Analysis of the Modi Era

Jobs Are Modi’s Central Mission, and He’s Failing: Mihir Sharma

Narendra Modi’s government is set to dramatically reshape Asia’s third-largest economy with the biggest tax reform since independence in 1947

Three years ago, Narendra Modi was sworn in as prime minister of the Republic of India amid much hope and tremendous expectation. A good portion of the population remains optimistic that he’ll fulfill his promises to unshackle the Indian economy. But Modi’s tenure cannot yet be judged a success for one central reason: He’s signally failed to create jobs for the desperate young people who gave him his massive mandate.

Modi’s landslide victory in 2014 was bigger than any seen in India for three decades. His Bharatiya Janata Party took home an unprecedented majority of seats in the lower house of India’s parliament, which meant that he was free to act without having to consult coalition partners. What’s more, he won the election more or less single-handedly. Voters, especially in India’s poor and under-employed north, thrilled to his personality and pledges of economic and political revival.

Three years in, some important steps forward have been taken, including the passage of a landmark reform of indirect taxes. Foreign investors remain bullish on the country.

Yet Modi’s jobs record is even poorer than that of the much-maligned Congress government that his replaced. India needs to create as many as a million new jobs every month just to keep up with the growing population. Under Modi, just over 10,000 jobs a month are being created instead, according to government figures from 2015. The scale of this failure is enormous — especially since it will add to the angry army of already underemployed young Indians.

The reforms needed to spur real job growth are simple to lay out. The government needs to reform itself — starting with creating a less-intrusive regulatory state and a more accountable tax bureaucracy. In particular, factor markets like those for land and labor need to be swiftly made more flexible nationwide, so that business becomes more competitive. India’s troubled state-owned banks need to have their books cleaned up and, ideally, be privatized or forced to shrink. Government needs to free up capital by borrowing less, and foreign investment into infrastructure must be prioritized.

On most of these fronts, progress has been shaky or nonexistent. Many observers have judged Modi leniently, arguing he hasn’t had the political capital needed to make drastic changes. Modi certainly didn’t worry about political capital last November, though, when he took the puzzling and destructive step of rendering 86 percent of India’s currency illegal overnight. Far from paying a political price for a decision with a poor economic outcome, Modi and his party were rewarded with another unprecedented victory in state elections a few months later.

Modi seems to realize that he hasn’t moved swiftly enough to create jobs, which could cost him when he runs for re-election in 2019. That may be why his party and government have subtly changed the emphasis of their promises to the electorate. There is much more talk now of protecting cows — sacred to many Hindus — and of defending India’s interests in Kashmir.

In terms of economics, too, a subtle shift is visible. In Modi’s first year, the government decided on a manufacturing push; the slogan-loving prime minister called it the “Make in India” program. But the lack of fundamental structural reform has stalled that initiative: The share of manufacturing in India’s gross value added has barely increased.

Instead, Modi has lately been placing less emphasis on formal jobs — with salaries and promotion prospects and pensions — and more on what he calls the “personal sector”: small-scale entrepreneurship. Some of his initiatives — such as a scheme to hand out loans to fund small businessmen — have replaced “Make in India” as the government’s primary talking points.

The government would argue that this is where most Indians are currently employed. But that isn’t where new jobs need to be created. While India’s informal economy has shown robust growth for decades, it’s simply not growing at the speed needed to create a China-like transformation. That needs a more formal economy.

Not to mention, the kinds of jobs the informal sector tends to generate are insecure, and fail to create a ladder to prosperity for unskilled workers. No lower-middle-income country can ascend to middle-income status without generating mass employment, which in turn requires a dynamic manufacturing sector. Given the quickening pace of automation, India has precious little time left to ramp up industrialization.

Perhaps the focus on small entrepreneurs, together with a renewed commitment to welfarism, will be enough for Modi to survive 2019. But India’s prime minister once seemed like the country’s only hope for transformative growth. It looks like he’s abandoned that quest — and India’s future looks much bleaker than it did in 2014.