Time to reward India’s job creators as Prime Minister Narendra Modi crosses halfway mark

By Bibhudatta Pradhan and Shruti Srivastava

Businessman Romi Singh is desperate for some government assistance for his leather factory in the northwestern Indian state of Punjab. At stake is his survival in the industry and the livelihood of hundreds of his staff.

“If the situation does not improve in next few months I will be forced to shut down the factory," Singh, director of the Jalandhar Leather (India) Pvt., said in a choked voice, pointing to the processing machines sitting idle behind him.

"Me, along with 250 employees, will be on the streets," he said of the business established by his father three decades ago that was growing up until 2013. "I have few orders, the factory is running at one-sixth of the capacity and I am facing a tough time to pay salaries and repay loans.”

Along with Singh’s leather factory, India’s 51 million micro, small and medium enterprises employ 117 million people, accounting for 45 percent of the country’s total exports and contributing more than 7 percent to its gross domestic product through manufacturing. The sector, which is mostly informal and unregistered, hasn’t generated enough jobs or contributed to overall growth for decades. It’s held back by poor infrastructure, inadequate market linkages and a lack of access to finance.

Jobs Hit

After the government’s decision to withdraw 86 percent of the currency in circulation in November, anecdotal evidence suggests significant job losses swept through India’s vast informal sector that employs more than 90 percent of the country’s workers.

While India’s gross domestic product grew at one of the fastest paces in the world over the last two years, employment creation in 2015 was the slowest in seven years. It’s placed considerable pressure on Prime Minister Narendra Modi, who won the biggest electoral mandate in three decades on the promise of improving the ease of doing business and faster job creation.

The Feb. 1 budget is an opportunity for Modi to unveil measures that will fulfill his 2014 guarantee of growth and more jobs, a task made all the more urgent given he has already crossed the halfway point of his tenure and faces crucial state elections three days after its release. If he fails, it will slow consumption and leave the rural economy struggling, denting his credibility -- already hit by the abrupt cash clampdown -- on tough policy measures.

“Job creation is crucial for India as it will facilitate the development of the manufacturing sector," said Shilan Shah, Singapore-based India economist at Capital Economics Ltd. "Without a stronger manufacturing base it probably won’t be able to grow sustainably, to say, 8 to 9 percent a year over the medium term," he said, adding that the primary reason for the growth in unemployment is the failure of land and labor reforms.

"There are some positives in place at the moment -- we might see a slightly bigger push towards public investment,” without hurting the fiscal deficit target, Shah said.

Jagdish Thakkar, a spokesman in the Prime Minister’s Office, didn’t answer calls or respond to a text message.

Ripe For Reform

The time is right for Modi to take policy measures in the industrial, manufacturing and agricultural sectors, all vital for faster generation of employment.

The country’s inflation is below the mid-point of the central bank’s target, the government is likely to achieve its fiscal deficit target of 3.5 percent of GDP, monsoon-sown food grain production is expected to be the highest in at least 14 years and revenue is expected to surge because of a tax amnesty and the cash ban.

Reviving growth and boosting demand are also essential as gross domestic product is likely to grow 7.1 percent in the year through March, the slowest pace in three years -- and this is before considering the impact of currency shortages in an economy where 98 percent of consumer payments are made in cash.

Farmer Harjinder Singh says he is in dire need of government support after his income plummeted when he was unable to get a decent price for his food grains. One of Modi’s targets is to double farm incomes by 2022.

“I am in huge debt," said Singh, 35, at a grain wholesale market in Punjab. "The cost of everything has increased -- fertilizer, diesel, electricity and water pumps -- everything except my farm produce.”

Coastal Economic Zones

The government may announce incentives to labor-intensive sectors such as clothing, leather, food processing and farming along with spending more on projects like roads, railways, low-cost housing and irrigation, economists said.

It could also take measures to promote its ‘Make in India’ and ‘Skill India’ initiatives, provide sops to encourage digital transactions, focus on ‘housing for all’ through increased allocation, tax incentives and interest subvention, said a Kotak Securities research team in a Jan. 24 note.

"Job creation is our big focus -- we have to see where the future jobs lie," Commerce Secretary Rita Teaotia said in an interview. "They will come from technology-based sectors, the services industry." Regulatory reforms are needed for these sectors to grow, she said.

It may also announce China-style coastal economic zones for setting up manufacturing units to generate employment.

"To be successful, these zones would have to cover a large area and would have to have some existing infrastructure and economic activities," Arvind Panagariya, vice chairman of NITI Aayog said in a blog, arguing the need for the creation of Shenzhen-style zones on the country’s western and eastern coasts.

Wooing Rural Voters

As budget expectations rise, Finance Minister Arun Jaitley faces the task of pleasing rural voters by spending more on social programs as well as providing stimulus to small and medium scale industries via duty incentives.

"Lack of employment has an adverse impact on consumption -- it is a big challenge but the government can’t do much directly," said Madan Sabnavis, chief economist at Credit Analysis & Research Ltd. "It can just increase infrastructure spending or give push to a sector to provide jobs indirectly."

In northwestern town of Jalandhar in Punjab, Singh produces finished leather for shoes, garments and handbags in his factory and exports to countries including Italy, Vietnam and Germany.

Yet in the last two years his products have become less competitive compared to Brazilian, Bangladeshi and Pakistani goods because of India’s higher export duty structure. Compounded by other problems such as a shortage of animal hides and the cash clampdown, Singh’s revenue has fallen by more than one-third, forcing him to retrench about 200 employees in the last three years.

“I am just struggling to survive," said Singh, 42, explaining he is hoping the budget will deliver a higher export incentive and less import duty on chemicals. "My only hope is the budget.”