Mumbai, New Delhi: As India seeks a successor to Indian central bank governor Raghuram Rajan, Modinomics is poised to focus on job creation ahead of key elections.

Prime Minister Narendra Modi is less than a year away from a vote in Uttar Pradesh, India’s most populous state, ahead of national polls in 2019. While macroeconomic stability remains a key focus of global investors, job growth is Modi’s biggest vulnerability among Indian voters.

“They have a very limited window of opportunity now," said Harsh Pant, a professor of international relations at King’s College London. If Modi doesn’t generate more employment quickly, Pant said, his opponents can say “you’ve been in power since 2014 and there are no jobs."

Those political calculations are underpinning the rise of Modi’s Hindu nationalist base, which attacked both Rajan and a leading candidate to succeed him as representing foreign interests over those of India. The failure of Modi’s administration to defend Rajan was cited as a reason for his decision to leave, a characterisation the government has rejected.

Though Modi took office in 2014 with the biggest Indian mandate in 30 years, he has adopted an incremental approach to overhauling Asia’s third-biggest economy. He’s made market-friendly moves when it has helped him, and shelved others that would incur political costs.

Successes include shifting to auctions for coal mines and telecom licenses, opening more sectors to foreign investment and moving to market-based energy pricing. At the same time, he refused to relinquish powers to retroactively tax companies, failed to push for labour reforms, abandoned a proposal to make land easier to acquire after opposition from farmers and has struggled to pass a landmark goods-and-services tax in parliament.

“The government will carry on doing what’s politically expedient and what’s practically feasible," said Saurabh Mukherjea, chief executive officer of institutional equities at Ambit Capital Pvt. Ltd in Mumbai. “It’s not as if they are ideologically obsessed about reforms."

Modi’s move to ease foreign-investment rules after Rajan said he planned to leave demonstrated the practical nature of his policy making. While the measures indicated that his reform program would continue even without Rajan, analysts said their economic impact depended largely on the fine print.

Lack of jobs

At the moment, India still remains attractive to investors. The nation has surpassed a slowing China as the world’s fastest-growing economy, and it gives investors solid carry returns.

Nonetheless, all is not well. India’s inflation rate is among Asia’s highest, bad loans are at a 15-year high and jobs are scarce. More than 2,500 people applied for five openings for porters at a government body in Maharashtra state, the Times of India reported on Tuesday.

Modi is under pressure to fulfil his campaign promises of economic development. While his popularity remains high, a recent poll showed that his biggest failure so far has been an inability to create jobs.

India has no reliable jobs data, but the indicators that do exist paint a grim picture. Overall employment fell by 20,000 jobs in the quarter through December in eight industries including textiles, metals and automobiles, according to the latest official survey.

Competing visions

To address these issues, Rajan saw the need for India to bite the bullet and absorb some short-term pain for long-term growth. This meant keeping borrowing costs high enough to lower consumer-price inflation, forcing banks to provision for bad loans and linking rate cuts to fiscal discipline.

The governor’s critics, on the other hand, say he’s killing growth at a time when commodity prices are low and the global economy is sputtering. They want to spur job creation—particularly at hard-hit small businesses that form Modi’s base—by having more cash flowing through the economy. In their view, this means lower rates, bailouts for state-run banks and looser fiscal policy.

“Fixing and reviving the economy should not be held back at the expense of fears of inflation, especially when the world is in the biggest supply-side deflation of a generation," said Nikhil Bhatnagar, New York-based senior vice-president for Asian equities at Auerbach Grayson & Co., a brokerage specializing in global trading.

10% growth

One of Rajan’s biggest critics, ruling-party law maker Subramanian Swamy, said growth would reach 10% with a new governor. He criticized Rajan for using “outdated theories about controlling inflation by raising interest rates."

While Swamy holds no formal position in Modi’s government, his outspoken attacks against political foes, large Twitter following and advocacy for Hindu causes make him an influential player in Indian politics. As such, he’s an important weapon for Modi heading into key elections.

Yet while Swamy’s influence has grown since Rajan’s ouster, there’s few signs that Modi will embrace his competing economic vision. Finance minister Arun Jaitley defended his chief economic adviser on Wednesday from Swamy’s attacks, suggesting that his policy proposals don’t reflect the official position.

Either way, politics are constraining what Modi does next, according to Shilan Shah, a Singapore-based India economist at Capital Economics Ltd. For instance, he said, it would be far tougher for Modi to go against powerful interests and allow more foreign investment in banking and multi-brand retail—two sectors that didn’t make the list this week.

“He’s probably gone as far as he can," Shah said. “The relatively low hanging fruits in terms of wide reforms have probably now all been used up." Bloomberg

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