India’s post-electoral priorities

India’s election results this week have surprised most observers across the globe as the governing BJP party sustained substantial losses to its representation in the country’s Lok Sabha legislature. While together with allies from the National Democratic Alliance (NDA) Narendra Modi’s BJP party managed to secure a majority in the lower house of India’s parliament (293 seats out of a total of 543), the opposition INDIA alliance secured 232 seats, with the Indian National Congress (INC) garnering 99 seats compared to 52 in the 2019 elections. The election results have already been taken by some commentators as a sign that the high growth rates demonstrated by India’s economy are not translating sufficiently into higher employment rates and a rise in living standards. The post-electoral challenge for Modi’s government will be to find ways for the economy to tackle unemployment and spread the growth dividends across a wider strata of the country’s population.

Going into the electoral period this year India’s growth performance appeared to be on track to solidify the position of the ruling BJP party. In January-March 2024 India’s GDP growth reached 7.8% exceeding expectations of 6.7% growth (Reuters poll), with the official growth projection for the fiscal year 2023-24 being revised upwards to 8.2% from the earlier estimate of 7.6%[1]. Given the positive growth dynamics, S&P Global raised its sovereign rating outlook for India to “positive” from “stable”, adding that “regardless of the outcome of the national elections… [the agency] expected broad continuity in India’s economic reforms and fiscal policies”[2].

The problem is that this high growth in India is not resulting in sufficient increases in employment – in fact according to CMIE’s Consumer Pyramids Household Survey, unemployment in India rose to 8.1% in April 2024 from 7.4% in March 2024 (official data exhibits lower unemployment figures of less than 6% in the 2023 fiscal year). The increase in the unemployment rate was registered in urban and rural parts of India, with rural unemployment staging an increase to 7.8% in April from 7.1% in March[3]. A Reuters poll undertaken in April 16-23 of this year showed that the majority of economists – 15 of 26 – singled out the need to reduce unemployment as the most significant challenge for the government after the elections[4].

The unemployment problem is particularly acute in the youth segment of the population – the data from the International Labor organization (ILO) shows that in 2023 India had the highest youth unemployment rate (18%) across BRICS-5 economies apart from South Africa where youth unemployment exceeded 50%[5]. Furthermore, according to the ILO India’s unemployment is particularly high for young cohorts with higher education compared to those without any education/schooling – the unemployment rate for young cohorts with secondary of higher education was 18.4%, more than 5 times higher than the 3.4% unemployment rate for those who cannot read and write[6]. Another important dimension in India’s unemployment problem is the low female labour force participation rate (FLFPR) – the lowest among the BRICS-5 economies. While in other BRICS-5 economies female labour force participation is above 50%, data from the Periodic Labour Force Survey in India showed that in 2017 the FLFPR indicator reached a low of 23%, recovering however, to 37% in the 2022-23 period[7].  

Possible remedies to high unemployment may include active labour market policies as well as greater integration of the business sector/enterprises with the educational system with more focus placed on early job matching in universities for students and improved connectivity with corporates in students’ job search. Prioritizing the development of the country’s services sector rather than overemphasizing the centrality of manufacturing (a sector that is becoming increasingly competitive in Asia[8]) may also provide more scope for employment growth. Indeed, trade in services grew by 9% in 2023 – well above the rates of growth in merchandize global trade[9]. At the same time, India’s exports of services are well below potential, notably lower than in China and just ahead of Singapore[10]. More of the job creation in the global economy is likely to take place in services given the rising importance of human capital development (education, healthcare), green transition and AI – all areas that are crucial for the future of India’s economy. Reinforcing linkages with India’s diaspora (the largest in the world) and developing the potential for overseas employment/education possibilities for India’s young cohorts may also merit analysis. A further track to addressing India’s structural imbalances, including those in the labour market, is a more open trade policy that would allow for greater market access for India’s exports, most notably in the fast-growing regions of the Global South.

In terms of foreign trade policy India could explore a number of options. The most obvious and perhaps the most pressing one is to develop the regional integration platforms in South Asia – whether via the South Asian Association for Regional Cooperation (SAARC) or the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). A greater intensity of trade flows within India’s regional perimeter would be conducive to increasing FDI inflows into the country’s economy from the relatively subdued levels that prevailed in the past several years. Another possibility is for India to revisit the possibility of participating in the Regional Comprehensive Economic Partnership (RCEP) – one of the largest blocs in the global economy that brings together some of the fastest growing economies in the world. Further options have to do with expanding and/or multilateralizing some of the trade accords (Free Trade Areas (FTAs) and Preferential Trade Accords (PTAs)) concluded by India with individual economies such as Chile and regional blocs such as ASEAN and MERCOSUR.

One of the possible platforms for multilateralizing/combining the numerous existing trade accords as well as ongoing trade liberalization discussions could be a BRICS+ platform for regional integration arrangements of the Global South economies. India’s ongoing trade talks with such blocs from the developing world as the Eurasian Economic Union (EAEU), BIMSTEC, South African Customs Union (SACU) as well as IBSA (India, Brazil, South Africa) could be brought together under the umbrella of BRICS+ “integration of integrations” with palpable effects for boosting South-South trade cooperation and opening markets in the Global South to India’s exports.

In devising its foreign trade policy India could also explore the possible conditions and clauses in trade agreements that would expand the employment possibilities for its labour force. Some of these provisions may be seen in the recent FTA concluded by India with EFTA countries. In particular, “the EFTA countries have agreed to various promotional activities to encourage EFTA investment in India… [with] a target of USD 100 billion in investment and one million jobs over the next 15 years”[11]. Similar conditions/clauses could be utilized to raise the employment-creation effects arising from other trade agreements that are in the process of negotiations. In order to boost employment creation in the services and IT sectors India could explore the benefits of participating in Digital Economic Agreements (DEAs) that are actively advanced by Singapore and its ASEAN partners. Finally, India would also greatly benefit from a revitalized and more effective World Trade Organization (WTO), in which it could play a leading role in representing the interests of the Global South and in participating in the new rounds of multilateral trade liberalization.   

Overall, the post-electoral setting is challenging for India, but the good news is that there is no lack of options and opportunities to build on some of the advances in growth attained in recent periods. India’s success in attaining higher growth rates and in reducing poverty levels would be transformational for the Global South and the global economy. In case India were to emulate China’s progress in poverty reduction the world economy would receive a tremendous boost to growth and consumption through a widening “middle class” in the developing world. A more open Indian economy could become a major driver of reversing the current trend towards protectionism and economic fragmentation. The world economy in such a scenario would become increasingly dependent on further growth and openness in India and China – the two BRICS giants could then potentially develop a more cooperative relationship that is increasingly rooted in mutual economic interests. Granted, this is all a “blue sky” scenario, a scenario that is not altogether unrealistic, however, but very much dependent on India’s post-electoral course of action.

Yaroslav Lissovolik, Founder, BRICS+ Analytics

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