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Economic Survey 2019: Need over 35% investment rate for 8% GDP growth, says Sanjeev Sanyal

Updated : July 04, 2019 07:30 PM IST

Ahead of the July 5 Union Budget, finance minister Nirmala Sitharaman tabled the Economic Survey 2018-19 in Parliament on Thursday.

Sanjeev Sanyal, principal economic adviser in the ministry of finance, shares his views on the Economic Survey with CNBC-TV18.

Sanyal said: "This is a blueprint for a longer term growth. If you look at international experience, sustaining high growth rate in the 8 percent range has only happened when investment rates in the country have been high. So if you take the East Asian experience, the data is very clear — you need an investment rate in excess of 35 percent of the GDP [gross domestic product] if you want to sustain 8 percent type growth rates.

"However, the main point that we are making right upfront is that it is too difficult and complicated to try and solve every little problem in a silo and hope that growth happens. In every single episode of high growth, the high investment rate basically cuts through the morass and drives growth.

"So it is investment that drives demand. It is investment that creates new opportunities and brings in new innovation, it creates jobs. So it is a virtuous cycle that drives it. So that is basically the case we have made. Of course there are a whole host of things that need to be done to get this investment cycle going but rather than focus on a disparate bunch of things, we have tried to focus everybody down to what is it that we need to do to get a higher investments rate."

He added: "The point we are trying to make here is that a growth model where we want to sustain 8 percent type growth rates and there are lots of cases in East Asia and even in Western Europe during the post-war rebuilding they also had a high investment model. So what is it that is needed to get that going and there are constraints to that model as well.

"However, the key points are the following: first, it requires that the cost of capital is structurally lowered, so cheap capital is a very important ingredient in having an high investment growth rate.

"However, the second point is, that this investment almost always comes from domestic savings. Now conventional economic text books will tell you that domestic savings is driven by interest rates and so if you cut interest rates you get more investments but you get much less savings because people save less as interest rates fall and therefore this dynamic slows down.

"So we found evidence quite to the contrary that savings is in fact driven by demographics, it is driven by growth itself and not by interest rates. In fact, it is quite insensitive to interest rates. Now that gives you a very key degree of freedom which means that if you can lower the cost of capital, it gets investment growing, that generates growth and that in fact leads to more savings.

"So that allows you to create virtuous cycles. What we are arguing is that try to trigger these virtuous cycles rather than try to create some sort of a optimal equilibrium which we are pointing out is not what anybody has ever managed to do."
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