Economy & Business Inclusive Growth India Macroeconomics
Econographics June 13, 2024

Low employment: The Achilles’ heel of Modi’s economic model

By Hung Tran

High unemployment, including a lack of suitable jobs for young people, has been cited as one of the main factors behind the underperformance of India’s ruling party in the general election that wrapped up early this month. The Bharatiya Janata Party (BJP) lost its majority in the Lok Sabha (parliament) and will now have to rule in coalition with smaller parties. These concerns reveal a serious weakness in Prime Minister Narendra Modi’s economic model, although it has been credited for good gross domestic product (GDP) growth over the past ten years.

Since Modi became prime minister in 2014, the Indian economy has grown by an average annual real rate of 6 percent to the latest fiscal year ending in March 2024—quite impressive against the backdrop of a slowing down of many major economies, especially China’s, since the COVID-19 pandemic. With annual GDP at around four trillion dollars, the Indian economy has become the fifth largest in the world, poised to overtake Japan and Germany in the foreseeable future to rank third after the United States and China. That growth has been attributed to the Modi economic model—heavy promotion of the information and communications technology (ICT) sector, in particular IT services and other service exports, and the “Make in India” campaign to encourage more manufacturing activity by streamlining administrative tasks, building up infrastructure, and improving banking and payment services.

However, it is important to keep in mind that the 2014-2024 period experienced a slowdown from the previous decade under Prime Minister Manmohan Singh, which had enjoyed an average annual real growth rate of almost 7 percent. The slight slowdown under Modi has preserved the basic features but exacerbated the fundamental weaknesses of the Indian economy. For several decades, the ICT industry has been the most dynamic. But although this sector represents 13 percent of India’s GDP, it relies on a very small number of highly skilled workers—accounting for less than 1 percent of India’s labor force of 594 million (according to the World Bank). And even within this privileged group, slow salary increases have been a cause of frustration for more junior workers.

Under the “Make in India” plan and its recent $24 billion of subsidies to chosen sectors, manufacturing employs 35.6 million workers, or about 6 percent of the labor force—even less than the United States. More importantly, the ratio of foreign direct investment to GDP has fallen to the lowest level in sixteen years. Private sector investment has also declined from more than 25 percent of GDP in the mid-2000s to less than 20 percent. Those declines have contributed to the fact that the share of manufacturing value added in Indian GDP has decreased from 17 percent in 2010 to 13 percent in 2022.

Essentially, even including the impact of consumption spending by workers in the ICT and manufacturing sectors on consumer-related businesses, the contribution of these two sectors to overall employment is relatively small. This could become even smaller if the declining trend in the manufacturing-to-GDP ratio cannot be reversed soon.

The Modi economic model has clearly spurred GDP growth. But its fruits have tended to accrue to a small percentage of the population, raising the number of billionaires to 271 in the process. Income inequality is considered worse than under British colonial rule, according to a new report from the World Inequality Lab. The pace of non-farm job creation has fallen from an average of 7.5 million new jobs a year in the decade prior to Modi’s premiership to about half of that during his time in office. Perversely, employment in the agricultural sector has risen by 56 million workers in the past five years—driven by COVID-related distress. This poor employment performance has thus failed to absorb nearly 12 million new entrants to the labor market each year. As a result, the unemployment rate remains high at more than 8 percent—and much higher at 17.8 percent for young workers compared with the world average of 14.3 percent. The economic and social ramifications for India are even worse than those unfavorable numbers appear to suggest.

India faces a double-edged sword of being the most populous country on earth with more than 1.4 billion inhabitants—75 percent of whom are of working age (15 to 64 years)— but with a labor force participation rate at 51 percent. The Asian average is 63 percent and China’s is 76 percent. Furthermore, only 23 percent of the workforce are salaried workers. The rest work in agricultural and informal sectors. This has made the goal of strong and inclusive growth intractable and difficult to achieve.

India’s huge working-age population can fuel strong growth if adequately and properly employed. However, if job creation cannot keep pace with labor force growth, what could have been a tremendous demographic dividend will turn into an economic and social crisis. The challenge to Modi in the next five years is to carry out a balancing act between maintaining the recent growth momentum and making it more inclusive by providing regular employment, especially for the millions of young entrants to the labor force. This probably means switching government priorities from supporting a few conglomerate national champions to helping the multitude of micro-, small-, and medium-sized enterprises, which provide the bulk of employment in India. Furthermore, government attention should be widened from a focus on advanced technological areas such as semiconductors and artificial intelligence to basic manufacturing and processing, which can create many jobs. Policy announcements in the weeks ahead will tell us how Modi intends to deal with this challenge.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

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