Economic Survey 2024: Critical points to know

The government recently released Economic Survey 2024, and it provided a comprehensive view of India's economic landscape. For an investor, it is essential to understand what the government thinks about the country's growth. It helps you determine areas of concern and sectors that can do better in the coming years. In this article, we cover an overview of the Economic Survey 2024, covering all the essential points.

On Indian Economy Growth

As per the report, the Indian economy is on a strong wicket and stable footing, demonstrating resilience in the face of geopolitical challenges. Post Covid, there has been a recovery. To sustain that, there has to be heavy lifting on the domestic front because the environment has become extraordinarily difficult to reach agreements on key global issues such as trade, investment, and climate.

The good news for India is that unlike other nations headline inflation rate is largely under control, although the inflation rate of some specific food items is elevated. The trade deficit was lower in FY24 than in FY23, and the current account deficit for the year is around 0.7% of GDP.

National income data show that non-financial private-sector capital formation, measured in current prices, expanded vigorously in FY22 and FY23 after a decline in FY21. However, investment in machinery and equipment declined for two consecutive years, FY20 and FY21, before rebounding strongly. Early corporate sector data for FY24 suggest that capital formation in the private sector continued to expand but at a slower rate. The survey projected India's GDP growth for the current fiscal year to be between 6.5% and 7%.

On Foreign Direct Investment

The Foreign Direct Investment (FDI) has been held up. As per RBI's data, India's Balance of Payments was $45.8 billion in FY24 compared to $47.6 billion in FY23. This slight decline is in line with global trends. Reinvestment of earnings remained the same. Repatriation of investment was $29.3 billion in FY23 and $44.5 billion in FY24.

Many private equity investors took advantage of buoyant equity markets in India and exited profitably. It is a sign of a healthy market environment that offers profitable exits to investors, which will bring newer investments in the years to come. The environment for FDI to grow in the coming years is not highly favorable for many reasons. Here are the top four reasons:

1. Interest rates in developed countries are much higher than they were during and before Covid years. This not only means a higher cost of funding but also a higher opportunity cost to invest abroad.
2. Emerging economies have to compete with active industrial policies in developed economies involving considerable subsidies that encourage domestic investment.
3. Notwithstanding the impressive strides made in the last decade, uncertainties and interpretations related to transfer pricing, taxes, import duties, and non-tax policies remain to be addressed.
4. Geopolitical uncertainties, which are on the rise, will likely exert a bigger influence on capital flows, notwithstanding other reasons for preferring to invest in India.

On Employment

A surge in agriculture employment is partly explained by reverse migration and the entry of women into the labor force in rural India. The Annual Survey of Industries has data on workers in nearly 2.0 lakh Indian factories.

The total number of factory jobs grew annually by 3.6% between 2013-14 and 2021-22. Somewhat more satisfyingly, they grew faster at 4.0% in factories employing more than a hundred workers than in smaller factories (those with less than a hundred workers). The annual growth rate was 1.2% in the latter set of factories.

Employment in different enterprises fell from 11.1 crore in 2015-16 to 10.96 crore. There was a reduction of 54 lakh workers in manufacturing but the expansion of the workforce in trade and services gained in jobs limited the overall reduction in the number of workers in unincorporated enterprises to around 16.45 lakhs between these two periods. This comparison masks a big jump in manufacturing jobs that seems to have occurred between 2021-22 (April 2021 to March 2022) and 2022-23 (October 2022 to September 2023).

India suffered two big economic shocks in quick succession. Bad debts in the banking system and high corporate indebtedness were one. It took the first term of the present government and more to bring it under control. The Covid pandemic was the second shock and quickly followed the first one. So, it is difficult to conclude that the Indian economy’s ability to create employment is structurally impaired.

On Employment Generation

It is worth reiterating that job creation happens mainly in the private sector. Second, many (not all) of the issues that influence economic growth, job creation, and productivity and the actions to be taken therein are in the domain of state governments. So, in other words, India urgently requires a tripartite (divided into or composed of three parts) partnership to fulfill the growing expectations of its citizens and achieve the vision of a developed India by 2047.

Private sector GFCF (Gross Fixed Capital Formation) in machinery and equipment and intellectual property products has grown cumulatively by only 35% in the four years to FY23. Meanwhile, its GFCF in ‘Dwellings, other buildings and structures’ has increased by 105%. This is not a healthy mix. Second, the slow pace of investment in M&E and IP Products will delay India’s quest to raise the manufacturing share of GDP, delay the improvement in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.

There is a silver lining in the data. In the two years since FY21, GFCF by the private sector has grown faster. General government GFCF rose a cumulative 42% between FY21 and FY23. Non-Financial Private Sector’s overall GFCF increased by 51%. Investment in Machinery and Equipment and Intellectual Property Products increased by 38%. So, the growth in these two critical sub-components of Private Sector GFCF is similar to that of the overall GFCF by the General Government.

On Agriculture Sector

The agriculture sector is one area ripe for and needs such a pan-India dialogue. Agriculture and farmers matter for a nation. Most countries understand that. India is no exception. India subsidizes their water, electricity, and fertilizers. The former two are provided virtually free. Their incomes are not taxed. The government offers them a minimum support price (MSP) for 23 selected commodities. Monthly cash support is offered to farmers through the PM-KISAN scheme. Indian governments – national and sub-national –write off their loans.

So, governments in India spend enough resources to look after the farmers well. Yet, a case can be made that they can be served better with some re-orientation of existing and new policies.

Earlier development models featured economies migrating from farm beginnings to industrialization to value-added services in their development journey. Technological advancements and geopolitics are challenging this conventional wisdom. Trade protectionism, resource-hoarding, excess capacity and dumping, onshoring production, and the advent of AI are narrowing the scope for countries to squeeze out growth from manufacturing and services.

That is forcing us to turn conventional wisdom on its head. Can the farm sector be the savior? A return to roots, as it were, in terms of farming practices and policymaking, can generate higher value addition from agriculture, boost farmers’ income, create opportunities for food

processing and exports, and make the farm sector both fashionable and productive for India’s urban youth. When resolved, the problem areas mentioned above that the current policy configuration has created over the years can become sources of India’s strength and a model for the rest of the world - developing and developed.

On Small Enterprises

Another area where policy intentions have yet to manifest in desired outcomes is concerning small, medium, and large enterprises. Earlier, several products were reserved for small-scale industries. That was phased out as it benefitted neither the small-scale industries nor the overall economy.

Recent concerted efforts at formalizing them are making progress. Progress is relatively slower on access to finance. Buyers and creditors are shedding old mindsets and practices too slowly for these enterprises to feel the effect. However, these enterprises need maximum relief from the compliance burdens they face. Laws, rules, and regulations stretch their finances, abilities, and bandwidth, perhaps robbing them of the will to grow.

On Successful Energy Transition

Other priorities, such as energy transition and mobility, may pale compared to the complexity of getting the farm sector policies right. Still, they have one thing in common with it. They require getting many things across several ministries and states aligned. Emulating policy practices of other nations may be neither feasible nor desirable, for solutions may not emerge from approaches and places that created the problems in the first place.

Before you go

The Economic Survey 2024 painted a largely positive picture of India's economic performance while acknowledging challenges and outlining strategies for sustained growth.