As the Economic Survey 2019 lays out the path towards being a $5 trillion economy by 2025, it suggests a radical drop in the cost of capital to boost investment, which it sees as a key driver for the growth.
Chief Economic Advisor Krishnamurthy Subramanian's first Survey talks about India's real GDP growth to be a sustained 8 per cent during the next five years to achieve the target of $5 trillion GDP by 2025.
It further says that growth can only be sustained by a virtuous cycle of savings, investment and exports catalysed and supported by a favourable demographic phase. Investment, especially private investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.FULL COVERAGE: Union Budget 2019
The chief economic advisor, who seems to have drawn a lot of inspiration from China's and South East Asian Countries' economic growth, says that every economy that has grown has done it by focussing on investments. "Evidence from these countries shows that when they get into an investment-driven growth, they were also developing economies and yet they managed to do that," he says.
Principal Economic Advisor Sanjeev Sanyal elaborated: "Key driving factor in the growth of these economies was that they didn't try to solve all the silos. Instead, they used very high investments to cut through the morass. Investment brought demand, technology created disruption. So, this one driver cut through everything."
The Economic Survey is suggesting that investments should be 35 per cent of GDP (from the current 29 per cent). It also emphasises that any investment - labour intensive or capital intensive - is welcome as long as it enhances productivity.
The survey also emphasises on the fact that the economy has to shift focus from domestic consumption-driven growth to export-driven growth, as was the case with China and South East Asian countries.
On asking the source of investment at a time when the private sector investment remains subdued and the government is constrained by fiscal considerations, the CEA says that the key to enhancing investment lies in bringing down the cost of capital.
"One key opportunity that we have is that cost of capital internationally is low. Liquidity is very high, as a result, there is opportunity for funds as well as for the sovereign to raise money abroad," says Subramanian.
Sanjeev Sanyal further says that savings is the key driver for investment. He contradicted the traditional economic belief that savings are influenced by real interest rates. "Savings rates do not depend on interest rates but on demographics and growth."
Sanyal is of the view that the government is in a position to reduce radically the structure of cost of capital without affecting savings rates.
"You lower the cost of capital and savings rate continues to grow because of demographic and growth. China, for example, has a savings rate of 50 per cent despite real interest rates being too low," says Sanyal.