Deregulation, better hiring, salary by India Inc key to boost urban consumption, says CEA Nageswaran

Chief Economic Adviser V Anantha Nageswaran.

Deregulation and better private sector hirings and compensation practices could boost India’s urban consumption, chief economic adviser V Anantha Nageswaran told Moneycontrol in an interview.

The Economic Survey for 2024-25 authored by Nageswaran and his team in the finance ministry’s economic division was tabled in the Parliament on January 31.

Nageswaran explained since deregulation lowers the cost of doing business, especially for small and medium enterprises, “they can scale up, employ more and thereby generate the virtuous cycle of employment, income growth, consumption, etcetera.”

Similarly, a re-examination of private corporate sector compensation and hiring practices can also be another lever to boost urban consumption.

These are two key pillars to boost and accelerate urban consumption, Nageswaran added.

His comments come at a time when there are concerns around a more pronounced slowdown in India’s urban consumption evident from lower sales of passenger vehicles and other key macroeconomic data points.

Below are the edited excerpts of the interview with Nageswaran:

Elaborating on ‘deregulation’, the survey notes: “This means changing the operating principle of regulations from guilty until proven innocent ‘to ‘innocent until proven guilty’. What exactly do you mean by this, does this by any chance pertain to the flurry of GST cases against certain businesses?

I think these are fertile imaginations, we did not have anything specific in mind when we wrote this. In general, any economic system has a choice which is to allow economic activity to happen, while some people will always find a way to cheat and evade. But if you want to focus on ensuring that no one cheats or evades then naturally economic activity will be impacted. That means you will suspect that everyone will be prone to cheating and evading therefore you will have extensive controls and reporting requirements and compliances in place. But if you want to talk about economic activity being more important than you will acknowledge the possibility that there will be a small percentage that will always look to exploit loopholes and evade and cheat in which case you would not make it over-intrusive. This is a dilemma for all regulators, all governments across the world, over the years. We were not talking of anything specific; this is a philosophical mindset that needs to apply. Are we going to make sure that economic activity is secondary to compliance or compliance is secondary to facilitating economic activity.

The 6.3-6.8 percent growth does that suggest we are amidst a slowdown? Is this worrying for our Viksit Bharat goals that may require an annual trend growth rate of 8 percent?

I would contest the statement that 6.3-6.8 percent acknowledges that we are in a slowdown. It is just that there was a natural rebound from a Covid pandemic era of economic growth contraction in 2021 and that gave us few years of very high growth. But, if you look at the global economic activity index of the Federal Reserve Bank of Dallas has also been declining since 2023 so India’s growth slowdown therefore has to be placed in context of global economic activity trending down and now it is in fact in the negative territory now. When global investment and trade flows are becoming problematic or more uncertain, you cannot call it a slowdown, it is something we may have to live with for some time until the global environment becomes more certain and conducive, that is all these numbers reflect.

Then is 8-percent trend growth still possible for India?

Why not. That is why, in this survey, we are focussing on things that we can do or we need to do without necessarily relying on global factors.

You have spoken about the need for the private sector to pick up on investments, hiring and wages given that their profitability has been on the rise, however it seems that they have been on the sidelines especially on capex cos they are unsure about urban demand conditions improving. When and how do we solve this riddle?

It is not entirely true that the private sector has been on the sidelines. It is just that the rate at which they are increasing their investments is somewhat slower than what we would like it to be or somewhat slower than what we experienced in the first decade of the Millennium. However, what they need to realise that though usually investments depend on demand visibility, but investments by the private sector can itself create the demand visibility through investments leading to more hirings, hiring leading to more compensation, compensation leading to more demand, demand leading to more investments. We are saying that the private sector needs to think about how it can create the very demand conditions it is looking for in order to undertake capital formation.

What’s the best ways to boost consumption as per you given that despite a pick up of late, urban consumption continues to remain weak? Is there a case for a tax cut?

I do not want to get into specifics on the eve of Budget presentation, you can wait until tomorrow for your answers. But we do see deregulation and private sector hirings and compensation practices as two important pillars of boosting consumption. Because, deregulation lowers the cost of doing business, especially for small and medium enterprises, they can scale up, employ more and thereby generate the virtuous cycle of employment, income growth, consumption, etcetera. Similarly, private corporate sector re-examining its compensation and hiring practices post pandemic can also be another lever to boost urban consumption. Whether fiscal policy is an important tool or not (for consumption), I am not getting into that, but right now in the survey, we are focussing on these two aspects as two key pillars to boost and accelerate urban consumption.

Do we need to tailor our trade policies to tackle Trump’s America-first stance as well as to safeguard the country from implications from potential trade wars between China & US?

I would not want to venture into this area right now, because it is now being discussed inside the government and across governments, so it is a sensitive matter and there is no point speculating on it in public.

The Economic Survey warns that India should keep in mind that it is highly dependent on imports for EV production when incentivising them. India is hugely dependent on China like other nations for EV components. Recently, Trump withdrew the EV mandate put in place by his predecessor and many saw it as a move to reduce reliance on China for EV parts, do you feel India too should re-consider its EV subsidies?

India and US are different. US produces so much crude oil by itself so therefore whatever mandate on EVs they may have revoked may be in line with their requirements. I do not want to get into that. When it comes to India, we are dependent on fossil fuel imports and that has implications for our air and water and environmental pollution, we may therefore have a different attitude towards tail pipe emissions. We have realised there are import implications and therefore the government has announced incentives and schemes in the last two Budget for development of battery technology, battery storage technology, and some other EV supply-chain ecosystems inside the country itself. We are aware that more EV production and sales in the country may increase our import reliance in the near term and therefore we have taken action, but they will take some time to bear fruit. In the meantime, more and more EV production will increase our import reliance in the near term, which comes with its own risks. That’s why in the Survey we write about a need for a more calibrated approach, which also needs to understand that we have invested so much in public transportation and that has got huge potential to reduce traffic congestion, air pollution and reduce our import dependency on fossil fuels. We need to therefore take a more holistic view of transportation and energy transition solution rather than simply focussing on tail pipe emission reduction, which is what the EV policy focusses on.

We may have a good reason to subsidise given our import dependency when it comes to fossil fuels and that fossil fuels are subject to different kinds of geopolitical condition so whether we should pull the subsidy (for EVs) or retain them for a specific period of time or cap them, these things need to be carefully studied.

In your survey you noted that India’s CPI inflation would be 4 percent, to RBI’s target, if one takes out the volatile TOP vegetables, do you think this furthers the case for RBI to not track food inflation while deciding on interest rates? When do you see headline inflation going back to 4 percent?

We don’t have a timeline for headline inflation returning to 4 percent. And in last year’s Economic Survey we have written about how the central bank should look through specific food commodities’ prices so I do not have more to add to that at this stage. But I do believe, inflation dynamic is becoming more favourable from the Indian perspective.