Addressing the Disparity Between Profit Growth, Capital Formation, and Hiring in Companies
Chief Economic Advisor V Anantha Nageswaran has called on Indian businesses to increase capital expenditure and align worker compensation with profitability growth. Speaking at a Confederation of Indian Industry (CII) event, he emphasized that these measures are essential for maintaining a growth rate of over 6.5% and achieving the goal of becoming a developed nation by 2047. Nageswaran highlighted the importance of a virtuous cycle of investment for enhancing production capacity, creating jobs, and boosting household savings.
Investment and Profitability Trends
Nageswaran pointed out a concerning trend in the Indian economy where the growth in profitability has outpaced capital formation. He noted that while private sector profitability surged from Rs 7.2 lakh crore to Rs 28.7 lakh crore by March 2024, capital formation only increased threefold during the same period. This discrepancy, he warned, could hinder India’s ability to sustain a minimum growth rate of 6.5% in real terms. He stressed the need for a course correction to close this gap, stating, โIf we have to achieve a sustained 6.5 per cent growth minimum in real terms and aim for a higher growth rate then this gap has to close.โ
Nageswaran also underscored the necessity for balanced deployment of capital and labor, along with significant investments in infrastructure and capacity creation over the next 25 years. He emphasized that sustainable capital formation is closely tied to rising household incomes and savings, which are crucial for long-term economic stability.
Policy Support and Regulatory Simplification
During his address, Nageswaran highlighted the importance of policy support and regulatory simplification to foster a conducive environment for growth. He acknowledged that while deregulation can stimulate economic activity, it also presents challenges. He noted that a significant portion of regulatory overreach stems from a lack of trust between the private sector and the government. โThe ‘what’ of deregulation is clear, but ‘how’ becomes more challenging,โ he explained, indicating that deregulation can sometimes lead to unintended consequences.
He called for a collaborative approach between the central and state governments, as well as the private sector, to achieve the ambitious goals set for ‘Viksit Bharat’ by 2047. Nageswaran emphasized that without this collaboration, the desired development over the next 25 years may not be realized.
Macroeconomic Outlook
On the macroeconomic front, Nageswaran reassured stakeholders that India is on track to maintain a growth rate between 6.3% and 6.8%, as projected in the Economic Survey. He attributed this positive outlook to favorable factors such as good monsoons, government-led capital expenditure, tax relief, and a low-interest-rate environment. These elements are expected to support economic growth and stability in the coming years.
Additionally, Nageswaran addressed the currency outlook, predicting only a modest depreciation of the Indian rupee. He cautioned against expecting the rupee to weaken significantly, suggesting that India might face the challenge of adapting to a stronger currency in the future due to international trends. This perspective indicates a shift in the economic landscape that businesses and policymakers will need to navigate carefully.
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