Time for private sector to take baton of investment: Economic Survey

The survey, tabled in Parliament by finance minister Nirmala Sitharaman, made a strong case for the private sector to scale up investments and focus on job creation, at a time technology and generative artificial intelligence are disrupting the labour market. It also flagged that hiring and wage growth among private companies have not kept pace with their improved financial performance, cautioning that their investments were skewed towards dwellings and structures than towards machinery, equipment and creation of intellectual property rights. This, the survey noted, was not a healthy mix, and can delay India’s quest to becoming a manufacturing hub and create high-quality formal jobs.

The message from the North Block to the industry is loud and clear. “Employment is about dignity, self-worth, self-esteem, self-respect, and standing in the family and community, not just about the income it brings. That is why it is in the enlightened self-interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously," Nageswaran said in the preface to the survey.

The emphasis on employment comes in the context of the opposition criticizing the government on job creation, one of the issues in this year’s national polls in which the ruling Bharatiya Janata Party lost absolute majority in Lok Sabha.

Not structurally impaired

The survey said that though the Indian economy suffered the shocks of high corporate indebtedness and the pandemic, it was not structurally impaired to create jobs. To tackle India’s development challenges, a tripartite compact is needed among the Centre, the states and the private sector, the survey said.

“Public investment has sustained capital formation in the last several years, even as the private sector shed its balance sheet blues and began investing in FY22. Now, it has to receive the baton from the public sector and sustain the investment momentum in the economy. The signs are encouraging," the survey said.

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Former chief statistician of India Pronab Sen attributed the private sector’s subdued job creation potential to automation, stating the government could frame policies to address this.

Sen said that the growth rate projected in the Survey was consistent with the projections by the International Monetary Fund and the World Bank.“In the longer run, the economic growth rate of a country is determined by the investment rate. A growth rate of 6.5-7% is what our investment rate justifies," Sen said. In the last three financial years, gross fixed capital formation or investments in fixed assets have remained between 33.3-33.5% of gross domestic product.

Factors that can impact growth

The survey identified geopolitical uncertainties, protectionism, climate change-related concerns and any possible corrections in the elevated financial market valuations which may impact household finances and corporate valuations as factors that may negatively impact India’s growth prospects, but noted that market expectations for growth are on the higher side. It also said there has to be heavy lifting on the domestic front.

D.K. Srivastava, EY’s chief policy advisor, said a medium- to long-term growth of 6.5-7% will require a real investment rate of about 35% to 36% and correspondingly, a real saving rate of 33% to 34% would be required. “This appears to be feasible given the current saving and investment rates. However, the growth needs to be sustained at this rate over the next two to three decades, which would be facilitated by suitable policy interventions," said Srivastava.

The survey also pointed out that the government continues to stick to the fiscal glide path, and that the fiscal deficit of the central government is expected to drop to 4.5% of GDP or lower by FY26. The Union budget is witnessing a significant shift, with tax buoyancy contributing to a sharp reduction in the revenue deficit, while a major part of borrowings is directed towards capital expenditure, indicating an improvement in the productivity of borrowed resources.

Easing compliance burden is another key reform proposed by the survey.

FDI from China

The survey also suggested that foreign direct investment (FDI) from China may be looked at in a more favourable light, stating nations like Mexico, Vietnam, Taiwan and Korea, which were direct beneficiaries of the America's trade diversion from China, had also displayed a concomitant rise in Chinese FDI.

The world cannot completely look past China, even as it pursues China-plus-one strategy, the survey said. “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," it said. Moreover, choosing FDI as a strategy to benefit from the China-plus-one approach appears more advantageous than relying on trade, the survey said.

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, the survey said.

At a news briefing after the survey was tabled in Parliament, Nageswaran said that work is underway on revamping India’s statistical system. “Soon, you will see these things becoming a reality, with newer indices, newer weights and newer components. Work is very much underway at a brisk pace."

Rhik Kundu and Gulveen Aulakh contributed to the story.