Introduction

A target of becoming a USD 5 trillion economy by 2024-25 is set. To achieve that India needs to sustain a real GDP growth rate of 8%. For this, Survey departs from traditional Anglo-Saxon thinking by advocating a growth model for India that views the economy as being either in a virtuous or a vicious cycle, and thus never in equilibrium. Growth model stems from two key departures from the traditional view;

• 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.

Next five years: a blueprint for growth and jobs           

• To understand how to generate and sustain 8% growth, there is need to examine the drivers of economic growth followed by countries across the globe.
• International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by, Virtuous cycle of savings & Investment (Especially Private Investment)
• It is the ‘key driver” that drives demand, creates capacity, increases labour productivity, introduces new technology.
• It allows creative destruction and generates jobs.
• It should be supported by a favorable demographic phase
• exports catalysed and supported by a favorable demographic phase.
• Survey postulates the centrality of the triggering macro-economic variable that catalyses the economy into a virtuous cycle.

• Investment as the key driver
• Emphasize on legal reform
• Presenting data as a public good
• Encouraging behaviour change
• Ensuring policy consistency

In addition, Survey also focuses upon policies that nourish MSMEs to create more jobs and become more productive, reduce the cost of capital, and rationalize the risk-return trade-off for investments.

Importance of saving

• ‘Feldstein-Horioka puzzle’ states that a high investment effort must be backed by domestic savings.
• Research has also shown that savings and growth are not only positively correlated but their positive correlation is even stronger than that between growth and investment.
• 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

• Chinese investment model has shown that general apprehension that high investment rate will substitute labour is not correct.
• What matters most is whether or not investment enhances productivity and thereby international competitiveness.
• Capital investment fosters job creation as capital goods production, research and development, and supply chains also generate jobs. Therefore, job creation can indeed be fostered by encouraging investment.

• Exports can be the final demand for the large capacities created by high investment.
• East Asian Economies show that strong correlation between growth in exports and GDP growth.
• As the capital investment enhances total factor productivity, which in turn enhances export performance. Therefore, investment becomes crucial to enhancing export performance.
• There is a need to study and examine the recommendations of the High-Level Advisory Group, chaired by Dr Surjit Bhalla, on exports.

An economy that is in a constant state of dis-equilibrium needs a new approach to navigate. The earlier attempt to create five-year plans, largely using the equilibrium framework, failed because it was too prescriptive for an inherently unpredictable world. Therefore, navigating this uncertain world of dis-equilibrium requires three elements : (i) a clear vision; (ii) a general strategy to achieve the vision; and (iii) the flexibility and willingness to continuously recalibrate tactics in response to unanticipated situations. In postulating the above growth model, the Survey departs from traditional Anglo-Saxon thinking by viewing the economy as being either in a virtuous or a vicious cycle, and thus never in equilibrium.

• By presenting data as a public good, emphasizing legal reform, ensuring policy consistency, and encouraging behaviour change using principles of behavioural economics, the Survey aims to enable a self-sustaining virtuous cycle.
• Key ingredients include a focus on policies that nourish MSMEs to create more jobs and become more productive, reduce the cost of capital, and rationalise the risk-return trade-off for investments.

• India has already entered the ‘Demographic-Dividend phase’ and will remain there for two more decades.
• A rise in the share of the working-age population increases income per capita, decline innumber of youth dependents.
• It also increases saving and consequently investment, life expectancy, behavioural changes etc.
• Savings is driven primarily by demographics and income growth. Therefore, keeping domestic interest rates high may not encourage savings behaviour.

Role of job creation and earnings

• ‘Dwarf Firms’ dominates the Indian economy and holds back job creation and productivity.
• Different statistics show that firms that are able to grow over time to become large are the biggest contributors to employment and productivity in the economy.
• Globally companies/firms employs more than at least double as many workers when it is 40 years. However, in India, an average firm in India only employs 40% more workers when it is forty years of age.
• So, the survey suggests that focusing incentives on infant firms, i.e. firms less than ten years of age with the appropriate grandfathering of the existing pattern of incentives to MSMEs.
• Labour law changes are crucial also because they can enhance investment.

• These are small firms that never grow beyond their small size.
• Firms employing less than 100 workers are categorized as small and firms employing 100 or more workers as relatively.
• Firms that are both small and older than ten years are categorized as dwarfs as these firms have continued to be stunted in their growth despite surviving for more than 10 years. [Grandfathering- Exempt someone or something from a new law or regulation.]

• Investment-led growth model implies a rapid expansion in the financial system by a factor of magnitude – both banks and capital market.
• Such a rapid expansion could be disrupted by a major financial crisis.
• In this context, recent efforts to clean up the banks and establish a bankruptcy process should be seen as valuable investment which will reap benefits soon.
• Strong financial sector can significantly lower the cost of capital.

• Systematically lowering the risks faced by investors in India is critical for the success of the investment-driven model for economic growth.
• It is because investors prefers less riskier projects.
• Risk pertains to the possibilities of upside, when a project performs well, and downside, when the project fails.
• Generally the after-tax return for successful projects crucially affects the risk return trade-off and thereby becomes critical to foster investment.
• Optimal tax policy plays a crucial role in this matter. So, tax policy and its implementation for start-ups must be rationalised to foster innovative investments in the Indian economy.
• Design of optimal tax policy also aims to raise revenue efficiently and fairly, while encouraging the Bonafide taxpayers and punishing the malafide ones.

As Indian ranks third in the world in the startup ecosystem and Startups face significantly greater uncertainty than traditional ‘brick-and-mortar’ firms, startup firms