Invest in building trust to achieve $5 trillion target

Prime Minister Narendra Modi has said that making the Indian economy worth $5 trillion is not easy, but achievable. The recent Economic Survey 2019-20 provides the underpinnings of what is needed to achieve this aspirational goal.

Specifically, the survey talks about promoting wealth creation through the invisible hand of markets, and the role that the government could play therein. For example, measures that provide equal opportunities to new entrants, enable fair competition and ease of doing business, eliminate policies that undermine markets, enable trade for job creation, and efficient scale up of the banking sector can be taken. The survey also talks about supporting markets through the hand of trust. The chief economic adviser and his team have done a splendid job in getting into these foundational underpinnings.

Notably, the survey is raising the issue of trust at a time when there has been a rapid erosion of this quality. The survey provides evidence on how some unscrupulous promoters behaved opportunistically to misreport on their financials and to wilfully default on their commitments. Such instances led to a ballooning of non-performing assets in the banking system and its effect percolated down to the non-banking financial companies, leading to rapid erosion of trust. Alongside, a couple of big bang policy decisions such as demonetisation of higher currency notes and the rolling out of the Goods and Services Tax system, too, may have had deleterious effects on the trust factor.

Thus, while it is good to see the survey raising the issue of trust as a public good, it doesn’t take a holistic view of it in strengthening the economy. In talking about trust, the survey focuses mostly on trust between the government or the regulators and markets but neglects the role of trust among other broad economic constituents. A limited view of the role of trust is probably the result of the absence of any framework used in the survey. A simple framework of three constituents — the government, markets and citizens — can help in taking a holistic view.

Trust between markets and the public, on one hand, and between the government and the public, on the other, too, has an important role in achieving higher economic growth. Indeed, the government is rolling out several measures such as increasing deposit insurance by several multiples, bringing all medical devices under a regulatory ambit, making all (non-life) insurance companies to mandatorily offer a standardised health insurance product, making hallmarking of gold items mandatory from January 2021 and so on. These measures will strengthen the people’s trust in markets.

Also, several government measures such as direct benefit transfers, common service centres, the Fit India movement, the Eat Right movement, simplification of the tax system and developing a taxpayers’ charter will increase the people’s trust in the government.

Strengthening trust among all three broad constituents is important in taking India’s economy to the aspired five-trillion level. The survey rightly notes that trust is a public good that gets enhanced with greater use. Yet, it ignores interaction between the other two other constituents from the lens of trust.

In its partial view of trust, the survey rightly highlights the need for various regulators to be adequately resourced, which is so essential for their supervision of the market economy. In this context, the survey notes, “The economy cannot achieve the ambitious $5 trillion mark as long as it is plagued by market malpractices and suboptimal supervision.” Besides the resourcing of regulators well, the survey calls for significant investments in technology and data analytics.

However, this is mostly about central regulators and that too about regulators of the financial market. Regulations in many other spheres such as healthcare and education are a shared responsibility between the Centre and states. A disconnect between the Centre and states can make the markets function sub-optimally and lower peoples’ trust in those markets. To offer an example from the health sector, the Clinical Establishment Act — for the registration and regulation of all clinical establishments — was passed by the Centre in 2010. The law took effect in 2012. Based on Central guidance, states were supposed to pass similar laws, which most states haven’t done. More importantly, of the few states that have adopted this law, not all are implementing it in earnest. The survey does not touch upon the idea of how the Centre and states could be made to work in tandem in areas where they have a joint mandate. The Goods and Services Tax Council is one good example of a Centre-state compact. We need to look for other models of creating a Centre-state compact, especially for non-financial sectors.

Why do we expect the Economic Survey to be a document discussing these issues? Well, starting 2014-15, Economic Surveys have started coming in two volumes (in addition to statistical tables). Volume one has started looking at specific problems through a fresh perspective and providing innovative ideas. This year’s Economic Survey is no exception. The Economic Survey 2019-20 is pivoted on the $5 trillion goal and advocates the idea of wealth creation through two broad sets of policies — one, policies that strengthen the invisible hand of markets and, two, policies that support markets through the hand of trust.

When is trust so central to this year’s Economic Survey, one would expect it to dwell on the topic more holistically, including on the issue of the Centre-states compact, which is so essential to building people’s trust both in the market economy and the government. The next Economic Survey (Economic Survey 2020-21) may consider filling these gaps!