Economy to grow 6.5-7% in fiscal 2025; time for private sector to take the lead on investment: Economic Survey

The study, tabled in parliament by Finance Minister Nirmala Sitharaman, made a strong case for the private sector to increase investment and focus on job creation at a time when technology and generative artificial intelligence are disrupting the job market. It also noted that growth in employment and wages at private companies had not kept pace with their improving financial performance, warning that their investments were more focused on housing and construction than on machinery, equipment and intellectual property rights. This, the study noted, was not a healthy mix and could set back India’s drive to become a manufacturing hub and create high-quality formal jobs.

The message from North Block to the industry is loud and clear. “Employment is a matter of dignity, self-worth, self-respect, self-respect and standing in the family and community, not just the income it brings. It is, therefore, in the enlightened interest of the Indian corporate sector, swimming in gluttonous profits, to take its responsibility for creating employment seriously,” Nageswaran said in the introduction to the study.

The push for jobs comes amid opposition criticism of the government over job creation, which was an issue in this year’s national elections in which the ruling Bharatiya Janata Party lost its outright majority in the Lok Sabha.

It is not structurally damaged

The study found that while the Indian economy was hit by shocks from high corporate debt and the pandemic, it was not structurally weak enough to create jobs. A tripartite agreement between the Centre, states and the private sector is needed to address India’s development challenges, the study said.

“Public investment has sustained capital accumulation over the past few years, even as the private sector shed its balance sheet slump and started investing in FY22. It now needs to take the baton from the public sector and keep the investment momentum in the economy going. The signs are encouraging,” the study said.

Former Indian chief statistician Pronab Sen attributed the limited job creation potential in the private sector to automation and said the government could come up with policies to address the issue.

Sen said the growth rate projected in the study was in line with the forecasts of the International Monetary Fund and the World Bank. “In the long run, a country’s economic growth rate is determined by its investment rate. Our investment rate justifies a growth rate of 6.5% to 7%,” Sen said. In the past three fiscal years, gross fixed capital formation, or fixed asset investment, has been at 33.3% to 33.5% of gross domestic product.

Factors that may affect growth

The study identified geopolitical uncertainties, protectionism, climate change concerns and any possible correction in high valuations in the financial market that could impact household finances and corporate valuations as factors that could negatively impact India’s growth prospects, but noted that market expectations for growth are higher. It also said heavy-handed action is needed on the domestic front.

DK Srivastava, EY’s principal policy advisor, said medium-term and long-term growth of 6.5-7% will require a real investment rate of around 35% to 36% and, consequently, a real savings rate of 33% to 34%. “This seems feasible given the current savings and investment rates. However, growth needs to be sustained at this rate for the next two to three decades, which will be facilitated by appropriate policy interventions,” Srivastava said.

The survey also said the government remains on track with the central government’s fiscal deficit set to come down to 4.5% of GDP or lower by fiscal 2026. The Union Budget is undergoing a significant shake-up with tax increases contributing to a sharp reduction in the revenue deficit while a larger share of borrowings is being channelled towards capital expenditure, indicating improved productivity of borrowed resources.

Another key reform proposed in the study is to reduce the compliance burden.

Foreign Direct Investment from China

The study also suggested that foreign direct investment (FDI) from China could be viewed in a more favorable light, finding that countries such as Mexico, Vietnam, Taiwan and Korea, which were direct beneficiaries of U.S. trade diversion with China, also saw concurrent increases in Chinese FDI.

The world cannot completely ignore China even if it pursues a China-plus-one strategy, the study said. “India faces two choices to benefit from a China-plus-one strategy: it can integrate with the Chinese supply chain or promote foreign direct investment from China. Among these choices, focusing on foreign direct investment from China seems more promising to boost India’s exports to the US, similar to what East Asian economies have done in the past,” the study said. Moreover, choosing foreign direct investment as a strategy to benefit from a China-plus-one strategy seems more beneficial than relying on trade, the study said.

As the US and Europe shift away from direct sourcing from China, it is more efficient for Chinese companies to invest in India and then export products to those markets, rather than import them from China, add minimal value and then re-export them, the study found.

At a press briefing after the survey was tabled in Parliament, Nageswaran said work was underway to overhaul India’s statistical system. “You will soon see these things becoming a reality, with new indices, new weights and new components. The work is very rapid and ongoing.”

Rhik Kundu and Gulveen Aulakh assisted in preparing this article.