'Deregulation, better hiring policies, more state capacity, needed for higher growth'
- Doubling down on deregulation, expanding state capacity for public investment, and improving hiring and compensation policies in the private sector — these regulatory and policy changes would be crucial to push growth in India.
Highlights:
- Chief Economic Advisor (CEA) V Anantha Nageswaran emphasized the need for regulatory and policy reforms to accelerate India’s economic growth. His remarks followed the release of disappointing GDP growth data for the second quarter of FY24, which underscored sluggish manufacturing and mining activity.
Key Challenges Identified
- Disparity in Profit Growth and Compensation:
- Corporate profits have surged, with the profit-to-GDP ratio rising from 2.1% post-Covid to 4.8% in FY24. However, hiring and compensation growth rates remain tepid, diminishing purchasing power and suppressing demand for consumer goods, which in turn slows manufacturing.
- Slower GDP Growth:
- India’s real GDP growth rate fell to a seven-quarter low of 5.4% in Q2 FY24, reflecting weaknesses in key sectors like manufacturing and mining.
- Endogenous Slowdown in Manufacturing:
- Insufficient income growth among workers has contributed to weaker demand for FMCG and consumer durables, creating a feedback loop that hampers private-sector manufacturing growth.
- Fragile Global Conditions:
- Geopolitical risks, potential supply chain disruptions, and fluctuating global capital flows could exacerbate domestic economic challenges.
CEA’s Prescriptions for Growth
- Doubling Down on Deregulation:
- Deregulation, especially at the state and local government levels, is crucial to enhancing ease of doing business and reinvigorating growth. Simplified processes could help achieve growth rates closer to 7%.
- Strengthening Public Investment:
- The state’s capacity for capital expenditure (capex) must be improved, shifting focus from revenue expenditure to infrastructure development. This would drive long-term economic growth.
- Private Sector Reforms:
- The onus is on the private sector to boost hiring and improve wage growth, thereby enhancing purchasing power and demand.
- Adopting policies that balance profitability with equitable income distribution is critical for sustainable demand growth.
- Leveraging Resilience in Other Sectors:
- Positive performances in construction, agriculture, and some segments of manufacturing highlight areas of resilience. The CEA emphasized using these as foundations for broader economic recovery.
- Mitigating Global Risks:
- Strategies to buffer against global dollar shortages and tariff actions need to be developed.
- Ensuring stable inflation and liquidity conditions domestically will be vital.
Prelims Takeaways
- National Statistics Office (NSO)
- Gross Domestic Product (GDP)