Economic Survey 2024-25: Will Local Governments Allow Suggested Interventions

Due to rising geo-economic fragmentation, real-time basis policy tweaking has become more important than ever. Writes Pratim Ranjan Bose.

Policymaking was a linear, if not easier, exercise in both the closed-economy era and three decades of globalisation. That was a time when you could take longer-term views in areas like trade, tariffs, and industrialisation. Not that long-term agenda is missing these days. However, keeping in tune with rising geopolitical uncertainty and increasing geo-economic fragmentation, real-time basis policy tweaking has become more important than ever.

This year’s Economic Survey highlighted the need for apparently small interventions which might end up playing critical roles in ensuring India’s energy security, paving the way for manufacturing growth, creating a more skilled labour force, improving productivity in the agriculture sector, etc.

There is, however, one rider. Many of the suggested changes fall in the purview of states and local governments like municipal corporations.

Local rules

The survey pointed out how restrictive local regulations related to land and land revenue, building bylaws, water and fire safety rules etc, can impact the costs of a small and medium enterprise (MSME). MSMEs form the backbone of the industrial supply line which is crucial for the success of the large industry. Globally the industrial value chain is upwardly mobile. Smaller industries scale up operations with time to optimise costs.

In India, there is a structural disincentive to scale up. The survey pointed out that the compliance cost of a 300-worker factory is often higher than a 150-worker facility. Similarly, the Factory Act of 1948 limits working hours every week.

Though the overtime rate is “higher” in India, Chief Economic Adviser (CEA) Anantha Nageswaran said, the act stipulates how much overtime a worker can do.

Interestingly, India’s competing nations found a simple solution. They stipulated how much work is legal in say six months. A small tweak in labour law can help industries meet seasonal demands at lower cost.

The survey recommended that higher educational institutes be given freedom to tweak courses keeping in tune with the changing market demand in the days of artificial intelligence. Not highlighted by Survey but this area needs some bigger reforms as well. If we need foreign investment in higher education and research, why did we make it mandatory for them to invest through trusts? Leave it to the choice of the investor.

Such examples lead even up to the local level. In Kolkata, the trade license of a one-room registered company is three times more costly compared to partnership firms and trusts which are cumbersome to manage.

Energy security

In what may be called a recent global trend, the Survey pointed out the dangers involved in hurrying up the energy transition to solar and electric vehicles (EV), where China controls key minerals, components or technologies. Almost the entire global supply of solar modules, cells and polysilicon comes from China. The situation is the same in EVs where Beijing has near complete dominance on the supply of key minerals like Cobalt, Lithium, Graphite etc.

Ideally energy transition should reduce our risks and vulnerabilities from a cartelised dollar-denominated crude oil trade. But until such time the supply of key elements is democratised or new energy sources – like hydrogen – are established; the energy transition might lead us to a bigger trap.

US President Donald Trump was not incorrect in taking a U-turn from Joe Biden-era EV policy. India may not do that drastic but a slowdown in EV transition policy may be welcome.

The same goes for solar. Apart from the geo-economic and security considerations, solar is hugely costly because it increases the system redundancy.

It is time we must reconsider our coal strategy. With huge domestic reserves in place, should it be better both for economic value creation and energy security to focus on cleaner coal technologies?

The former Shinzo Abe government of Japan was a huge proponent of clean coal technologies. India has also made some policy tweaks in the last few years. More may be coming.

Trade and tariff Survey is clear that geoeconomic fragmentation and trade restrictions are set to rise. There has been a 60 per cent jump in trade restrictions imposed by countries around the world over the last four years.

With the USA pulling out of the Paris Climate Agreement and World Health Organisation one can clearly see the United Nations architecture crumbling. We are yet to assess the impact of Donald Trump’s attempt to Make America Great Again (MAGA) on global FDI.

Things are going to be extremely difficult. India is trying to ride on its vast domestic market advantage. However, it would be crucial to ensure that the rising trade barriers don’t make domestic production inefficient.