India’s Modi urged to set ‘ambitious’ economic agenda after poll humbling

Unemployment and inflation among the biggest challenges facing Modi’s reduced coalition, analysts say.

Indian Prime Minister Narendra Modi has secured a third term in office following national elections [Money Sharma/AFP]

Indian Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) campaigned on India’s sizeable economic expansion in the lead-up to the country’s recent national elections.

Since Modi came to power in 2014, GDP per capita has risen from about $5,000 to more than $7,500.

India’s GDP growth hit 8.4 percent in the financial year ending March, making it by far the fastest-growing major economy.

At the same time, the economy is producing much far less impressive data, including a high unemployment rate, which rose to 8.1 percent in April from 7.4 percent in March.

It is this statistic, along with high inflation, that has been touted as a key reason for the weaker-than-expected performance of the BJP, which won 240 seats, well below its previous tally of 303 and fewer than the 273 needed to form a government on its own.

While Modi has formed a government with the help of his National Democratic Alliance partners, his reliance on smaller parties changes the equation for a leader who commanded outright majorities during his previous two stints as prime minister.

“This is going to be really unusual for Prime Minister Modi,” Vina Nadjibulla, vice president of research and strategy at the Asia Pacific Foundation of Canada, told Al Jazeera.

“It was partly why the markets reacted the way they did,” Nadjibulla added, referring to the sharp drop in Indian stocks following the election result.

Nadjibulla said investors are concerned Modi may be unable to push through reforms needed to tackle issues such as high unemployment.

Despite strong headline economic growth, nearly half of India’s population is still employed in the relatively unproductive agricultural sector – a share that rose during Modi’s second term, from 42.5 percent in 2018-19 to 45.8 percent in 2022-23, according to an Oxford Economics report.

Young people, in particular, suffer from a lack of employment – in 2022-23, the youth unemployment rate was about 10 times higher than the adult rate, according to the report.

It is “ironic” that India’s robust growth under the Modi government “has come at the cost of economic stability for the lower classes”, Michael Kugelman, director of the South Asia Institute at the Wilson Center, told Al Jazeera.

In its third term, the Modi government will have to find a way to help poorer Indians in a way that goes beyond building infrastructure, Kugelman said.

“Across the board, it’s going to be a very ambitious economic agenda,” he said.

Manufacturing vs services job

Much has been made of India’s push to boost manufacturing, create jobs and lure global brands looking to set up alternative supply chains in the face of trade tensions between the United States and China.

India’s “Make in India” drive, however, has done little to create jobs for the large segment of the population that is still employed in agriculture.

Employees assemble an electric transformer inside a manufacturing unit of Inductotherm (India) Private Limited at Sanand GIDC (Gujarat Industrial Development Corporation), on the outskirts of Ahmedabad, India
India wants to create a manufacturing powerhouse to create jobs [File: Amit Dave/Reuters]

One reason for this is that the government’s focus has largely been on promoting higher value-added yet less labour-intensive sectors such as electronics, Alexandra Hermann, Oxford Economics lead economist, told Al Jazeera, adding that this would probably not change.

Another oft-touted reason is the lack of “big bang” reforms to land and labour rules, experts say, which are needed to bring in the type of major investment needed to really expand manufacturing.

While the Modi government has failed to make serious headway in this area – despite large majorities in parliament – experts say its coalition partners may now help it pave the way for some of those measures as jobs will benefit all voters.

Coalition partners could also help the Modi government make some progress in its so far failed efforts for land and labour reform, which have been highlighted as a necessary step to attract more investment in manufacturing.

“There will have to be some coordination with state governments… and coalition partners are regional parties that will have a lot of sway in some parts of the country and that is where a coalition government will be very helpful for Modi and the BJP,” Kugelman said.

For now, rather than relying on manufacturing, India’s growth story has largely been driven by services, which experts say will only be able to continue over the longer term and create sustainable and inclusive growth if human capital levels increase.

“Raising human capital levels on a broad basis will be crucial to create inclusive and sustainable growth over the medium-to-long-term,” Hermann said.

“Although India is home to some top technology and management universities nurturing global business leaders, it is the quality of primary and secondary education that still leave the Indian population, on average, relatively low-skilled. [But in its manifesto] the BJP fell short of committing to the higher spending goal,” Hermann said.

Kugelman agreed. 

“Some of the fastest growing sectors are in services but the labour force is not equipped for those jobs and there’s a complete mismatch,” he said.

People from northern states crowd the labor chowk - a bazaar at the junction of four roads where hundreds of workers gather daily at daybreak to plead for work in Manesar Industrial Area, Haryana state, India,
India’s labour force is not equipped with skills for the services sector [File: Bhumika Saraswati/AP Photo]

‘Conditions for private investment’

Ultimately, though, GDP growth and job creation are driven primarily by private investment, said Ajay Shah, an economist in Mumbai.

Private investment has not fared well in India since 2009 or 2011, depending on which measure you use, so “the organising principle for economic policy should be to create conditions for private investment”, Shah told Al Jazeera.

Part of the reason for the lack of success in this area has been excessive central planning in economic policy, Shah said.

“This,” he said, “creates policy risk. Arms of the government behave in unpredictable and personalised ways. This creates risk for private persons.”

Shah expressed hope that the incoming coalition will be better positioned to address such problems.

“There are more checks and balances,” he said.

Source: Al Jazeera