India's Strategy for Deregulation and Growth | 10 Dec 2024

Source: IE 

Why in News? 

Recently, the Chief Economic Advisor (CEA), Dr. V. Anantha Nageswaran, has announced that deregulation will be a major theme in the Economic Survey for 2024-25.  

• This announcement underscores the government’s intention to ease restrictive regulations in various sectors to spur economic growth, and enhance the productivity of Small and Medium Enterprises (SMEs).

What are the Key Focus Areas for Economic Growth of India? 

• Deregulation as a Catalyst for Growth: The upcoming Economic Survey for 2024-25 highlights deregulation, particularly at state and local levels, as a key growth catalyst. 
  • Citing outdated restrictions on 118 occupations deemed "risky" for women, and to reform female labour force participation and promote entrepreneurship, unlocking greater economic potential. 
• Wage Growth and Consumption: CEA highlighted the stagnation of wages, especially for contractual employees, which has failed to keep up with inflation, reducing purchasing power. Despite rising corporate profits, wage disparity persists.  
  • A correction in corporate wage structures is needed to align earnings with living costs, stimulating demand and economic growth. 
• Informalisation of the Workforce: The Covid-19 pandemic accelerated the shift from regular to informal employment, weakening job security and benefits. While beneficial for companies, this trend hampers consumption and economic growth by limiting workers' ability to save and invest.  
• Small and Medium Enterprises (SMEs): India's Small and Medium Enterprises (SMEs) sector is crucial for economic growth, especially in manufacturing. However, it faces challenges due to the "micro" category, limiting access to resources and support.  
  • Learning from Germany and Switzerland, India must end concessions that keep SMEs small. A vibrant SME sector can help achieve India's goal of a 25% share of GDP from manufacturing. 
• Job Creation and Labour Force Participation: India needs to create around 8 million jobs annually to absorb its growing workforce. CEA emphasized balancing capital and labour-intensive growth, with the private sector playing a key role.  
  • Policies like cash incentives and provident fund contributions for first-time hires aim to boost job creation. 

What are the Implications of Deregulation for the Indian Economy? 

• Boost to Private Sector Growth: Deregulation allows businesses to operate with greater autonomy, reducing bureaucratic delays and enabling faster decision-making. This has led to the flourishing of industries such as telecommunications, aviation, and IT. 
• Innovation and Entrepreneurship: Deregulation has created a conducive environment for startups and innovation by reducing compliance burdens and fostering ease of doing business. 
  • With the growth of industries due to deregulation, there has been a corresponding increase in job opportunities across various sectors, contributing to economic empowerment. 
• Attraction of Foreign Investments: By removing restrictions on foreign direct investment (FDI) in various sectors, deregulation has helped India become a preferred destination for global investors, enhancing capital inflows and technology transfer. 
• Increased Efficiency and Competition: A deregulated market fosters healthy competition, ensuring better quality goods and services at competitive prices, benefiting consumers while driving industrial growth. 

What is the Importance of Deregulation for the Indian Economy? 

• Reviving Economic Growth:  
  • The Covid-19 pandemic triggered a significant contraction in India's economy in 2020. While the economy rebounded strongly in 2021 with a GDP 9% growth, which has now slowed down to 5.4% in July-September FY25, below RBI's 7% projection. 
  • By reducing bureaucratic hurdles and empowering market forces, deregulation fosters entrepreneurship, investment, and innovation, driving sustainable economic recovery and growth. 
• Addressing Unemployment and Underemployment: 
  • The pandemic worsened unemployment, with over 1.8 crore salaried jobs lost between April and July 2020.  
  • By promoting ease of doing business and fostering private sector growth, deregulation creates employment opportunities, particularly in sectors that were adversely impacted by the pandemic 
• Reinvigorating Agriculture and Allied Sectors: 
  • Despite some recent growth, the agricultural sector which employs over 50% of the workforce has not kept pace with overall economic growth. 
  • The sector's contribution to GDP has declined from 35% in 1990-91 to 15% in FY23 and its growth rate declined to 1.4% in 2023-24 from 4.7% in 2022-23. 
• Bridging Infrastructure Deficit: 
  • According to the World Bank, India faces an infrastructure gap estimated at USD 1.5 trillion, with significant deficiencies in transportation, energy, and healthcare.  
  • Private investment remains low, falling to 19.6% of GDP in 2020-21, and Gross Fixed Capital Formation (GFCF) declined by 14.5% in FY 2020-21. 
• Enhancing Export Competitiveness and Geopolitical Tensions: 
  • Geopolitical issues, such as the Russia-Ukraine war, have disrupted global trade, impacting sectors like textiles and footwear, where exports have contracted.  
  • Additionally, India's pharmaceutical sector, despite its global aspirations, has struggled to keep pace with growing demand, lagging behind global growth in the sector. 

What Strategies Can India Adopt to Make Deregulation Impactful? 

• Encourage PPP and Competition: 
  • For making deregulation successful and impactful there is a need to foster partnerships between the government and private sector to ensure effective implementation of reforms while encouraging fair competition to break monopolies and foster innovation. 
• Leverage Technology and Simplify Compliance: 
  • Use digital platforms to enhance governance transparency, reduce compliance burdens, and streamline approval processes. The Digital India initiative and single-window clearance systems under the Ease of Doing Business reforms. 
• Promote Financial Inclusion and Support SMEs: 
  • Ensure deregulation benefits marginalized populations by expanding access to banking and credit facilities, while supporting SMEs to adapt to market dynamics. Example: Pradhan Mantri Jan Dhan Yojana (PMJDY) and Startup India initiatives. 
• Learn from Global Examples: 
  • There is a need to adapt global best practices to local contexts and engage stakeholders in participatory decision-making to build trust and address resistance. 
  • Singapore's deregulation has fostered economic growth and improved living standards, benefiting the financial sector, telecommunications, transportation, and electricity market. 
• Sector-Specific Reforms: Sector-specific reforms should address unique challenges while ensuring strong regulatory oversight in critical areas like finance, environment, and defense. 
  • For example, allowing 100% FDI in defense promotes modernization but requires stringent regulations for security, while the Insolvency and Bankruptcy Code (IBC) streamlines financial resolution while maintaining accountability and preventing risks.