GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

Why in the News?

India’s average Index of Industrial Production (IIP) for fiscal year 2025 has dropped to 4%, the lowest level in the past four years, showing a clear slowdown in industrial growth.

Why has rural consumption remained strained despite a drop in retail inflation?

• Lingering Effects of High Food Inflation: Although retail inflation dropped, the high food inflation experienced in the last fiscal year (October to December) continues to affect rural households, leaving them with reduced disposable income. Eg: In FY24, the spike in food prices, particularly for essential items like pulses and vegetables, strained rural budgets, and recovery from this shock has been slow.
• Reduced Farm Incomes: Despite lower retail inflation, farm incomes have been negatively impacted by factors like erratic weather, reduced crop yields, and rising input costs, which affects rural consumption. Eg: Poor monsoon and drought in some regions led to crop failures, reducing farmers’ incomes and limiting their purchasing power.
• Limited Impact of Inflation Reduction: While overall retail inflation decreased, the price drops were not significant enough in rural areas to translate into meaningful gains in consumption, especially for low-income families. Eg: The fall in vegetable prices towards the end of FY25 helped urban consumers, but rural households still struggled due to stagnant or low farm output and income.
• Structural Economic Challenges: Rural India still faces structural challenges like inadequate infrastructure, low wages, and high dependence on agriculture, which limits overall consumption despite lower inflation. Eg: Many rural households rely on agriculture, which remains vulnerable to climate change and market volatility, restricting their ability to consume more even when prices drop.

How has the performance of different industrial sectors (like mining, manufacturing, and electricity) changed in FY25 compared to FY24?

What steps can the government take to boost private investment and protect MSME jobs?

• Enhance Domestic Demand through Targeted Public Spending: The government can invest in rural infrastructure, housing, and public services to stimulate consumption, which in turn will encourage private sector production and investment. Eg: Increased spending under schemes like PM Awas Yojana or rural roads (PMGSY) can boost demand for cement, steel, and consumer goods produced by MSMEs.
• Strengthen Trade and Market Access for MSMEs: By finalizing beneficial trade agreements and easing export procedures, the government can open more markets for MSMEs. Eg: Concluding a bilateral trade deal with the US could reduce tariffs and give India’s 60 million MSMEs better access to one of the world’s largest markets.
• Expand Credit Support and Reduce Compliance Burden: Provide low-interest loans and simplify regulatory procedures to ease doing business for small enterprises. Eg: Extending the Emergency Credit Line Guarantee Scheme (ECLGS) and digitizing compliance through platforms like Udyam Assist can help micro-industries scale up with less red tape.

Way forward: 

• Stimulate Demand and Investment: Boost domestic consumption through targeted rural and infrastructure spending while incentivizing private capital expenditure with tax benefits and interest subvention.
• Empower MSMEs for Global Competitiveness: Strengthen MSME access to credit, simplify compliance, and finalize trade deals to expand their global market footprint and protect employment.

Mains PYQ:

[UPSC 2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

Linkage: High food prices, mentioned in the article, are putting pressure on rural spending and slowing down the economy.

Why in the News?

Startup founders publicly claimed to support gig workers’ rights but secretly resist laws that would actually protect them.

What is the nature of employment in urban labour chowks and mazdoor mandis?

• Daily Wage and Informal Work: Workers gather at labour chowks every morning, hoping to be hired for the day. Example: Construction workers in Delhi’s Kashmere Gate labour chowk wait for contractors to hire them for masonry or painting jobs.
• Highly Competitive and Unstable: Large numbers of workers compete for limited jobs, often accepting lower wages out of desperation. Example: In Mumbai’s Dadar labour market, carpenters and plumbers rush to secure work before others.
• Exploitative Hiring Practices: Employers and thekedars (middlemen) negotiate wages, often offering the lowest possible rates. Example: In Ahmedabad, daily wage workers in textile markets are hired at rates well below the minimum wage.
• Lack of Social Security and Benefits: No job security, health benefits, or pensions; workers are paid only for the day they work. Example: Brick kiln workers in Hyderabad have no accident coverage despite working in hazardous conditions.
• Piece-Rate and Task-Based Payment: Workers are often paid per unit of work completed rather than a fixed wage. Example: In Chennai’s wholesale vegetable markets, loaders are paid per sack carried rather than for the number of hours worked.

Who benefits the most from the presence of thekedars in the labour market?

• Employers Benefit from Lower Labour Costs: Thekedars help employers negotiate lower wages and better terms by creating a competitive environment among workers. This allows employers to maximize profits by minimizing labor costs. Example: In urban labour chowks, employers can select workers at the lowest possible wage due to the high competition among workers, which benefits the employer financially.
• Thekedars Themselves Profit from Commissions: Thekedars earn commissions or fees from both workers and employers for their services. This financial gain is a direct benefit to them. Example: In the construction industry, thekedars often receive a percentage of the workers’ wages as a commission for facilitating the hiring process.

How do digital platforms replicate the role of thekedars in modern gig work?

• Acting as Middlemen Without Responsibility: Just like thekedars, digital platforms connect workers to employers but do not recognize them as formal employees, avoiding obligations like job security or benefits. Example: Ride-hailing apps like Uber and Ola classify drivers as “partners” rather than employees, denying them benefits like PF or health insurance.
• Downward Wage Bidding: Workers must accept the lowest possible payment, as platforms set rates based on demand and supply, just like the daily wage auctions in mazdoor mandis. Example: Food delivery workers on Swiggy and Zomato have seen their per-delivery payments decrease over time as competition increases.
• Algorithm-Controlled Work Allocation: Platforms use algorithms to decide which worker gets a task, replacing the manual selection process of thekedars. Workers have no bargaining power over wages or work hours. Example: Freelancers on Upwork or Fiverr depend on algorithms that prioritize clients, making workers compete for lower pay.
• Lack of Collective Bargaining: Gig workers are isolated, just like daily wagers in urban labour markets, making unionization and collective bargaining difficult. Example: Amazon Flex workers have no union representation and must accept whatever delivery rates the company offers.
• Exploitative Rating Systems: Workers must maintain high ratings to get work, forcing them to accept low wages and poor conditions, similar to how thekedars exploit labour desperation. Example: “Insta Maids” service offers house help for ₹49 per hour, making workers compete for ratings instead of fair wages.

What are the challenges for gig workers in India? 

• Lack of Job Security and Social Benefits: Gig workers are classified as “independent contractors,” denying them benefits like health insurance, provident fund, and paid leave. Example: Delivery partners for Swiggy and Zomato receive no compensation if injured while working.
• Low and Unstable Earnings: Payment structures are unpredictable, with fluctuating wages and reduced per-task payouts over time, making financial planning difficult. Example: Uber and Ola drivers often struggle as their earnings depend on peak-hour incentives, which companies frequently revise.
• Exploitation Through Rating Systems: Workers must maintain high ratings to secure jobs, forcing them to accept unreasonable customer demands and work long hours. Example: Urban Company service providers risk lower earnings or job loss if they receive poor ratings from customers, regardless of actual service quality.

Way forward: 

• Strengthening Legal Protections & Social Security: Enforce minimum wages, accident insurance, and pension benefits for gig and informal workers. Example: Amend the Code on Social Security, 2020 to ensure mandatory employer contributions.
• Collective Bargaining & Fair Work Standards: Facilitate unionization and introduce fair algorithmic policies to prevent wage suppression. Example: Implement transparent rating and payment systems on digital platforms like Swiggy and Uber.

Mains PYQ:

Q Examine the role of ‘Gig Economy’ in the process of empowerment of women in India. (UPSC 2021)

Reason: The article explores “insta-commerce,” where gig workers, including women, sell via social media. While the PYQ focuses on empowerment, the article highlights challenges like job insecurity, unfair wages, and the lack of grievance redressal. This perspective offers a nuanced view of the gig economy’s impact, including its dual role in both enabling and potentially disempowering women.

Why in the News?

The rise in the services Purchasing Managers’ Index (PMI) to 59 in February has brought relief to investors and policymakers.

What is the significance of the sharp rise in the services Purchasing Managers’ Index (PMI)?

• Indicator of Economic Expansion: A PMI reading above 50 signifies sectoral growth. The rise to 59 in February reflects a strong rebound in the services sector. Example: Increased demand for financial services and hospitality indicates higher consumer spending and business confidence.
• Boost to Investor Confidence: A higher PMI suggests a positive business environment, encouraging domestic and foreign investments. Example: Global investors may increase FDI in India’s technology and telecommunication sectors due to sustained growth signals.
• Job Creation and Income Growth: Growth in the services sector leads to higher employment opportunities and better wages. Example: The rise in IT services and healthcare sectors can create new jobs in software development and medical support.
• Balancing Manufacturing Weakness: A strong services PMI can offset slowdowns in manufacturing, ensuring overall economic stability. Example: Despite the manufacturing PMI falling to a 14-month low, growth in financial services has maintained economic resilience.
• Improved Fiscal Outlook: Higher activity in services increases tax revenues, improving the government’s ability to fund infrastructure and social programs. Example: Growth in e-commerce and logistics boosts GST collections, strengthening public finances.

Which major challenges to India’s services and manufacturing sectors? 

As per the industry leaders and NASSCOM’s 2025 Strategic Review report, the major challenges are :

• Technological Disruption from Artificial Intelligence (AI): AI-driven solutions are transforming traditional business models, reducing revenue from new contracts, and reshaping hiring and training practices. Example: Automation in IT services is reducing the need for entry-level jobs, impacting employment growth.
• Global Protectionism and Rising Tariffs: Increasing reciprocal tariffs and trade barriers, particularly from major economies like the United States, pose a threat to export-oriented industries. Example: U.S. tariffs on Indian textiles and pharmaceuticals may reduce market competitiveness and profit margins.
• Slowdown in IT Sector Growth: India’s IT sector growth is expected to be 5.1% in FY25, a decline from its historical 16% CAGR, due to reduced demand and shifting client priorities. Example: Major IT firms report fewer large-scale outsourcing contracts as clients adopt in-house AI solutions.
• Geopolitical Uncertainty: Geopolitical tensions and supply chain disruptions increase business risks and operational costs. Example: Disruptions in the Red Sea trade route affect electronics and automotive supply chains.
• Potential U.S. Recession Risk: A U.S. economic slowdown could reduce export demand, significantly impacting both manufacturing and services, as the U.S. is India’s largest trading partner. Example: A U.S. recession may lead to fewer orders for Indian IT services, pharmaceuticals, and automotive components.

How could the reciprocal tariffs announced by the U.S. impact India’s manufacturing sector?

• Reduced Export Competitiveness: Higher import duties on Indian goods will increase prices in the U.S. market, making Indian products less competitive against local and other global manufacturers. Example: Indian textile exports to the U.S. could decline as higher tariffs make them more expensive compared to those from Vietnam or Bangladesh.
• Disruption of Supply Chains: Tariff barriers may affect cross-border supply chains, increasing production costs and causing delays in delivery. Example: Indian automotive components exported to U.S. manufacturers may face disruptions, affecting just-in-time production systems.
• Reduced Investment and Market Access: Tariffs create uncertainty, discouraging foreign direct investment (FDI) and limiting India’s access to the lucrative U.S. market. Example: Electronics manufacturers considering India as a production hub may shift investments to low-tariff countries to maintain U.S. market access.

Way forward: 

• Diversify Export Markets: Strengthen trade ties with emerging economies (e.g., Africa, Southeast Asia) and regional blocs to reduce dependence on the U.S. market.
• Enhance Domestic Manufacturing Competitiveness: Promote Make in India, invest in advanced technologies, and offer export incentives to reduce costs and improve global market access.

Mains PYQ:

Q Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer.  (UPSC IAS/2021)