With the micro-economic and macroeconomic foundations laid over the last five years, the Indian economy is ready to shift gears so that economic growth, jobs and exports can be pushed up to the next level. For this purpose, the Survey presents a blueprint.

Emphasizing Growth

The overwhelming evidence across the globe, especially from China and East Asia in recent times, is that high growth rates have only been sustained by a growth model driven by a virtuous cycle of savings, investment and exports catalyzed and supported by a favorable demographic phase.

Two key departures from the traditional Anglo-Saxon view of the economy;

• First, the traditional view, which has come under significant challenge following the Global Financial Crisis, considers the concept of equilibrium as a key tenet. In contrast, by imbibing some of the new learning from the economics literature following the Global Financial Crisis, we view the economy as being in a constant state of disequilibrium as captured by a virtuous or a vicious cycle
• Second, the traditional view often attempts to solve job creation, demand, exports, and economic growth as separate problems. In contrast, as we show below, these macro-economic phenomena exhibit significant complementarities.

Therefore, understanding the “key driver” and enhancing the same enables simultaneous growth in each of the other macro phenomena. This Survey makes the case for investment as the “key driver” that can create a self-sustaining virtuous cycle in India.

This investment can be both government investments in infrastructure, as such investment crowds in private investment (Chakrabarti, Subramanian and Sesha, 2017), and private investment in itself.

China remains an investment-driven economy even today with its investment and savings rates reaching about 45% of GDP even in 2017.

A virtuous cycle of savings, investment, exports and growth with investment as the “central driver”

• Evidence supporting the “virtuous cycle” view :
• the share of GCF, savings and exports in GDP evolved for China as a function of the log of GDP per capita from 1980 to 2017. Crucially, we note that all the three macro-variables increased as the country became richer. Thus, as the economy started doing better, as measured by the rising GDP per capita, China’s savings, investment and exports increased further. Same relationships for saving and investment for four countries in East Asia (Thailand, Indonesia, Malaysia and South Korea), which witnessed high growth before the Asian Financial Crisis.

Importance of savings

• “Feldstein-Horioka puzzle”: A high investment effort must be backed by domestic savings.
• Savings and growth are not only positively correlated but their positive correlation is even stronger than that between growth and investment.
• In fact, Sandri (2014) argues that as investment is risky, entrepreneurs are exposed to the risk of idiosyncratic business failure that leads to the loss of the invested capital. Therefore, savings have to increase more than investment to allow for the accumulation of precautionary savings.

Jobs

A general apprehension is that high investment rate will substitute labour. This thinking has led to much debate about labour-intensive versus capital-intensive modes of production.

• However, the Chinese experience illustrates how a country with the highest investment rates also created the most jobs. What matters most is whether or not investment enhances productivity and thereby international competitiveness.
• The misconception arises from a view buried in the silo of a specific activity. When examined in the full value chain, capital investment fosters job creation as capital goods production, research and development, and supply chains also generate jobs.
• International evidence also suggests that capital and labour are complementary when high investment rate drives growth.
• For instance, Lin (2011) shows that the coming of software and computers, while having replaced some white collar tasks, have also generated new labour centric tasks related to software and application development, computer security, and specialised tasks for loan application analysts and medical equipment technicians.

Therefore, job creation can indeed be fostered by encouraging investment

Exports

With the share of consumption in GDP constrained by the high level of savings, domestic consumption can be, at best, act as a force-multiplier when high income growth feeds consumption. So, where would the final demand for the large capacities created by high investment come from? The answer is exports. This is why an aggressive export strategy must be a part of any investment driven growth model.

• The global market is extremely competitive with the firms that are able to produce at the lowest costs having the ability to gain market share in exports. So, average productivity of firms in the economy becomes crucial to export competitiveness.
• While it is true that world trade is currently facing some disruptions, India’s share in global exports is so low that it should focus on market share. One could even argue that the current disruptions provide an opportunity for India to insert itself into global supply chains.
• The High Level Advisory Group, chaired by Dr Surjit Bhalla, submitted its report in June 2019 on how India can enhance its exports.

Thus, the survey outlined a growth model that views the economy as being in constant disequilibriuma virtuous cycle or a vicious cycle. When the economy is in a virtuous cycle, investment, productivity growth, job creation, demand and exports feed into each other and enable animal spirits in the economy to thrive.