Gross domestic product (GDP) will likely grow at 6.5–7 percent in 2024-25, the Economic Survey 2023-2024 projected on July 22, signalling a moderation in the pace of expansion amid potential risks from cheaper imports that could affect private investment.

The conservative prospects and the Survey’s flagging of headwinds in the broader economy were predicated on a possible slowing down of private investments.

“A note of caution is warranted here. Private capital formation after good growth in the last three years may turn slightly more cautious because of fears of cheaper imports from countries that have excess capacity,” the Survey said.

The Survey, the maiden one authored by Chief Economic Adviser V. Anantha Nageswaran, however, flagged some challenges that loomed on the immediate horizon, obliquely advising the government to steadfastly stick to the path of fiscal consolidation and not indulge in extra borrowing to fund non-merit welfare handouts.

National income data released on May 31 showed India’s real or inflation-adjusted GDP grew 8.2 percent in 2023-24.

The Survey, presented a day ahead of the Budget, made a strong case for investment as a key driver to sustain growth and enable a self-sustaining virtuous cycle.

To be sure, the government has been emphatically focused on the investment-led growth model. In the Interim Budget for 2024-25, which was presented on February 1, finance minister Nirmala Sitharaman pencilled in capital expenditure of Rs 11.1 lakh crore, a growth of 11.1 percent over 2023-24.

The focus on capital expenditure relies on the principle that higher public investment in infrastructure projects unleashes economic growth through multipliers.

This has grown 33 percent from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24.

Highways and ports are long gestation projects, but they can create jobs, with cascading benefits for intermediate industries such as cement and steel. The government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure project execution but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.

The Survey exhorted the private sector to pick the “baton” from the public sector and sustain the investment momentum in the economy.

“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,” it said.

The evidence suggests that private sector investment has been sub-par.

Private sector gross fixed capital formation (GFCF) in machinery and equipment and intellectual property products has grown cumulatively by only 35 percent in the four years to 2022-23. Meanwhile, its GFCF in ‘dwellings, other buildings and structures’ has increased by 105%. This is not a healthy mix.

Besides, the slow pace of investment in machinery and equipment and IP products will delay India’s quest to raise the manufacturing share of GDP, delay the improvement in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise, it said.

Letting go-ease of business

The Survey obliquely championed the cause, in a mix of philosophy and economic merits, for the government to withdraw from a few areas of business, perhaps as a signal for more privatisation and easier rules, compliances, and procedures for businesses to prosper.

“Letting go is part of good governance…The burden is felt more acutely by those least equipped to bear it – small and medium enterprises. It holds them back, leashes their aspirations, and, in the process, holds the country back,” it said.

Quoting Isha Upanishad, the CEA, in his signed foreword, was rather upfront for lesser government and authoritarian interference. “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.”

Jobs and more

Creating jobs by the millions for years on end for the armies of youth who join the queue of hopefuls every year remains a central long-term policy challenge in India. A productive job is the most powerful form of inclusion.

According to the Survey the key ingredients for this strategy include a focus on policies that nourish micro, small and medium enterprises (MSMEs) to create more jobs and become more productive, reduce the cost of capital, and rationalise the risk-return trade-off for investments.

The Survey squarely placed the responsibility of creating jobs with the private sector and asked profitable companies to add capacities and hire more.

“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. That requires another tripartite compact - between the government, the private sector and academia,” it said.

This could require appropriate policy intervention from the government to “unshackle the industry and academic institutions to play their respective roles in that mammoth task”.

It cited the example of the Apprenticeship Act, which remains a work in progress, at best, in encouraging large-scale apprenticeships in the country.

The New Education Policy 2020 proposes freeing India’s higher education from regulatory oversight to market oversight. “A corporate sector that helps shape the design of higher education with inputs to curriculum, evaluation standards, and faculty will pave the way for a high-quality higher education that market competition brings, replacing regulatory oversight,” it said.

Farm reforms

The Survey made some telling observations about India’s farm sector, which, for too long, has been a tale of market distortions.

Successive efforts to dismantle barriers often ran into political resistance, scuttling policy attempts at shifting the terms in favour of farmers by getting rid of unscrupulous middlemen and vested interests that distorted markets.

At the core of this is the fear among farmers that they will lose their bargaining power if large corporations and private traders can enter unregulated agriculture produce markets.

“A panoply of policies – by national and sub-national governments - working at cross-purposes with each other is hurting farmers’ interests…The payoff will be immense if we untie the knots that bedevil farm sector policies,” the Survey said.

It advocated a “return to roots” in terms of farming practices and policymaking, which 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”.

Small is beautiful

The Survey made a powerful argument for turning India’s micro, small and medium enterprises (MSMEs) into growth engines by ironing out a few rough policy and institutional edges.

“These enterprises need maximum relief from the compliance burdens they face. Laws, rules and regulations stretch their finances, abilities and bandwidth, perhaps robbing them of the will to grow,” it said.

The estimated 60 million MSMEs form the lifeblood of India’s organised economy, contributing about 45 percent of the country’s GDP and employing about 110 million people.

Sticking to the commitment of fiscal consolidation, India's Finance Minister Nirmala Sitharaman unveiled a budget that aims to provide impetus to job creation, start-ups and small enterprises, while proposals for raising the tax rates on capital gains damped market sentiment and send the rupee to a record low.
The government lowered the fiscal deficit target to 4.9 percent of GDP for the financial year 2025 from 5.1 percent projected in the interim budget announced in February.
This reduction was largely aided by the Reserve Bank of India's huge dividend payout. The government aims to reduce the fiscal deficit below 4.5 percent of GDP by 2025-26.

In her seventh consecutive Budget speech, and also the first in the third term of Prime Minister Narendra Modi, Sitharaman said the government set aside nearly $24 billion for job creation and skill development of youth.

Sitharaman unveiled three new employment linked incentive schemes and programs for skill development.

In a bid to bolster the Indian start-ups, the angel tax for all classes of investors was abolished.

The government endeavor to maintain strong fiscal support for infrastructure over the coming five years, the minister said. The government raised infrastructure investment to 3.4 percent of GDP for FY2025.

The import duty on gold and silver was cut to 6 percent and that on platinum to 6.4 percent.

Sitharaman also proposed to cut the corporate tax rate on foreign companies to 35 percent from 40 percent.

Meanwhile, markets reacted negatively as the government raised the long-term capital gain tax to 12.5 percent from 10 percent and short-term capital gains tax was lifted to 20 percent from 15 percent.

Moreover, the security transactions tax on futures and options of securities is proposed to be increased to 0.02 percent and 0.1 percent respectively. Also, the government intends to tax income received on buy back of shares in the hands of the recipient.

The Indian rupee weakened to a record low against the US dollar after the government lifted the capital gain tax. The rupee hit 83.68 to the dollar.

The government revised the tax structure under the new Income Tax regime. The changes will help salaried employees to save up to INR 17,500 in income tax, the finance minister said.

Sitharaman said, "India's economic growth continues to be the shining exception and will remain so in the years ahead."

In the economic survey, the government has projected 6.5-7.0 percent real GDP growth in the financial year ending March 2025.

"There is always a chance of fiscal slippage, but recent success in hitting deficit targets suggests the risk is smaller than has been the case previously," Capital Economics economist Shilan Shah said.

The economist said the absence of a fiscal blowout will give the RBI scope to loosen policy later in the year once inflation is closer to the 4 percent target.