A $5 Trillion Economy Is Fine. But We Have To Fix The Economy’s Plumbing First

Suddenly, all the focus seems to be on gross domestic product (GDP). While the Prime Minister has talked about aiming for a $5 trillion economy by 2024, economists are arguing about more mundane things like whether our GDP is being correctly or incorrectly estimated.

While stretch targets to achieve a $5 trillion economy are good to have, and it is always a good thing to improve our methodologies for estimating GDP, the time is nigh to get out of our GDP obsession. Reason: higher GDP is the result of doing the right things to improve the quality of economic activity in the country, not the end-goal. If we get the right things done, the GDP will automatically rise. Even if it does not, the right things will deliver the right results at the level where it matters.

Former chief economic adviser Arvind Subramanian got a whole lot of sarkari economists worked up by suggesting that many important sectors of the economy were performing badly even though GDP was up there at around 7 per cent. He used this divergence to suggest that actual GDP growth may have been 2.5 per cent lower between 2011-17 than the official figures.

However, the real merit of Subramanian’s research paper is not in its conclusions about GDP, but its pointers to where the plumbing needs to be fixed. If we improve the playing field in each sector better and reduce regulatory frictions, the economy will take care of itself.

An additional reason why we should not obsess too much over GDP is the tenuous link between growth and jobs. Some 20 years ago, the employment elasticity of the economy was around 0.4 – that is, 10 per cent GDP growth would give us a 4 per cent lift in jobs created; 7.5 per cent would give us 3 per cent growth in jobs. The 12th plan document talked of a drop in the elasticity to less than 0.2, and a publication by Azim Premji University (State of Working India 2018) put the figure even lower at 0.1. If this is true, it means even 10 per cent GDP growth will yield only a 1 per cent rise in employment.

Applying a basic idea in correlation, 0.1 represents very weak linkage between growth and employment. Growth and jobs can even be seen as random variables in the system.

This is not to rubbish the need for GDP growth or for improving the methods used to estimate it, but to emphasise that GDP targets cannot be an end in themselves. GDP is important, for it tells us how much value the economy is creating, but it tells us nothing about how much of this growth is trickling down to improve the lot of our people.

To put it plainly, what matters is not how fast we achieve $5 trillion status, but how well we fix the plumbing to make economic activity smoother, where we level down the speed-breakers that are slowing us down.

One is the labour and land markets, which need to be freed from an excess of regulation. We can do it incrementally or we can do it in big bang doses. But we have to do it nevertheless so that both markets are flexible and responsive to supply and demand. The labour markets need to be freed to allow for more labour-intensive manufacturing and services, and the land markets need to be freed to allow for faster urbanisation at lower cost.

Two, we need to free agriculture from the burden of too many official interventions and restrictions on market access. This means removing the middleman, who eats most of the value in the food chain, impacting both producers and consumers negatively, and precipitating the need for official intervention on pricing. Both minimum support prices (MSPs) and food subsidies need to be slowly whittled down, and state requirements forcing farmers to sell their produce at agricultural produce market committee (APMC) mandis gradually eliminated. Export markets must be opened up, and consumers can be marginally subsidised through cash transfers to adjust to market-based pricing of essentials.

Three, regulations in general must be whittled down in all spheres, and state supervision made transparent.

Four, both the goods and services tax (GST) and the insolvency and bankruptcy code (IBC) must be made simpler and sharper. The GST must be easier to comply with, and IBC must change rules to ensure that the various bankruptcy courts do not end up taking years to bring failed companies towards resolution. It cannot make sense for an Essar Steel to drag on for two years, defeating the very purpose of having such a code.

Five, the state needs to expand in areas involving public goods – which means law and order, justice systems, enforcement of contracts, et al. It can also expand in education and health services, but more by providing the resources to private agents than by setting up institutions on its own. Privatising the management of state health and educational institutions – but without parting with the assets – will improve the quality of services provided in these crucial areas.

Sixth, the railways must be corporatised, and then partially privatised, once a political consensus evolves. The same must apply to banks and telecom companies, and the public sector in general. The Prime Minister once said that the business of government is not business, but he has done little to live up to this claim. Time to change his innate disinclination towards privatisation.

A $5 trillion economy is good to have, but it is the journey and content of the $5 trillion that will make a difference to people’s lives, not the topline alone. It is the plumbing that will matter as much as the vision.