INDIAN ECONOMY IS ON A STRONG WICKET AND STABLE FOOTING, DEMONSTRATING RESILIENCE IN THE FACE OF GEOPOLITICAL CHALLENGES: ECONOMIC SURVEY 2023-24

PREFACE TAKES A STOCK OF THE PAST AND PRESENT AND SUGGESTS VARIOUS MEASURES TO STEER INDIAN ECONOMY STRONGLY TOWARDS THE FUTURE

The tripartite compact that India needs to become a developed nation amidst emerging unprecedented global challenges is for Centre and State Governments to trust and let go, for the private sector to reciprocate the trust with long-term thinking and fair conduct and for the public to take responsibility for their finances and their physical and mental health, this was stated by the Economic Survey 2023-24, tabled by Union Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman in Parliament, today.

The Economic Survey states that the return of the National Democratic Alliance Government led by Prime Minister Shri Narendra Modi with a historic mandate for the third term signals political and policy continuity.

The Survey mentions that after recovery from the COVID-19 Pandemic, the Indian economy is on a strong wicket and stable footing, demonstrating resilience in the face of geopolitical challenges. However, for the recovery to be sustained, there has to be heavy lifting on the domestic front because the environment has become extraordinarily difficult to reach agreements on key global issues such as trade, investment and climate.

STRONG INDIAN ECONOMY

The Survey notes, inter alia, that there are many encouraging signs for the Indian economy:

• High economic growth in FY24 on growth rates of 9.7% and 7% in FY23 and FY23 respectively
• Headline inflation rate is largely under control, although the inflation rate of some specific food items is elevated
• Trade deficit lower in FY24 than in FY23
• Current account deficit for FY24 around 0.7% of GDP, with current account registering surplus in Q4 FY24
• Ample foreign exchange reserves
• Public investment sustains capital formation in the last several years even as the private sector shed its balance sheet blues and began investing in FY22.
• National income data show that non-financial private-sector capital formation, measured in current prices, expanded vigorously in FY22 and FY23 after a decline in FY21.
• Investment in machinery and equipment rebounds strongly after decline in FY20 and FY21
• Early corporate sector data for FY24 suggests capital formation in private sector continues to expand but at a slower rate

INVESTMENT INTEREST OF EXTERNAL INVESTORS

Citing RBI data, the Survey noted that although India’s Balance of Payments shows us that the investment interest of external investors, measured in terms of dollar inflows of new capital, was $45.8 billion in FY24 compared to $47.6 billion in FY23, but the Foreign Direct Investment in India has held up. This slight decline is in line with global trends. The Survey noted that the repatriation of investment was USD29.3 billion in FY23 and USD44.5 billion in FY24.

The Survey states that many private equity investors took advantage of buoyant equity markets in India and exited profitably. It is a sign of a healthy market environment that offers profitable exits to investors, which will bring newer investments in the years to come.

The Survey notes that the current environment for foreign direct investment to grow in the coming years is not highly favourable due to:

• Interest rates in developed countries are much higher than they were during and before Covid years
• Emerging economies have to compete with active industrial policies in developed economies involving considerable subsidies that encourage domestic investment.
• Uncertainties and interpretations related to transfer pricing, taxes, import duties and non-tax policies remain to be addressed.
• Geopolitical uncertainties, which are on the rise, will likely exert a bigger influence on capital flows

INFLUENCE OF SHOCKS ON EMPLOYMENT

On employment generation, citing the Periodic Labour Force Survey, the Survey mentions that a surge in agriculture employment is partly explained by reverse migration and the entry of women into the labour force in rural India.

And citing Annual Survey of Industries, the Survey notes that the total number of factory jobs grew annually by 3.6% between 2013-14 and 2021-22, and they grew faster at 4.0% in factories employing more than a hundred workers than in smaller factories (those with less than a hundred workers). In absolute numbers, the Survey states that the employment in Indian factories has grown from 1.04 crore to 1.36 crore in this period.

Citing the Annual Survey of Unincorporated Enterprises for 2022-23 in comparison with the results of the NSS 73rd round of the ‘Key Indicators of Unincorporated Non-Agricultural Enterprises (Excluding Construction) in India’, the Survey observes that it shows an overall employment in these enterprises fell from 11.1 crore in 2015-16 to 10.96 crore. There was a reduction of 54 lakh workers in manufacturing but the expansion of the workforce in trade and services gained in jobs limited the overall reduction in the number of workers in unincorporated enterprises to around 16.45 lakhs between these two periods. This comparison masks a big jump in manufacturing jobs that seems to have occurred between 2021-22 (April 2021 to March 2022) and 2022-23 (October 2022 to September 2023), it argued.

Taking stock of the two big economic shocks in quick succession – the Non Performing Assets (NPA) in banking combined with high corporate indebtedness, and the COVID-19 Pandemic, the Survey observes that the global backdrop for India’s march towards Viksit Bharat in 2047 could not be more different from what it was during the rise of China between 1980 and 2015.

The Survey notes that in the modern world, de-globalisation, geopolitics, climate change and global warming, and advent of Artificial Intelligence (AI) casts a huge pall of uncertainty for India as to its impact on workers across all skill levels – low, semi and high. These will create barriers and hurdles to sustained high growth rates for India in the coming years and decades. The Survey states that overcoming these challenges requires a grand alliance of union and state governments and the private sector.

EMPLOYMENT GENERATION: REAL BOTTOM LINE FOR PRIVATE SECTOR

The Survey espoused a tripartite compact between private sector, Centre and State Governments to deliver on the higher and rising aspirations of Indians and complete the journey to Viksit Bharat by 2047 as job creation happens mainly in the private sector, and many (not all) of the issues that influence economic growth, job creation and productivity and the actions to be taken therein are in the domain of state governments.

Citing the results of a sample of over 33,000 companies, the Survey states that in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled and therefore, in terms of financial performance, the action lies with the private sector.

The Survey argues that it is in the enlightened self interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously and find people with the right attitude and skills.

COMPACT BETWEEN PRIVATE SECTOR, GOVERNMENT AND ACADMIA

The Survey also explores the idea of another tripartite compact - between the Government, the private sector and academia. This compact is to reboot the mission to skill and equip Indians to catch up with and get ahead of technological evolution. To succeed in the mission, governments must unshackle the industry and academic institutions to play their respective roles in that mammoth task.

THE REAL CORPORATE SOCIAL RESPONSIBILITY

The Survey also espoused a greater role for the corporate sector by nurturing and sustaining a culture of investing for the long term. Second, just as corporate profits are booming, the net interest margin of Indian banks has risen to a multi-year high. It is a good thing. Profitable banks lend more.

To sustain the good times, the Survey noted that it is important not to forget the lessons of the last financial cycle downturn. The banking industry must aim to lengthen the gap between two NPA cycles. The Survey further notes that corporates benefit from the higher demand generated by employment and income growth. The financial sector benefits from channelling household savings for investment purposes. The Survey states that these linkages must grow stronger and last longer to meet the infrastructure and energy transition investments in the coming decades.

The Survey also talks about India’s working-age population to be gainfully employed, for which they need skills and good health. The Survey stated that social media, screen time, sedentary habits, and unhealthy food are a lethal mix that can undermine public health and productivity and diminish India’s economic potential.

The Survey argues for India’s traditional lifestyle, food and recipes that have shown how to live healthily and in harmony with nature and the environment for centuries. It makes commercial sense for Indian businesses to learn about and embrace them, for they have a global market waiting to be led rather than tapped.

The Survey also argues that policymakers – elected or appointed – have to rise to the challenge as well. There has to be conversation, cooperation, collaboration, and coordination across ministries, States, and between the Union and States. Noting that this challenge is easier said than done and that it has not been done before on this scale, not in the time frame and not amidst a turbulent global environment, the Survey called for forging and sustaining consensus between governments, businesses and the social sectors are necessary to succeed in this endeavour.

AGRICULTURE CAN BE A GROWTH ENGINE IF…

The Survey makes a case for serving tha agricultural sector better with some re-orientation of existing and new policies and states that it is one area ripe for and in need of such a pan-India dialogue. The Survey states that the payoff will be immense if India unties the knots that bedevil farm sector policies. More than anything else, the Survey states, it will restore faith in the self-confidence and ability of the state to steer the nation to a better future, apart from delivering socio-economic benefits.

Technological advancements and geopolitics are challenging the conventional wisdom. Trade protectionism, resource-hoarding, excess capacity and dumping, onshoring production and the advent of AI are narrowing the scope for countries to squeeze out growth from manufacturing and services.

The Survey called for a return to roots, as it were, in terms of farming practices and policymaking, 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. This solution can become sources of India’s strength and a model for the rest of the world - developing and developed.

SUCCESSFUL ENERGY TRANSITION IS AN ORCHESTRA

Other priorities, such as energy transition and mobility, may pale compared to the complexity of getting the farm sector policies right. Still, they have one thing in common with it.

In the energy transition and mobility sector, the Survey stated that they require getting many things across several ministries and states aligned and this  sector requires attention in the following areas:

a. resource dependence on hostile nations;

b. technological challenges such as intermittency of power generation, ensuring grid stability amidst surges and drop in generation from renewable energy sources and battery storage

c. recognition of the opportunity cost of tying up land in a land-scarce country;

d. fiscal implications that involve both additional expenditures for subsidising renewable energy generation and for e-mobility solutions, loss of tax and freight revenue currently accruing from the sale and transportation of fossil fuels;

e. impairment to bank balance sheets from the so-called ‘stranded assets’ and

f. examination of the merits of alternative mobility solutions such as public transportation models and more.

The Survey argued for formulating original policy and practices instead of emulating other nations, as that may be neither feasible nor desirable.

UNLEASHING SMALL ENTERPRISES

The Survey also argued for maximum relief to small scale enterprises from the compliance burdens they face. Laws, rules and regulations stretch their finances, abilities and bandwidth, perhaps robbing them of the will to grow.

LETTING GO IS PART OF GOOD GOVERNANCE

While contemplating the challenges that lie ahead, the Survey noted that one should not be daunted because the social and economic transformation of democratic India is a remarkable success story. India has come a long way. The economy has grown from around $288 billion in FY93 to $3.6 trillion in FY23 and India has generated more growth per dollar of debt than other comparable nations.

The Survey argued for the Indian state to free up its capacity and enhance its capability to focus on areas where it has to by letting go of its grip in areas where it does not have to. The Licensing, Inspection and Compliance requirements that all levels of the government continue to impose on businesses is an onerous burden. The Survey notes that relative to history, the burden has lightened. Relative to where it ought to be, it is still a lot heavier. The burden is felt more acutely by those least equipped to bear it – small and medium enterprises. The Survey cites Ishopanishad that enjoins all of us to let go of (renounce) our possessions, be free and enjoy that freedom:

ईशा वास्यमिदं सर्वं यत्किञ्च जगत्यां जगत्।

तेन त्यक्तेन भुञ्जीथा मा गृधः कस्यस्विद्धनम्॥

Power is a prized possession of governments. They can let go of at least some of it and enjoy the lightness it creates in both the governed and the governing.

Tripartite compact among government, private sector and academia urged to drive jobs, skills and coordinated economic reform. The Economic Survey 2023 24 calls for a tripartite compact among Centre and State governments, the private sector and citizens (and a related compact with academia) to sustain growth and job creation amid geopolitical and macroeconomic headwinds. It notes macroeconomic strengths-recovery in growth, contained inflation, healthier capital formation and adequate reserves-while warning of constraints on FDI and risks from NPAs and the pandemic. The Survey urges corporates to invest for the long term, targeted farm policy reform, coordinated energy transition planning, skills and health investments, and relief from regulatory compliance for small enterprises.