Chief Economic Adviser Ananth Nageshwaran has pitched for a larger role for the private sector. File
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Chief Economic Adviser Ananth Nageshwaran has pitched for a larger role for the private sector, driven by increased deregulation, in his strategy to improve domestic economic growth, as laid out in the Economic Survey.

The real GDP is expected to grow at a pace of 6.4% in 2024-25 and the annual growth rate needs to be at 8% for at least a decade to increase private investment, the CEA said, in the Survey. “Achieving this growth will require an increase in the investment rate to around 35% of GDP from the current level of around 31%. It is deemed desirable, in general, for the investment rate to rise so that a higher GDP growth rate is achieved,” he said.

Acknowledging the challenge of increasing the actual rate of investment due to “capital constraints”, the CEA said that the efficiency of investment can be boosted instead; it is here that slashing government control over businesses can come in handy. He added that easing rules and regulations could increase the economic freedom of small industries, by reducing the costs of compliance. While admitting that his pitch for deregulation is not as big as those in the liberalisation period, he said that his proposals would change rules at the State and local level that could help with “time and the resource bandwidth”, thus creating a butterfly effect on innovation, entreprenuership, and even employment generation.

Creating space for business

The Survey listed the areas in which regulations could be eased, including local body laws demarcating land use, citizen accountability, land ceiling fire safety, and floor area indices. He suggested freeing up urban spaces that are constrained by floor area regulations, to accommodate more businesses. 

“This could reduce fixed costs for small businesses which could induce increased hiring. Floor area ratio restrictions, parking regulations take away much of the land available at the ground floor level for businesses so actually manufacturing can start only from the first floor onwards in many small enterprises both in urban and rural India if they fully comply with the letter and spirit of these regulations. Naturally, that raises the fixed cost of doing business and naturally, it also disincentivizes more hiring,” Mr. Nageshwaran said in his media briefing, emphasising that deregulation can spur employment generation.

‘Relax labour laws’

He pitched for easing labour codes like unionisation laws, shop laws, and rules governing contract labour, calling for more flexible work hours administered for a longer period of time rather than weekly compliance. He also suggested a demarcation of work hours based on the order flows of firms, which he said could be negotiated between workers and employers. While pushing for deregulation, the CEA also underlined changes in the qualitative aspects of doing business. In the Survey, he cited studies that underline the importance of a healthy work place for worker productivity.

Mr. Nageshwaran recommended deregulation in agricultural marketing and pollution control and the relaxation of rules on food safety, excise, and legal metrology. He also pushed for cheaper electricity tariffs for industries. The Survey said that these sector-specific suggestions were merely illustrative, arguing that incremental liberalisation of laws would be easier once the first stage of deregulation is set in motion. “These are areas we don’t have to micromanage,” the CEA said in his briefing.

State successes

The Survey also reported that existing deregulation at the State level has already yielded results, offering examples from Andhra Pradesh, Karnataka, and Haryana, which deregulated worker laws to allow night shifts for women in information technology firms. Tamil Nadu and Haryana have changed building codes 12 times in the past year, while Punjab liberalised labour, building, and fire safety codes.

In addition to deregulation, the CEA also proposed the importance of public-private partnership-led capital expenditure in infrastructure growth. Highlighting the work done in this area, he admitted that such investment has not yet been induced in some core sectors. “The efforts of the Union Government would need to be supplemented with wholehearted acceptance of the need for public-private partnerships in infrastructure across the country,” the Survey said.

By highlighting deregulation as a major ingredient to deliver domestic growth and infrastructure investment, the Economic Survey has set the tone for the Union Budget 2025-26 to be presented on Saturday, industry experts said.

For representative purposes
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The story so far: The failure of private investment, as measured by private Gross Fixed Capital Formation (GFCF) as a percentage of gross domestic product (GDP) at current prices, to pick up pace has been one of the major issues plaguing the Indian economy. Private investment witnessed a steady decline since 2011-12 and the government has been hoping that large Indian corporations would step in and ramp up investment. In fact, in 2019, the Centre slashed corporate taxes from 30% to 22% hoping that the move would encourage private investment.

What is GFCF and why does it matter?

GFCF refers to the growth in the size of fixed capital in an economy. Fixed capital refers to things such as buildings and machinery, for instance, which require investment to be created. So private GFCF can serve as a rough indicator of how much the private sector in an economy is willing to invest. Overall GFCF also includes capital formation as a result of investment by the government.

GFCF matters because fixed capital, by helping workers produce a greater amount of goods and services each year, helps to boost economic growth and improve living standards. In other words, fixed capital is what largely determines the overall output of an economy and hence what consumers can actually purchase in the market. Developed economies such as the U.S. possess more fixed capital per capita than developing economies such as India.

What is the trend seen in private investment in India?

In India, private investment began to pick up significantly mostly after the economic reforms of the late-1980s and the early-1990s that improved private sector confidence. From independence to economic liberalisation, private investment largely remained either slightly below or above 10% of the GDP. Public investment as a percentage of GDP, on the other hand, steadily rose over the decades from less than 3% of GDP in 1950-51 to overtake private investment as a percentage of GDP in the early 1980s. It, however, began to drop post-liberalisation with private investment taking on the leading role in fixed capital formation.

The growth in private investment lasted until the global financial crisis of 2007-08. It rose from around 10% of GDP in the 1980s to around 27% in 2007-08. From 2011-12 onwards, however, private investment began to drop and hit a low of 19.6% of the GDP in 2020-21.

Why has private investment fallen?

Many economists in India have blamed low private consumption expenditure as the primary reason behind the failure of private investment to pick up over the last decade, and particularly since the onset of the pandemic. Their reasoning is that strong consumption spending is required to give businesses the confidence that there will be sufficient demand for their output once they decide to invest in building fixed capital. Hence these economists have advised that the government should put more money into the hands of the people to boost consumption expenditure, and thus help kick start private investment.

Historically, however, an increase in private consumption has not led to a rise in private investment in India. In fact, a drop in consumption spending has boosted private investment rather than dampening it. Private final consumption expenditure dropped steadily from nearly 90% of GDP in 1950-51 to hit a low of 54.7% of GDP in 2010-11, which was a year prior to when private investment hit a peak and began its long decline. And since 2011-12, private consumption has risen while private investment has witnessed a worrying fall as a percentage of GDP. The inverse relationship between consumption and investment is likely because the money that is allocated towards savings and investment, either by the government or by private businesses, comes at the cost of lower consumption expenditure.

Other economists believe that structural problems may likely be the core reason behind the significant fall in private investment as a percentage of GDP over the last decade or so. They have cited unfavourable government policy and policy uncertainty as major issues affecting private investment. The rise in private investment in the 1990s and the 2000s correlated with the economic reforms programme started in 1991. The drop in private investment, on the other hand, correlated with the slowdown in the pace of reforms in the last two decades under both the UPA (second term) and NDA governments. Further, policy uncertainty can discourage private investment as investors expect stability to carry out risky long-term projects.

What about low private investment?

The biggest cost of low private investment would be slower economic growth as a larger fixed capital base is crucial to boost economic output. The push by the government to increase government investment is also seen as a negative by some who believe that it crowds out private investment.

Others, however, think that government investment compensates for the lack of private investment. It should be noted, however, that private investors are considered to be better allocators of capital than public officials, helping avoid wasteful spending. Further, taxes imposed to raise money for public spending can be a significant drag on the economy.

The ADB’s growth forecast for India for FY25 is in line with the projections made by the Reserve Bank of India.
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The Asian Development Bank (ADB) on Thursday raised India’s GDP growth forecast for the current fiscal to 7 per cent from 6.7 per cent earlier, saying the robust growth will be driven by public and private sector investment demand and gradual improvement in consumer demand.

The 2024-25 growth estimate is, however, lower than 7.6 per cent projected for the 2022-23 fiscal. Strong investment drove GDP growth in the 2022-23 fiscal as consumption was muted, the ADB said.

The ADB had in December last year projected the Indian economy to expand 6.7 per cent in the 2024-25 fiscal.

“The economy grew robustly in fiscal 2023 with strong momentum in manufacturing and services. It will continue to grow rapidly over the forecast horizon. Growth will be driven primarily by robust investment demand and improving consumption demand. Inflation will continue its downward trend in tandem with global trends,” said the April edition of the Asian Development Outlook released on Friday.

Growth will be robust despite moderating in FY2024 and FY2025, it said. For the 2025-26 fiscal, the ADB has projected India’s growth at 7.2 per cent.

The ADB said exports are likely to be relatively muted this fiscal as growth in major advanced economies slows down but will improve in FY2025.

“Monetary policy is expected to remain supportive of growth as inflation abates, while fiscal policy aims for consolidation but retains support for capital investment. On balance, growth is forecast to slow to seven per cent in FY2024 but improve to 7.2 per cent in FY2025,” it said

To boost exports in the medium term, India needs greater integration into global value chains, the ADB added.

The ADB’s growth forecast for FY25 is in line with the projections made by the Reserve Bank of India (RBI).

The RBI last week had said GDP growth in the current fiscal is projected at seven per cent on expectations of normal monsoon, moderating inflationary pressures and sustained momentum in manufacturing and services sectors.