Erase the trust deficit – Economy News

One of the reasons the Indian economy has not been able to grow at a sustained 7-8% is that it is difficult to do business here. Smaller enterprises, in particular, struggle to comply with permissions and clearances — more than 60,000 according to one estimate. While the economy may have muddled through thus far, the Economic Survey for 2024-25 believes there is no other choice but for the government to “get out of the way”, specially for small businesses. A “business as usual” approach, it cautions, runs the risk of not just growth stagnating but the economy stagnating. Given how globalisation is on the retreat, any meaningful acceleration of the economy — and job creation — will simply not be possible, it contends, without a “deregulation stimulus” that cashes in on the demographic dividend. However, erasing the trust deficit and bringing in more flexible rules will require central as well as state governments to lead the way. Most small businesses will agree with this assessment as the red tape and bureaucratese that dog them are legion.

The Survey has chided the large enterprises for scaling back on hiring even though they are “swimming in excess profits”. While corporate profits increased by a smart 22.3% in FY24, employment rose by only 1.5%. And, despite reporting stable operating margins of 22% over the last four years, wage growth has moderated. The disproportionate rise in corporate profits and wage moderation raises concerns about income inequality. Moreover, while the impact of new technologies such as artificial intelligence on labour will be felt across the world, the problem is magnified for India, given its size and its relatively low per capita income. While technology need not always displace labour, the Survey believes India should put in place mechanisms to cushion societal impacts.

There is also concern about slowing investments. If India is to grow at an annual 8% on a sustained basis and become a developed economy by 2047, the investment rate must rise to 35% of gross domestic product from the current 31%. This could call for more capital to be committed by the private sector. In the meantime, the very subdued growth forecast of 6.3-6.8% for FY26 doesn’t suggest a big recovery in the near term. Indeed, it is unlikely India will create the 7.85 million new non-farm jobs annually till 2030 that the Survey believes are needed. There are several global headwinds.

The Survey rightly observes that attracting foreign capital will not be easy given how large developed economies are now working to keep businesses within their countries. However, while in the past the view has been that India should do business with China, and attract investments from that country, even if there are political concerns, the Survey points out that energy transition plans should take cognisance of geopolitical vulnerabilities. China may have large capacities of photovoltaic cells that help India’s manufacturers but the level of geographical concentration in global supply chains can also result in supply disruption, the Survey cautions. India must not become overly dependent on other markets for critical imports. Calling for strategic thinking, the Survey suggests that alternative sources be identified where possible and that near-term cost considerations be looked through. Again, indigenising the technology and raw materials for sectors such as electric mobility is an urgent task, it believes, given how the import intensity is becoming very high. All of this would call for local investment which currently doesn’t seem likely.

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