmala Sitharaman in Parliament today, suggests a direction that if taken at its tide could deliver Prime Minister Narendra Modi his China dream. From his days as Chief Minister of Gujarat, Modi has shown an inclination for the Chinese model of development partly shaped by his many visits to China scouting for investments and ideas for his Vibrant Gujarat summits. His formulation of the troika of ‘Speed, Scale, and Skill’ as the panacea for all that ails India’s development trajectory reflects those impressions. Setting up a separate ‘Skills-Ministry’ was one of his early decisions in the first term, and schemes like Jan Dhan and Ujjwala have carried the imprimatur of speed and scale in execution.

At the root of the China dream that has lasted four decades and more is an economy drawing in-exhaustively from domestic savings translating into national capital formation, and a society that has backed it with the discipline of a military. The Economic Survey speaks exactly of that as the ‘key-driver’ to kickstart Indian economy and pull it back from the stupor it has been in of late. For the shifting of the gears, the Survey suggests some radical measures on industry and society, the most sweeping of which is in the small-scale sector. The survey calls the bluff of this segment of the economy as the holy cow of manufacturing and calls for phased withdrawal of incentives regime in favour of younger and larger firms. It also asks for unleashing of labour reforms that favour attaining of ‘speed and scale’ by entrepreneurs.

What passes off as small-scale sector accounts for roughly half of industrial firms in India yet provides only 13% of jobs. Against this the much-maligned capital-intensive large-scale sector provides 25% of the jobs in the country, while accounting for only 6% of total firms in numbers. In terms of net value added, the large-scale accounts for 38% against a mere 4.7% of the small-scale. On the jobs front, the survey says that those states in India which show flexibility of labour laws contribute more towards overall employment and capital productivity. The average number of workers per factory, capital per factory and wages per factory are higher in states with flexible labour laws than those with rigid socialist era rules on hiring and firing.

From a conservative economics perspective it is in the fitness of things that the writer of the survey, Chief Economic Advisor KV Subramanian, comes from the Chicago Booth School of Economics. Though this is not the first time that someone has highlighted the built-in failure mechanism in the last relics of Nehruvian socialism. The whole edifice of India’s liberalization journey has been based on deconstructing Nehru’s superstructure. While corruption and lack of capacity impaired productivity in large State enterprises, protections given to the small-scale sector built inefficiencies into the system. The 2018-19 Survey provides a fresh opportunity to revert to the reforms that Modi 2.0 should grab with both hands.

Yet, it is not going to be easy. Illiterate of the Nehruvian trap, the right-wing industry and labour organizations are now equal champions of the old framework. If anything, more than the decimated and irrelevant left, it is the challenge from the Rashtriya Swayamsevak Sangh (RSS) that Prime Minister Narendra Modi would have to contend with. In his stump speeches during the general elections, Modi would call his first term a nuts-and-bolts job aimed at bringing the nation out of the UPA morass. His second term ideally should be about a Modi legacy. If that be the case, he might listen to the only political leader from recent history quoted in the Economic Survey today – China’s reforms architect Deng Xiaoping: Feel the stones and cross the river. Over to the budget speech.