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From a cautious growth projection, to the need for stability amid global headwinds and geopolitical risk, to an onus on the private sector to boost employment, the Economic Survey 2024 presented in Parliament on Monday by Union finance minister Nirmala Sitharaman had several key points.
Before the survey was presented, Prime Minister Narendra Modi underlined that “we are working to gradually realise the guarantees I have given” and the budget “will set the direction of our journey for the next five years and will set a strong foundation for Viksit Bharat”.
After Sitharaman’s remarks, Chief Economic Adviser Anantha Nageswaran, at a press conference, said that “we need the Union and state governments to act together”.
In 2022, the central theme was agile approach, which reiterated the economic response to the pandemic shock. In 2023, it was ‘recovery complete’, looking at the pre-pandemic growth path, and this year, the focus is on stability. It recalled global hurdles to India’s growth vision, such as challenges to the idea of economic globalisation, climate change, as well as the “rise of what is called the ‘Far Right’ by mainstream media in advanced nations”. “The literature analysing long political, social, and civilisational cycles has warned us of a fairly to severely turbulent three decades until the middle of the century.”
The economic survey is presented a day before the union budget and gives an overview of the state of the economy and insights into the actual budget that will be presented the next day. It is prepared by the economic division of the Department of Economic Affairs in the ministry of finance and overseen by the chief economic adviser.
A look at some of the takeaways this year.
Growth below RBI forecast
The survey sees India's real GDP growth at 6.5 to 7 percent in the new financial year, below the Reserve Bank of India’s estimate of 7.2 percent.
“The survey conservatively projects a real GDP growth of 6.5 to 7 percent, with risks evenly balanced, cognizant of the fact that the market expectations are on the higher side,” it said.
The forecast aligns with the International Monetary Fund’s estimate of 7 percent.
Chief Economic Adviser V Anantha Nageswaran underlined that the Indian economy is on a strong wicket but fears of cheaper import from countries with excess capacity could limit formation of private capital after good growth in the past three years. The survey said inflationary pressures had moderated in most economies but cautioned that these could be revived with any escalation of geopolitical conflicts.
Food and the need to revise the inflation framework
The report talks about the need to re-examine India’s headline inflation targeting framework.
The consumer price index currently measures inflation by tracking the change in prices of goods and services consumed by the retail population – prices of 299 items are tracked across categories such as food and beverages, clothing and footwear, housing, education, household goods, health, etc. The data is published each month by the Central Statistics Office.
The survey notes that “higher food prices are, more often, not demand-induced but supply-induced”. It suggests that rising food prices threaten the country’s inflation targets and forces the RBI to request government intervention. “That prevents farmers from benefiting from the rise in terms of trade in their favour.”
“Food constitutes a very high portion of the consumer price index in developing countries. That is par for the course. Hence, when central banks in developing countries target headline inflation, they effectively target food prices. So, when food prices rise, inflation targets come under threat. Therefore, the central bank appeals to the government to bring down the increase in the prices of food products. That prevents farmers from benefiting from the rise in terms of trade in their favour. India’s inflation targeting framework should consider targeting inflation, excluding food.”
“Higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth. Deploying them to deal with inflation caused by supply constraints may be counterproductive. Therefore, it is worth exploring whether India’s inflation targeting framework should target the inflation rate excluding food.”
Private sector bottomline
In more than one respect, the action lies with the private sector, the survey said. “In terms of financial performance, the corporate sector has never had it so good. Results of a sample of over 33,000 companies show that, in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled. Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24.”
The Union government cut taxes in September 2019 to facilitate capital formation. Has the corporate sector responded, it asked.
“It is in the enlightened self-interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously. Of course, it must find people with the right attitude and skills.”
It said that in a recent article, the Economist cites independent research that predicted a slow demise of India’s services exports over the next decade. While the boom in telecommunications and the rise of the internet facilitated business process outsourcing, the next wave of technological evolution might bring the curtains down on it.
“In this milieu, the corporate sector has a responsibility, as much to itself as it is to society, to think harder about ways AI will augment labour rather than displace workers.”
Skill gap challenge
The survey points to estimates to show that about one in two of India’s young population isn’t readily employable.
“Sixty-five per cent of India’s fast-growing population is under 35, and many lack the skills needed by a modern economy…it must be noted that the percentage has improved from around 34 per cent to 51.3 percent in the last decade.”
The Ministry of Skill Development and Entrepreneurship highlights that “as per NSSO, 2011-12 (68th round) report on Status of Education and Vocational Training in India, among persons of age 15-59 years, about 2.2 percent reported to have received formal vocational training and 8.6 per cent reported to have received non-formal vocational training”.
The China conundrum
The survey noted that India needs to plug itself into China’s supply chain to boost Indian manufacturing and plug India into the global supply chain.
At the same time, it noted that the large bilateral trade deficit with China makes India vulnerable to potential abrupt supply disruptions.
“The dynamics of India-China economic relations continue to be extremely complex and intertwined. The Chinese domination over the global supply chains across product categories is a key global concern, especially in the wake of supply disruption accompanying the war in Ukraine. Even though India is the fastest-growing G20 country and is now recording growth rates that outpace China’s, India’s economy is still a fraction of China's. In the context of energy transition, China's near-monopoly over the production and processing of critical and rare earth minerals has already been a cause of global concern.”
“Replacing some well-chosen imports with investments from China raises the prospect of creating domestic know-how down the road. It may have other risks, but as with many other matters, we don’t live in a first-best world. We have to choose between second and third-best choices. In sum, to boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China's supply chain. Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make.”
The survey also underlined two choices.
“India faces two choices to benefit from China plus one strategy: it can integrate into China's supply chain or promote FDI from China. Among these choices, focusing on FDI from China seems more promising for boosting India's exports to the US, similar to how East Asian economies did in the past. Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade. This is because China is India's top import partner, and the trade deficit with China has been growing. As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.”
Industrial growth
As per the report, the economic growth of 8.2 percent in FY24 was fueled by an industrial growth of 9.5 percent. The manufacturing and construction sector nearly doubled, while other sectors also reported growth.
The manufacturing sector has achieved an average annual growth rate of 5.2 percent in the last decade, driven primarily by sectors such as chemicals, wood products and furniture, transport equipment, pharmaceuticals, machinery, and equipment.
It said Indian steel exports have achieved their best-ever numbers in FY24. Coal dependence has reduced, with India producing 997.2 million tonnes of coal, importing 261 million tonnes, and consuming 1233.86 million tonnes in the financial year.
The electronics industry also performed well, with domestic production of electronic items increasing to Rs 8.22 lakh crore, and exports increasing to Rs 1.9 lakh crore.
On research and development, it said the number of granted patents increased 17-fold from 5,978 in 2014-15 to 1,03,057 in 2023-24.
Agriculture growth
The survey pointed out that a panoply of policies – by national and sub-national governments – working at cross purposes with each other is hurting farmers’ interests, destroying soil fertility, depleting groundwater, polluting rivers and the environment with nitrous oxide emissions, starving the crops of nutrients and undermining people’s health with a diet rich in sugar and carbohydrates rather than fibre and protein. The payoff will be immense if we untie the knots that bedevil farm sector policies.
A return to roots, as it were, in terms of farming practices and policy-making, can generate higher value addition from agriculture, boost farmers’ income, create opportunities for food processing and exports and make the farm sector both fashionable and productive for India’s urban youth. When resolved, the problem areas mentioned above that the current policy configuration has created over the years can become sources of India’s strength and a model for the rest of the world - developing and developed.
MSMEs: The Mittelstand
The survey pointed to the need for deregulation for expansion of the MSME sector, with the revival or creation of institutional mechanisms for dialogue with states on required policy changes as essential.
It also underlined the need for better infrastructure, connectivity, training, research and export strategy for the growth of the sector.
“Much of the action has to happen at the level of sub-national (state and local) governments. Physical and digital connectivity (industrial and freight corridors), infrastructure upgrade and development, the introduction of bullet trains, and the manufacture of semiconductor chips will contribute to the growth of the sector through the supply-chain network and the growth of ancillary industries that they catalyse, apart from the inspirational effects that projects such as building semiconductor fab and introducing a bullet train will have when they are operational.”
“MSME entrepreneurs also need training in critical areas of enterprise management, such as human resource management, financial management, and technology. These interventions have to be targeted, tailored to the circumstances of each sector, and practical rather than academic. The productivity of owner-entrepreneurs unleashed by such training will be immense. Export strategy is also a crucial component of elevating the manufacturing share of GDP and growing the country’s Mittelstand.”
Speculative trading and ‘orderly evolution’ of the market
The survey also critised speculative trading, saying it had “no place in a developing country” such as India. It warned investors that any potential fall in stock markets could make them feel cheated and deter them from returning to capital markets for a long time.
“Globally, derivatives trading loses money for investors, for the most part. Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading.”
“India needs to have an orderly and gradual evolution of the financial market. All stakeholders must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest. It is an act of self-interest too.”
Green challenges
The survey pointed to the crisis posed by climate change and global warming.
“Developed countries are pushing for a reduction in the emission of greenhouse gases into the atmosphere. With their policies having questionable effectiveness in achieving emission reduction in their own countries, they are ramping up pressure on developing nations.”
It said there are huge uncertainties as to the efficacy of drastic measures to combat climate change and their economic impact over the next half to a full decade. Slower growth, stagnation, or outright contraction might trigger social unrest and exodus of people to the West, it said.
On India’s green transition, it said India has committed to reducing its greenhouse gas (GHG) emissions by 33-35 per cent (from 2005 levels), increasing the share of non-fossil fuel-based electricity to 40 per cent and enhancing forest cover to absorb 2.5 to 3 billion tonnes of carbon dioxide by 2030.
“However, the path of green transition in India needs to (a) ensure the consistency of the E-Mobility policy with the required and optimal energy mix between traditional and renewable source; (b) ensure grid stability for E-Mobility to become pervasive; (c) develop or acquire storage technology at affordable costs for the share of renewable energy in power generation to rise; (d) reckon with the opportunity cost of land and capital being used for renewable energy given that India’s needs for land and capital far exceed their availability; (e) decide on the role and the share of nuclear energy in the energy mix; (f) recognise and deal with challenges posed by dependence on China for critical minerals, which are crucial raw materials needed for E-Mobility and renewable energy generation; (g) examine the implications of phasing down coal for bank balance sheets; (h) recognise and estimate the impact of phasing out of coal-fired thermal plants on the freight revenues of the Indian Railways and (i) study implications of replacing internal combustion engine vehicles with e-vehicles particularly on the sale of petrol and diesel and the tax revenues that such sale generates for the Union and State governments.”
“Last but not least, India not only has to deal with climate change and undertake energy transition but also deal with the protectionism of the developed countries.”
It pointed to several factors that have severely hampered the flow of finance for green transition projects. “Raising financial resources for climate change adaptation and mitigation actions of this scale is an unprecedented challenge, especially given that India’s climate action has been largely financed through domestic resources and the flow of international finance has been very limited.”
It said that despite securing a good rating on its green bond framework, Indian sovereign green bonds have hardly received any ‘greenium’ from private investors.
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