New Delhi: The Economic Survey 2023-24 has blasted the private sector for its “substantial” and “myopic” role in undermining the Indian population’s productivity and health by encouraging sedentary habits and fast food, while also saying that the sector is investing too little in productive areas that can boost employment and growth despite seeing robust growth in their profits.
Further, the survey, presented to Parliament Monday and prepared by Chief Economic Advisor V. Anantha Nageswaran and his team, laid the bulk of the onus for job creation on the private sector and state governments. It added that the private sector financial companies must desist from pursuing “short term profits at the expense of the customer” by mis-selling products to the public.
However, despite exhortations to the private sector to invest, the survey also sounds a note of caution, saying that while improved balance sheets will allow the private sector to invest, capital formation by the sector may turn “slightly more cautious” due to fears over cheaper imports from countries with excess capacity.
Overall, the survey predicted the Indian economy will grow by 6.5-7 percent in the current financial year 2024-25.
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Job creation is the role of private sector and states
“It is worth reiterating that job creation happens mainly in the private sector,” the survey said. “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.”
The document went on to say that, in more than one respect, “the action lies with the private sector”, since in terms of financial performance, “the corporate sector has never had it so good”.
The survey noted that, based on a sample of over 33,000 companies, the data shows that the profits after tax (PAT) of the Indian corporate sector has “nearly quadrupled” in the three years between FY20 and FY23.
“Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24,” it added. “Hiring and compensation growth hardly kept up with it. But it is in the interest of the companies to step up hiring and worker compensation.”
Not investing in the right areas
The survey also raised the question of whether the corporate sector has responded positively to the Union government’s 2019 decision to cut corporate tax rates to encourage capital formation. It found that this has not been the case so far, although the situation has been improving recently.
“Private sector gross fixed capital formation (GFCF) in machinery and equipment and intellectual property products has grown cumulatively by only 35 percent in the four years to FY23,” the survey noted.
“Meanwhile, its GFCF in ‘dwellings, other buildings and structures’ has increased by 105 percent,” it added. “This is not a healthy mix.”
Further, it said that the “slow pace of investment” in monitoring and evaluation and intellectual property products would delay India’s thrust to raise the share of manufacturing in overall gross domestic product (GDP). It added that this would also delay improvements in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.
However, looking ahead, the survey also pointed out that unfolding global events in other economies could see India’s private sector becoming more hesitant to increase investments.
“Private capital formation after good growth in the last three years may turn slightly more cautious because of fears of cheaper imports from countries that have excess capacity,” it said.
Embrace traditional lifestyles, not social media
The survey highlighted the need for skills and good health in order for India’s working-age population to be gainfully employed.
“Social media, screen time, sedentary habits, and unhealthy food are a lethal mix that can undermine public health and productivity and diminish India’s economic potential,” it said. “The private sector’s contribution to this toxic mix of habits is substantial, and that is myopic.”
It said that the emerging food consumption habits of Indians are both unhealthy and environmentally unsustainable, adding that India’s traditional lifestyle, food and recipes have “shown how to live healthily and in harmony with nature and the environment for centuries”.
“It makes commercial sense for Indian businesses to learn about and embrace them, for they have a global market waiting to be led rather than tapped,” the Survey noted.
Product misselling in financial sector is ‘short-termism’
The survey’s criticism of the corporate sector doesn’t stop there, extending to the private financial sector companies in banking and insurance as well.
Acknowledging that the role of the corporate has “never been greater than it is now”, the survey said that the other area of corporate responsibility had to do with nurturing and sustaining a culture of investing for the long term.
“Market practices that take their cues from the thinly disguised leveraged bets masquerading as financial innovations in the developed world have no place in a developing country with a low per-capita income,” the survey said.
It noted that, just as with corporate profits booming, the net interest margins of Indian banks have risen to multi-year highs, which, it said, was a “good thing” since profitable banks lend more.
However, it sounded a note of caution here.
“To sustain the good times, it is important not to forget the lessons of the last financial cycle downturn,” it said. “The banking industry must aim to lengthen the gap between two non-performing assets (NPA) cycles. It should also resist the temptation to pursue short-term profits at the expense of the customer.”
“Product misselling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel,” it added. “The same can be said of the insurance industry as well.”
The survey pointed out that corporates benefit from the higher demand generated by employment and income growth, while the financial sector benefits from channeling household savings for investment purposes.
“These linkages must grow stronger and last longer to meet the infrastructure and energy transition investments in the coming decades,” it said. “Short-termism can weaken these linkages.”