Economic Survey for 2024 – 25 pushes for deregulation and reforms as sure shot prescription for higher economic growth, resilience, employment, lower business costs amid global uncertainties.
V. Anantha Nageswaran
It will be over six months since the last Economic Survey when you lay your hands and cast your eyes on this document and this preface. In theory, there should not be much to write in this preface, given the short time lapse since the last Survey. In reality, there is. The world is perhaps evolving more rapidly than we realise. In the longer span of history, this is par for the course. But, we will leave that contemplation for another occasion.
2024 was a year of elections. Three big democracies went in for elections: India, America, and Indonesia. India returned the incumbent to office for a third term. The ruling party continued in Indonesia with a different leader at the helm. In America, there was a change in the presidency. The new President has been in office for less than two weeks now. The world has had an early inkling of policy changes that will affect the global movement of goods and labour.
Europe faces both political and economic uncertainties. Europe’s biggest economic engine, Germany, experienced economic contraction for two successive years. Political uncertainty, too, is a factor since elections are due to be held in February this year. France has had political uncertainty due to developments in the wake of the snap elections called there. The United Kingdom had a change of government. After a long gap, the Labour Party came into office amidst fiscal pressures and a slowing economy. In general, Europe is facing competitiveness pressures amidst much higher energy costs caused, in part, by the transition towards renewable energy. To a large extent, these developments have affected the global economy. The Index of Global Economic Activity of the Federal Reserve Bank of Dallas has been volatile since the pandemic began slowing at the end of 2023.
The reopening of the Chinese economy after the Covid shutdown has not led to a spurt in economic growth rate as overcapacity and financial strains in the real estate sector have come to the fore. Due to weak aggregate demand, the economy is in deflationary mode. The absence of a significant policy stimulus to boost domestic consumption has seen excess capacity spill over into external markets. Chinese exports are thriving. China’s trade surplus in 2024 was nearly one trillion US dollars.
Recent strength in the US dollar and rethinking in the Federal Reserve about the path of policy rates in America have caused emerging market currencies to weaken. Fiscal strains and low real rates relative to history have led to rapid erosion of value in some currencies compared to others. Borrowing costs for sovereigns are also rising as financial markets re-evaluate the outlook for inflation, policy rates and fiscal prudence.
Several stock markets worldwide are at elevated levels and do not appear unduly concerned about economic growth and earnings uncertainties. Nor have financial stability risks fazed investors even though serious concerns are re-emerging about securitisation, leveraged loans.
“The Future of European Competitiveness”
Mario Draghi wrote:
“The EU also benefitted from a favourable global environment. World trade burgeoned under multilateral rules. The safety of the US security umbrella freed up defence budgets to spend on other priorities. In a world of stable geopolitics, we had no reason to be concerned about rising dependencies on countries we expected to remain our friends. But the foundations on which we built are now being shaken. The previous global paradigm is fading. The era of rapid world trade growth looks to have passed, with EU companies facing both greater competition from abroad and lower access to overseas markets.”
This is the global backdrop for India as it seeks to steady and sustain the growth momentum that the economy has experienced post-Covid. The passing of the era of rapid world trade growth clouds the outlook for India’s export growth because, historically, India’s export growth has been a high beta play on global export growth. This means domestic growth levers will be relatively more important than external ones in the coming years.
The report on European competitiveness could easily have been written for India. Most of the challenges cited therein apply to India, except that India is an aspiring nation, and the European continent has the cushion of a higher per capita income. Europe is, by and large, ageing, but India has a more youthful demographic profile. That is an advantage, but it comes with a huge responsibility.
One of the refrains in the Draghi report is the ‘China Challenge’ to European competitiveness. It is no less for India. Several commentators have recently written about the manufacturing colossus that China has become in the last six years.
India faces limitations in producing critical goods at the scale and quality required to serve the infrastructure and investment needs of an aspiring economy. For instance, India has low production capacity in the solar energy sector for key components like polysilicon, ingots, and wafers. The production capacity of monocrystalline silicon ingot is expected to quintuple by 2035 from 2 GW in 2023, but it won’t be enough to meet the demand in the country. Several solar equipment manufacturers in the country significantly depend on Chinese supply chains and related services. The single-source concentration risk in several product areas exposes India to potential supply chain disruptions, price fluctuations, and currency risks. India’s task is cut out.
It means going all out to attract, promote and facilitate further domestic and foreign investments that India needs to become a competitive and innovative economy. It will not be easy because competition for investment is not only with other emerging economies but advanced economies, too, who are determined to keep their businesses at home. Equally, investing in and strengthening domestic supply-chain capability and resilience will be the hallmarks of strategic and long-term thinking on the part of the private sector. Alternative sources of supply, where possible, have to be located and nurtured, going beyond short-term cost consideration
Climate change and energy transition: Public policy will have to recognize the role of Energy Security and Energy Affordability in enhancing and maintaining competitiveness. It means forging India’s own path to energy transition and diversification away from fossil fuels. In this regard, electric mobility makes economic sense in a country which imports most of its oil and has abundant renewable energy and ores. However, it raises important challenges that need addressing. The import intensity of E-Vehicle production – especially from countries with whom India has persistent and large trade deficits – is very high. The extent to which electric mobility is incentivized in the short run needs to keep this factor in mind. Indigenising the technology and raw materials for electric mobility is an urgent task. Finally and importantly, given India’s vast size and limited land availability, public transportation is a more efficient alternative for viable energy transition. Therefore, national-level policies and local nudges must promote and facilitate its use, going beyond the focus on tail-pipe emissions of private transportation choices.
It will also require appropriate skilling and education for India’s youth to take advantage of technological advances such as Artificial Intelligence, enabling its population to stay one step ahead of technological developments. That would minimise or even eliminate the potential adverse impact on employment and, if possible, turn it into a force for augmenting employment. It would require a departure from “business as usual” for collaboration between academic institutions and businesses. Innovation should be facilitated through resource flows, setting up centres of excellence in different technologies, and expanding autonomy for academic and research institutions to attract top talent from the rest of the world to India. Policy action on this front is already underway, with recent budgets reflecting a clear focus on a technology-driven economy. This includes establishing Artificial Intelligence Centres of Excellence (CoE) at top educational institutions across India and the announcement of a ₹1 lakh crore financing corpus to catalyse private sector innovation and R&D in sunrise sectors.
Achieving competitiveness will be an incomplete project without raising productivity in the primary sector. As we wrote in the Economic Survey 2023-24, the agriculture sector needs to be freed, empowered, and emboldened to diversify away from water-dependent crops. Simultaneously, irrigation cover has to rise. Agricultural research will need a leg up. Much more can be done. Farmer support policies can benefit from a perusal of a report that the OECD put out in November.
Above all, underpinning specific policy efforts will have to be the philosophical approach to governance. “Getting out of the way” and allowing businesses to focus on their core mission is a significant contribution that governments around the country can make to foster innovation and enhance competitiveness. The most effective policies governments—Union and States—in the country can embrace is to give entrepreneurs and households back their time and mental bandwidth. That means rolling back regulation significantly. That means vowing and acting to stop micromanaging economic activity and embracing risk-based regulations. That means changing the operating principle of regulations—from “guilty until proven innocent” to “innocent until proven guilty”. Adding layers of operational conditions to policies to prevent abuse makes them incomprehensible and regulations needlessly complicated, taking them further from their original purposes and intents.
“Getting out of the way” is not easy for societies that are still structured around communities, groups, and kinship. These societies are largely hierarchical in nature. Various institutional forces propelled people in Western societies to go out and build relations with strangers. This process started as early as the first millennium. As a result, dealing with strangers and building networks and communities with them became necessary. Scale became inevitable and easier. One has to trust to deal with and form relationships with strangers. Written contracts formed the basis of such trust, and other institutional developments followed. However, in close-knit and kinship-based communities such as India, the trust quotient is still high within but low without. That inhibits scale. The low-trust quotient also gives rise to elaborate verification, compliance, and reporting requirements. Further, by and large, hierarchical societies are not made for disruption, change, and innovation but for maintaining the status quo. Even in such societies, in places and industries where this pattern is broken, innovation, competitiveness, and scale emerge. The information technology sector and the startup ecosystem that emerged in Bengaluru in the nineties are examples.
But, “get out of the way” and trust people, we must, for we have no other choice. Business as usual carries a high risk of economic growth stagnation, if not economic stagnation. Yes, trust is a two-way street, and the non-government actors in the economy have to vindicate the trust reposed. In fact, quite a significant chunk of the complicated compliance requirements stem from the efforts of businesses wanting to keep out domestic and foreign competition to the detriment of other industries and the economy. Nonetheless, wiping out the trust deficit in the country is imperative, and government agencies have to set the agenda in this regard. Then, it is a good bet that the Indian public will overcome the challenges and turn them into opportunities on the way to Viksit Bharat by 2047.
One crucial aspect of the low-trust “without” is that practices and policies that evolved in Western societies may be inapplicable and unlikely to succeed in India. India has to choose its own path suited to its context and history. While every chapter of the Economic Survey makes a case for simplification and deregulation wherever possible and necessary, it also acknowledges areas where more and/or appropriate regulatory intervention may be necessary.
For example, it is reasonable to expect that financial regulators hold themselves to the same standards that they expect of regulated entities. At the same time, in the chapter on Monetary and Financial Sector Developments, we also caution against the risk of financialisation and asset price bubbles that are now endemic to the West. That is why some measures India’s regulators took to rein in excessive and financially ruinous speculation for investors were necessary, not just for systemic stability. They were welfare measures in effect.
Similarly, if India were to realise the vast potential of its youthful population, their mental, emotional, and physical health need to be nurtured. Scientific evidence abounds that the consumption of ultra-processed foods (High in Fat, Salt, and Sugar or HFSS) is a big factor in undermining both physical and mental health. In this regard, globally, self-regulation has been ineffective. Stringent front-of-the-pack labelling rules are needed and to be enforced. It is not an exaggeration to suggest that the country’s future growth potential rides a lot on this measure. According to a WHO report published in 2023, India’s consumption of ultra-processed foods shot up from about USD 900 million in 2006 to over USD 37.9 billion in 2019.That is an annual compounded growth rate of over 33%. It is unclear if India has clear front-of-the-pack labelling stipulations for HFSS food.
In the Economic Survey 2023-24, in the chapter on the Social Sectors, we focused on the impact of screen time and ultra-processed foods on children. This time, the chapter examines the impact of work culture, lifestyle, and eating habits on mental health. These are some of the areas where the state has to step in. At the same time, when it comes to higher education, the chapter posits that the implementation of the National Education Policy is held back by regulations that are supposedly voluntary but effectively mandatory.
Further, the chapter delves into the policy priorities for women, farmers, youth, and the poor. Facilitating their productive and enhanced participation in economic activity is the litmus test of inclusive development policies. Investment in education, skill, and physical and mental health will be the focus for the youth of both genders. The poor will be provided targeted support to improve their livelihoods and opportunities to move from the periphery to the centre of economic activity. It is about finding pathways for advancing their income and living standards through empowerment. For women, governments around the country will have to eliminate legal and regulatory hurdles that hold back their participation in the labour force, besides undertaking facilitative measures. In other words, governments must get out of the way of women joining the workforce.
The chapters on the Industrial Sector and Employment and Skill Development bat for deregulation to boost capital formation and accelerate employment and output growth. In particular, the chapter on Industries notes the positive correlation between states that score on the ‘Ease of Doing Business’ parameters and the level of industrial activity. States that aspire to raise their industrialisation quotient know what they need to do. At the same time, the chapter celebrates the success story of the Production-Linked Incentive Scheme in air-conditioners, which is a story of successful indigenisation through government intervention.
The chapter on external sector developments wades into the challenges that India will face in the near future, such as the threat of restrictive trade policies that the European Union has initiated in the name of avoiding carbon leakage and saving the forests of the world. These have the potential to restrict India’s exports and widen the current account deficit at a time when the net foreign direct investment into India is declining because of successful exits by foreign investors, incentives given by many governments for investments to stay onshore, and higher interest rates in hard currencies. Therefore, the chapter raises the question of whether India’s sustainable current account deficit is lower than previously estimated. That has implications for capital formation and investment efficiency or lowering the incremental capital-output ratio. In that sense, this chapter provides a neat segue for the domestic issues covered in later chapters.
The special essay on Artificial Intelligence (AI) and its implications for employment generation in India is a brave attempt on our part to put forward some hypotheses on whether the technology would be hugely and adversely disruptive to employment. It suggests with all humility tentatively that some of the fears might be misplaced. The chapter does not answer the question of whether the problems that the world faces need a technological solution, such as artificial intelligence advances, technologists would scoff at the question of whether AI is necessary. They would argue that technology evolves due to the creative ingenuity of humans and that applications naturally follow. Further, given the rapid ageing in some societies, AI was perhaps a welcome development for them. However, this may not be the case for all countries, particularly for labour-rich countries like India. Therefore, policymakers must scrutinize whether AI is necessary. If the answer remains unclear, it calls for closer scrutiny of AI’s costs and benefits with necessary follow-up action. Even in countries where AI may fill the shrinking labour force, its enormous demand for water and electricity is slowly coming into view, much to the bewilderment of policymakers. Whether the world is ultimately better or worse off with AI remains an open question.
Climate Change and Energy Transition
The topic of climate change and energy transition, along with their international implications and linkages, has figured prominently in the last couple of editions of the Economic Survey. This time is no different. This issue will be relevant for at least another decade or two. In this area, the government will take the lead, while the private sector remains somewhat peripheral because public goods are not the private sector’s priority.
Globally, strong evidence is emerging that high and rising dependence on intermittent sources of power is strongly correlated with high energy costs. Indeed, this causality is likely running from the former to the latter and is one of the reasons for the rapid and deep slide in industrial production in Germany, as industries, citing higher energy costs, relocate to other places.
Research notes suggest that firm low-carbon resources including nuclear power, bioenergy, and natural gas plants that capture CO₂ help reduce the costs of lowering the carbon emissions of electricity generation. Without these resources, costs rise rapidly as CO₂ limits approach zero. While global warming necessitates an energy transition, as Prof. Mike Hulme pithily titled his book, “Climate change isn’t everything.”
Strategic Considerations for India
As noted earlier in this preface—and as it is now time to conclude—India’s energy transition plans must be mindful of geopolitical vulnerabilities and avoid deepening dependence on external sources for critical imports. Strategic thinking is warranted.
The two obsessions of the West—the water- and power-guzzling AI and energy transition—do not sit well with each other. One of them has to give. It appears to be the latter, because the more the West (Europe, in particular) pursues wind and solar energy, the greater the coal consumption in China.
The link between these two trends is as follows:
- The requirement for critical minerals and rare earths rises with the share of renewable energy in the overall energy consumption.
- China dominates the production and processing of these materials.
- Processing these materials requires cheap power.
- If cheap power is not available, these inputs become costlier, making energy transition even more expensive for Europe than it already is.
- Cheap power is only possible with coal-fired thermal plants.
As Ed Conway noted, both are two sides of the same coin. This complex interplay makes one thing clear for India: the country must focus far more on adaptation than on emission mitigation.
This issue is a key focus of the chapter on Climate and Environment.
Economic Outlook
The first and fifth chapters deal with near-term and medium-term outlooks for the Indian economy.
- The first chapter delves more deeply than usual into global developments and risk factors—an essential approach given the state of the world.
- The medium-term outlook provides an elaborate examination of several issues discussed in this preface, making it a crucial component of the overall analysis.
Therefore, there’s the need to get the domestic economic engine purring by pulling all the levers of deregulation. As is the tradition with all Economic Surveys, the first chapter gives our outlook for the real economy growth rate for the financial year 2025-26. I am not going to reveal it here and stop you from flipping the pages further. You can see the number at the end of the first chapter. The philosophy behind the growth projection is consistent with the philosophy that the government and the Ministry of Finance have adopted in the last five years with respect to fiscal goals: be realistic and strive harder to do better than that. The stellar progress in bringing public finances on track in this period is a vindication of this approach.
The Indian economy is on a steady growth path. The macroeconomic health checklist looks good. As the country aims to accelerate its economic growth rate in the coming years, it has the tailwind of strong balance sheets in the domestic corporate and financial sectors. But, globalisation is on the retreat. Hence, raising the growth average in the next two decades will require reaping the demographic dividend through a deregulation stimulus. As the Spartans apparently believed, “the more you sweat in peace, the less you bleed in war.” This Economic Survey is all about that, or so we would like to believe.
I hope this preface has given you a flavour of this Economic Survey and whetted your appetite to know more about what it packs between the pages. I am responsible for the views expressed and the errors, if any, committed in this document. Please let us know what you think of the former and point out the latter. We promise to get better at each outing.
As always, putting it and pulling it all together is a labour of love and a Yagna. Making the changes happen in reality is a Sadhana.
(Excerpts from preface to Economic Survey of 2024-25 written by Chief Economic Advisor, Government of India)
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