Economic Survey

De-Regulation to boost Indian Economy: Economic Survey 2024-25

Context: Globally, there is a shift from an era of hyper-globalisation to increased protectionism and strategic competitiveness among countries. In this backdrop, the Economic Survey 2024-25 prescribed reforms through de-regulation and increasing private sector participation.

Relevance of the Topic: Prelims: Economic Survey- State of Economy, Measures to boost economy

Highlights of Economic Survey 2024-25

Growth Rate: The Survey predicted India’s economic growth to be between 6.3-6.8% in 2025-26.
- The forecast falls short of both the previous Economic Survey’s 6.5-7% projection and the RBI’s 6.6% estimate for 2024-25.
- Its growth projection for FY26 is lower than the ADB’s forecast of 7% but in line with the World Bank’s (6.7%), the IMF’s (6.5%) and Fitch Ratings (6.5%).
- The Statistics Ministry expects the economy to grow at 6.4% in 2024-25.

Viksit Bharat can only be achieved with 8% growth for at least a decade. The survey prescribes a 4 pillar strategy to achieve higher growth in the new playing field, marked by protectionism and strategic competitiveness among countries.

Reforms prescribed by Economic Survey 2024-25:

De-Regulation:
- The Survey strongly advocates for de-regulation, guided by a broad laissez faire approach of ‘getting out of the way’ principle.
  - It recommends the government to stop micromanaging economic activity and to embrace risk-based regulations.
  - Changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’.
  - Simplifying regulations that affect businesses. E.g., Adoption of Business Reform Action Plan (BRAP) formulated by the Department for Promotion of Industry and Internal Trade (DPIIT).
- Focus on Ease of Doing Business 2.0, pushing on de-regulation as a pathway to employment generation. It recommends labour with a flexibility of working hours.
De-regulation by States: The Survey has called upon States to begin de-regulation exercise by:
- Identifying regulations that affect decision-making in enterprises
- Comparing their regulations on these issues with those in other States and countries
- Examining the economic impact of their current regulation on a single sample enterprise.
In Ease of Doing Business 2.0, States must work on:
- liberalising standards and controls
- setting legal safeguards for enforcement
- reducing tariffs and fees
- applying risk-based regulation

Private-sector participation in nation building:
- Bridge the Profit-Wage Gap:
  - The Survey suggested an equipartition of profits by the private sector to ensure better wages for workers.
  - Despite companies achieving a stable EBITDA margin of 22% over the last four years, wage growth has moderated.
  - Aligning profit growth with wage increases is essential for sustaining demand and supporting corporate revenue and profitability growth in the medium to long run.
- Creating Jobs: While corporate profits have climbed 22.3% in FY24, employment grew by a mere 1.5%.

Augmenting internal capacities: Enhancing economic freedom for individuals and small businesses to bolster India’s medium-term growth prospects.
Urgent Indigenisation for India’s EV sector:
- India will need to focus on indigenisation of raw material and technology.
- It highlights concerns over the need for imports to achieve transition to electric mobility, even as the global automobile industry looks to reduce its dependence on China.

Excessive Financialisation can hurt India's Economy

Context: Economic Survey 2024-25 highlights concerns about the rapid growth of financial markets in India, emphasising that excessive financialisation can harm the economy.

Relevance of the Topic: Prelims: Savings Trends in Indian Economy; Basic idea about Financialisation of Economy.

What is Financialisation?

Financialisation of Economy refers to the increasing dominance of financial markets, financial institutions, and financial motives in the overall economy.
- It means that economic growth and wealth generation rely more on financial activities (like stock markets, banking, and investment funds) rather than traditional sectors like manufacturing, agriculture, or services.
Financialisation of Savings refers to the shift of household or corporate savings from traditional, physical assets (like gold, real estate, or cash) to financial assets (like stocks, mutual funds, bonds, and insurance).

Aspects of Financialisation

Expansion of Financial Markets:
- Financial markets include the stock market, bond markets, derivatives, and foreign exchange markets.
- Financial assets and instruments are increasingly traded on a global scale, driving economic growth, but also introducing volatility.
Rise of Financial Institutions:
- Banks, investment firms, hedge funds, and insurance companies have grown in power and influence over other sectors, including manufacturing and service industries.
Shift in Corporate Focus: Companies increasingly rely on stock buybacks, dividends, and mergers and acquisitions to boost stock prices, rather than reinvesting profits into productive activities.
Households and Financialisation:
- Ordinary households have become more engaged in financial activities, from mortgage lending and credit card debt to retirement savings managed through pension funds and mutual funds.
- Financial markets directly influence household wealth and savings, making them vulnerable to market fluctuations.

Implications of Financialisation

Economic Inequality:
- Benefits of financialisation tend to be concentrated among the wealthy, particularly those with significant financial assets, leading to rising income and wealth inequality.
- Workers and middle-class households often do not benefit proportionately from financial growth.
Vulnerability to Financial Crises:
- Financialisation has made economies more vulnerable to financial shocks, such as the 2008 global financial crisis.
- The increasing complexity of financial instruments (E.g., derivatives, mortgage-backed securities) can lead to instability.
- The interconnectedness of global financial systems means that a crisis in one market or country can have ripple effects worldwide.
Short-Termism:
- Corporations and investors focus on short-term profits and immediate financial returns, often at the expense of long-term investment in innovation, infrastructure, and human capital. This short-termism undermines sustainable economic growth.
Debt-driven Growth:
- Financialisation often leads to a growing reliance on debt, both for governments and individuals.
- Consumer credit, corporate debt, and public debt have surged globally as access to credit has expanded.
- This debt-driven growth can lead to bubble in real estate and other asset markets, increasing the risk of financial crises.
Political Influence:
- Financial lobbyists often shape policy in ways that favour the financial sector, such as deregulation and tax incentives.

Financialisation in India

Widening role of financial markets: In India, financialisation is evident in the increasing role of financial markets, particularly with the growth of stock markets, insurance, and the mutual funds industry.
Rise in Retail Investors:
- There has been a significant increase in individual investors participating in the stock market, both directly and through mutual funds.
- The number of demat accounts (necessary for trading stocks) grew from 114.5 million in FY23 to 151.4 million in FY24.

Potential Risks:

Risk of Overconfidence: Overconfidence might lead to speculative behavior, expecting higher returns that may not align with actual market conditions.
Engagement of youth: Many new investors are young and may have a higher risk appetite, leading them to engage in derivatives trading, which is often speculative.
Derivatives Trading Concerns:
- Derivatives are financial instruments used for hedging but are often used for speculation.
- Globally, most retail investors lose money in derivatives trading.
- A significant market downturn could result in substantial losses for these investors, potentially discouraging them from future participation.

Lessons from other Economies:

The Economic Survey warns that rapid financial market growth without corresponding economic growth has led to crises in both developed and developing countries.
The 2008 global financial crisis is cited as an example of the dangers of excessive financialisation.

Recommendations:

India should ensure a gradual and orderly development of its financial markets.
All stakeholders, including investors, regulators, and the government, should work together to ensure that capital markets effectively channel savings into productive investments.
Continuous financial education is essential to inform investors about the risks associated with speculative trading.

Key Takeaways from Economic Survey 2024-25

Context: The Economic Survey for 2024-25 was tabled by Finance Minister Nirmala Sitharaman in Parliament on 31 January 2025.

Relevance of the Topic:Prelims: Key takeaways from Economic Survey.

About Economic Survey

The Economic Survey is prepared by the Economic Division of the Department of Economic Affairs in the Ministry of Finance under the supervision of the Chief Economic Adviser.
The Survey is a report of the state of the Indian economy in the financial year that is coming to a close.
It serves as a crucial resource for policymakers, economists, and stakeholders, outlining the trends, challenges, and opportunities that shape the economic landscape.

State of Indian Economy:

The Economic Survey contends that the domestic economy remains steady amidst global uncertainties.

1. Real GDP

Real Gross Domestic Product maps economic activity from the demand side of the economy.
- In the current financial year (FY25) Real GDP is pegged at 6.4%.
- In the coming year (FY26), the Survey expects it to lie between 6.3% and 6.8%.
The share of private final consumption expenditure — the money Indians spend in their individual capacity (the consumer demand) — in India’s GDP (at current prices) is estimated to increase from 60.3% in FY24 to 61.8% in FY25. This share is the highest since FY03.

2. Gross Value Added

On the supply side, which is mapped by Gross Value Added (GVA), India’s growth remains close to the decadal average.
Aggregate GVA surpassed its pre-pandemic trend in the first quarter of FY25, and it presently is above the trend.

3. Inflation

Headline inflation is moderating because of moderating core inflation.
- Core inflation refers to inflation in goods and services except food and fuel.
However, food inflation increased from 7.5% in FY24 to 8.4% in the current financial year, driven by factors such as supply chain disruptions and vagaries in weather conditions.

4. Employment

India’s labour market growth in recent years has been supported by post-pandemic recovery and increased formalisation.
The 2023-24 annual Periodic Labour Force Survey (PLFS) report shows that all key employment related metrics, such as unemployment rate, labour force participation rate and the worker-to-population ratio (WPR), have improved.

5. FDI Inflow

FDI indicates the amount of money invested in Indian companies by foreign investors. These inflows also regulate balance of payments and the rupee’s strength.
Net FDI inflows have fallen during the first eight months of FY25 due to a rise in repatriation/disinvestment. For the overall financial year, FY24 saw a drop in FDI compared to previous years.

6. Foreign Exchange Reserves

The country’s foreign exchange reserves act as a means to service external debt and imports, maintain liquidity and play an important role in monetary policy.
As of December 2024, the reserve stood at 640.3 billion U.S. dollars. This amount will cover 90% of India’s external debt of 711.8 billion dollars as of September 2024.

7. Industrial sector

The industrial sector is estimated to grow by 6.2% in FY25.
Growth in the services sector is expected to remain robust at 7.2%, driven by healthy activity in financial, real estate, professional services, public administration, defence, and other services.
The manufacturing sector, while steadily recovering, remains slightly below its pre-pandemic trajectory as it recovers from slowing global demand and supply chain disruptions.

8. Trade

The value of exports and imports fell by 0.1% and 2.3% in FY24 when compared to FY23. But they have seen a rise in FY25 (April to December) by 6.6% and 3%.

9. UPI payments

UPI payments have seen an exponential growth since it was launched in FY 2016. The total value of UPI payments almost touched ₹2 lakh billion in FY24, and it has already surpassed ₹1.9 lakh billion from April to December in FY25.

Survey’s recommendations

The Union government and state governments should strive to boost employment, income generation, and therefore consumption.
Need to deregulate the economy to unleash economic growth. There is a positive correspondence between business reforms and level of industrial activity.
- Presently, India faces limitations in producing critical goods at the scale and quality required, to serve the infrastructure and investment needs of an aspiring economy.
- By simplifying regulations that affect businesses can lower the cost of doing business, boost employment, income growth and therefore higher consumption.
- E.g., Adoption of Business Reform Action Plan (BRAP) formulated by the Department for Promotion of Industry and Internal Trade (DPIIT).

Concerns

In the context of the global economy, the Survey has flagged two main concerns:

1. Unfavorable global economic environment

The broader global economic environment has become unfavourable and challenging, and global trade and investment have slowed down.
Global trade dynamics have changed significantly in recent years, shifting from globalisation to rising trade protectionism, accompanied by increased uncertainty.
The impact of this shift in global structural forces is reflected in global trade growth, and signs of stagnation in the global economy are beginning to emerge.

2. Dominance of China

The dominance of China as the world’s manufacturing superpower is concerning for India.
- A third of all global production happens in China, and it alone manufactures more global output than the next 10 countries put together.
- However, post COVID-19 and due to global economic fragmentation, the world’s modus operandi of outsourcing manufacturing to China (pursued vigorously in the globalisation era) is coming to rest.