This post presents our monthly curation of developments in the policy landscape – highlighting I4I content pertaining to the India-UK free trade agreement, predictions of an above-normal monsoon this year, and new initiatives by the government to support medium-sized enterprises.
Looking West
On 6 May, India and UK signed a free trade agreement (FTA), which is expected to significantly boost trade between the nations as well as strengthen their strategic ties. The impetus to finally ink the deal, which was in the making for over three years, came from the heightened uncertainty in global trade due to the changing tariff policies of the US. While the two sides still have to work out the fine print, the pact is expected to be operational in a year’s time. From the UK’s perspective, India cutting import levies on most British products, including whisky, chocolate and automotives, would enable it to tap the burgeoning demand by India’s fast-expanding group of middle-class consumers. On the other hand, removal of the UK’s already low duties for almost all Indian products will benefit labour-intensive Indian industries like clothing, toys and jewellery, and other important sectors such as organic chemicals and engineering goods.
Writing in I4I last week, Confederation of Indian Industry’s (CII) industrial policy specialist Sharmila Kantha notes that the India-UK FTA is part of a wider shift in the country’s global economic strategy over the past few years, involving a renewed focus on trade treaties with developed countries. Tracing the evolution of India’s trade agreements in the recent decades reveals growing trade deficits with partner countries – with India’s imports rising at a faster pace than exports. Further, the compound annual growth rate of India’s imports and exports for the period between 2009-10 and 2023-24 shows that trade with FTA partners has in fact been subdued relative to that with other major partners.
Figure 1. India’s import and export growth with key partners
As India reviews its older FTAs and continues discussions with developed countries, Kantha recommends that, in a changing global trade regime, India must tread with care to balance the markets to its West and East and align its geopolitical and geo-economic objectives.
What has monsoon got to do with children’s test scores?
Monsoon rains have already arrived in India – the earliest onset in 16 years. The Indian Meteorological Department has predicted an above-normal monsoon for almost the whole country through the July-September period. Besides replenishing reservoirs for drinking water and power generation purposes, monsoons are crucial for agriculture, with over 40% of the population remaining dependent on the sector for their livelihoods. It is fairly well-known that the health of the monsoon and of the Indian economy are closely linked, via factors such as agricultural productivity, inflationary pressures, and rural incomes and consumption. But can a good monsoon influence children’s test scores in poor, rural households?
In their I4I article, Shah and Steinberg contend that, on the one hand, increased incomes are associated with more human capital investment in children. On the other hand, abundant seasonal rains also imply extra work – more planting, weeding and harvesting is to be done on family plots, and day labour is compensated at a higher rate in the spot market. As a result, teenagers may work on large farms, and/or young girls may carry out domestic chores and care of siblings while their mothers take advantage of the temporarily raised wages. In other words, schooling takes a backseat. Which of the two forces – income effect or substituting school with work – dominate, is an empirical question. Analysing data from rural India, the researchers demonstrate that when rainfall and wages are high, older children are less likely to be enrolled in school, have lower school attendance, and achieve poorer test scores.1
Supporting medium enterprises
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, first introduced the concept of a medium enterprise, with categorisation based on investment in plants and machinery. Following the 2018 MSMED Amendment Bill, there was a shift to new criteria in terms of investment and annual turnover: enterprises were considered ‘medium’ if investment was up to Rs. 50 crore and turnover was up to Rs. 250 crore (see Ranjan (2023), for more details).
In the Union Budget 2025-26, the classification criteria for MSMEs (micro, small and medium enterprises) was revised, to enable firms to better access resources and scale-up operations. For medium enterprises, effective from 1 April 2025, the investment limit is Rs. 125 crore, and turnover is Rs. 500 crore. Subsequent to this development, NITI Aayog has released a report that proposes a concessionary loan scheme for medium enterprises based on the rationale that these firms face steeper capital costs relative to both small and large enterprises. The report also makes other recommendations to augment the abilities of this segment of firms, such as in the areas of R&D, technology, cluster-based testing, and skills development.
Given the various initiatives that the government undertakes for the manufacturing sector, Kapoor and Krishnapriya emphasise the importance of understanding what type of firms drive employment growth. Based on the Annual Survey of Industries (ASI) data, they observe that, starting from 2000-01, the share of large firms (those having more than 250 workers) in employment has been climbing.
Figure 2. Distribution of employment in the formal sector
By 2015-16, large firms, at 58.5%, accounted for the highest share of employment. They question whether this trend is attributable to the expansion of previously small plants and their transition to larger size bins, or to the entry of new, larger plants. Finding evidence for the former, they recommend facilitating the entry of new medium firms. Further, among the incumbent medium and small firms, government policies should facilitate the growth of dynamic ones through finance and other forms of support.
Note:
- Younger children do benefit from the income effect, as they cannot be of use on the farm and so the substitution effect is not relevant for them.
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