Forbes India 15th Anniversary Special

Joblessness and rising food prices: Real challenges for BJP and its allies

India's private consumption expenditure is at a several-year low, hurt by rising unemployment and lower disposable income. Rising food prices only impacted households adversely. In its third term, the Modi-led government has one more chance to set things right

Salil Panchal
Published: Jun 6, 2024 02:33:21 PM IST
Updated: Jun 6, 2024 02:47:38 PM IST

Joblessness and rising food prices: Real challenges for BJP and its allies Applicants standing in queue to appear in the Indian Army Agniveer Exam at an examination center, Pataliputra on April 23, 2024 in Patna, India. Unemployment rate increased in April alongside a fall in the labour participation rate (LPR), Centre for Monitoring Indian Economy data shows. Image: Santosh Kumar/Hindustan Times via Getty Images

India’s climactic general elections drew to a close after a thrilling battle on June 4. The Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, failed to get a majority, but after swift negotiations with its coalition partners, it returned to power for a third term through its NDA (National Democratic Alliance).

Reliance on allies to form a government comes with its own set of concerns, particularly over policies involving labour, food inflation, capital expenditure and agriculture policies.

Modi will focus on a freshly reviewed 100-day agenda. But beyond this agenda mentioned in the interim budget on February 1, there are some sticky issues which the government and the central bank need to have a closer look at, economists tell Forbes India. The government needs to address how to improve income generation, boost consumption expenditure and, in turn, economic growth.

Joblessness and weak consumption

The pace at which India’s economy is growing (8.2 percent in FY24) is cloaking the fact that consumption spending has continued to slow down. India’s private final consumption expenditure (PFCE) grew at 4 percent in FY24, down 280 basis points from levels a year ago. This has been due to a combination of factors: Concerns over job security, stagnating income generation, rising inflation and a weakened/erratic monsoon last year, hitting urban and rural household incomes.

PFCE was seen to be lending resilience to the domestic demand in the economy, particularly post the pandemic, but in recent years, the trend is downhill. Job security has become a real concern in urban India due to the funding winter, with a spate of layoffs, particularly in the technology sector and startup universe. In rural India, rising food prices and an erratic 2023 monsoon hurt crop output and income generation.

“Strains coming in terms of real purchasing power and the fact that meaningful jobs have not been created have come in the way of consumption. The government can consider rationalising goods and services tax (GST) rates and income tax to provide for more disposable income,” says Bank of Baroda’s chief economist Madan Sabnavis. But this is unlikely to materialise anytime soon. “Consumption will only increase if jobs are created,” he adds.

Sabnavis argues that job creation should still be the responsibility of the private sector. The only way the government can create jobs is by having policies which bring about growth in different sectors. This could be done through incentives to industries/projects involved in capital expenditure or production linked incentives (PLI) schemes in different segments or even small & medium enterprises (SMEs) hiring.

“The unemployment numbers are high, and it’s a concern that people are not employed in a meaningful manner. It finally gets reflected in terms of consumption data,” Sabnavis says. Economist Surjit Bhalla claims that the Modi government created about 10 million jobs over the past seven to eight years.

Unemployment rate increased in April alongside a fall in the labour participation rate (LPR), Centre for Monitoring Indian Economy data shows. The LPR in India fell to 40.9 percent in April from 41.1 percent in March.

Latest data relating to private sector activity in India shows an improvement, based on HSBC Flash India PMI data in May, compiled by S&P Global and released on May 23. It indicates the third-strongest upturn in private sector output since July 2010. “Persistently strong increases in new orders underpinned job creation across the private sector. Employment has risen on a monthly basis throughout the past two years, with May seeing the rate of expansion quicken to the sharpest since September 2006,” the release had said.

Sakshi Gupta, principal economist at HDFC Bank, says the need is for people to leave agriculture and move to more labour-intensive sectors. “Construction and tourism are some of the sectors which are labour-intensive and should come under focus where a certain level of income is guaranteed,” she tells Forbes India.

The skill development programmes created by the government to train the untrained and help them acquire jobs have not been too successful. “There has to be a fresh policy focus to improve skilling,” she says.

Also read: Keeping focus on Make in India and sunrise manufacturing sectors like semiconductors crucial for new coalition government

Rate cuts in October?

Inflation, and particularly food inflation, became a scourge for the ruling government during the elections. Though overall inflation has been under control, the prices of items such as tomatoes and lentils in the past year became issues which the opposition parties highlighted. Food inflation has been above 8 percent since November 2023.

The India Meteorological Department has forecast an “above normal” rainfall most likely over the country as a whole during the June to September period. Private sector weather and climate forecasting and agri-risk management firm Skymet also predicts a normal monsoon.  

It is quite likely that the Reserve Bank of India (RBI) will prefer to wait until much of the monsoon plays out this year, before deciding on easing of monetary policy and lowering interest rates. “They will be keen to see how the monsoon plays out, and eye factors like a late arrival or patchy monsoon trend, areas not covered by the monsoon and the impact on crop output and prices,” Sabnavis says. Gupta of HDFC Bank says she does not expect the RBI to change its monetary policy stance until October. “The October-December period might be a good time to look at rate cuts. The monsoon uncertainty and global factors would all be behind us,” she says.

When the battle for seats was still on between the NDA and the rival INDIA coalition, there were fears that the BJP might need to focus on social welfare policies, which then might impact their focus on spending and strengthening policies for government-led infrastructure projects across roads, railways, ports and defence. But experts now say this is unlikely to happen and the BJP, in its third term, is likely to retain its focus on government-led capex spending.     

In the interim budget, the BJP had announced plans to increase its capital expenditure on infrastructure projects to Rs11.1 trillion ($135 billion) for FY25. This is up by 11 percent from the infrastructure expenditure announced in the previous fiscal, at Rs10 trillion.

The political mandate came with a bit of a struggle and now for the government, it will be akin to going back to the drawing board to execute a difficult economic agenda. This is one more, and possibly its last chance, to set things right.