After Rajan, Modinomics Seen Focused More on India Elections

  • Job creation crucial as Modi’s party seeks to win votes
  • ‘It’s not as if they are ideologically obsessed about reforms’

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

QuickTake India's Aspirations

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.

If Modi doesn’t generate more employment quickly, his opponents can say “you’ve been in power since 2014 and there are no jobs," said Harsh Pant, a professor of international relations at King’s College London. “The last two years there’s been a mix of reforms and populism from the Modi government. You will see a mix of that in the coming months as well."

The slow pace of job creating and rising discontent among small businesses has underpinned the resurgence of Modi’s Hindu nationalist base, which attacked both Rajan and a leading candidate to succeed him as representing foreign investors over those of India. The failure of Modi’s administration to defend Rajan was cited as a reason for his decision to leave, a characterization the government has rejected.

To read more on the political spat that prompted Rajan’s decision, click here.

Though Modi won India’s biggest mandate in 30 years after promising jobs for India’s youth, 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 mine and telecom licenses, opening more sectors to foreign investment and moving to market-based energy pricing. At the same time, he’s kept powers to retroactively tax companies, abandoned a proposal to make land easier and 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."

Rajan Exit

This was seen in the aftermath of Rajan’s exit announcement. Modi eased foreign-investment rules to become what his government called “the most open economy in the world for FDI," and also approved a roughly $1 billion package for the garment sector aimed at creating 10 million jobs.

“Farmers have a very strong link with the textile sector," Modi said. “The package will further lead to value addition of agro products & help farmers."

Although Modi’s popularity remains high, a recent poll showed that his biggest failure so far has been an inability to boost employment. India has no reliable jobs data, but news reports and the few indicators that do exist paint a grim picture. More than 2,500 people applied for five openings for porters at a government body in Maharashtra state, Times of India reported on Tuesday.

To read more about India’s struggle to shift from agricultural jobs, click here.

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. Even so, all is not well: India’s inflation rate is among Asia’s highest and bad loans are at a 15-year high.

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. This would mean 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 Percent Growth

One of the Rajan’s biggest critics, ruling-party lawmaker Subramanian Swamy, said growth would reach 10 percent 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 fully embrace his competing economic vision. Finance Minister Arun Jaitley on Wednesday defended his chief economic adviser from Swamy’s attacks, suggesting that his policy proposals don’t reflect Modi’s views.

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, Modi’s moves to open up to foreign investment excluded banking and multi-brand retail -- both of which have powerful domestic constituencies.

“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.”

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