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What we learned this month: labour reforms to test Modi’s mettle

What we learned this month: labour reforms to test Modi’s mettle

Every month, Citywire Global canvasses leading managers on a chosen theme to uncover what fears, opportunities or unexpected outcomes could occur, this month investors tackled post-election India.

The wave of optimism that has greeted Narendra Modi’s election victory has driven Indian equity markets higher on the hope that the structural and economic reforms needed will finally arrive.

Some commentators believe the most difficult issue will be creating enough jobs for a labour market that is set to increase dramatically over the next few years. A transformation of India’s archaic labour laws will be a crucial part of that process.

Bond investor’s view

Brett Diment, head of emerging market and sovereign debt at Aberdeen, says Modi faces something of a economic balancing act.

‘Expectations are that the BJP will turn the economy around ushering in a new investment cycle, which should improve rickety infrastructure and boost employment prospects – a key area. However, increased spending would put the fiscal deficit target of 4.1% at risk, which could bring about higher net bond issuance.

'This is not necessarily a bad thing as investors may be more forgiving should the extra expenditure be used in areas that are beneficial to the country’s long-term growth, especially if a credible medium-term road map for fiscal consolidation is drawn out.'

'Nevertheless, it is still unclear how open Modi will be to foreign direct investment, in particular into the retail sector.’

Upbeat outlook

Ajay Argal, head of Indian equities at Barings, is positive on the new prime minister’s determination to tackle key issues.

‘Modi is aware of the challenges on the job front and has repeatedly highlighted the same in his pre-election speeches. His belief is that the youth of the country need to have the required skills for the jobs that are being created. He has talked about “re-skilling” them in a systematic institutional manner.'

'Just like everybody else, he acknowledges that the other reason for the job gap is that India needs to do much better in manufacturing and manufacturing exports. A related issue here is challenging infrastructure, slow decision making by the ministries, as well as bureaucrats and regulatory over-reach.'

'Our understanding is that he will be working hard to reduce these burdens substantially to help the manufacturing sector grow rapidly thus creating many more jobs in the future compared with the past.’

Labour reforms a must

Gary Greenberg, head of emerging markets at Hermes, believes India’s archaic labour laws have been holding the job market back, with around 90% of the workforce in informal employment.

‘India adds 1 million every month to its working age population. A recent study estimates that running through 2019 and including the last three years (starting in 2011), there will be around 50 million new entrants into the workforce, as opposed to about 40 million new jobs.'

'This is a serious challenge for any Indian government. In narrow employment terms, the key is quality of employment opportunity rather than just any "McJob".'

'Many Indians have no job security or benefits and work outside of the formal system. Reforming labour laws and lifting education/ vocational training standards are at the root of creating better quality jobs.’

Job creation to the fore

Meanwhile, Andrew Graham, manager of the Martin Currie Asia Pacific fund, concurs with Greenberg.

‘The financial system is still very corrupt and inefficient, and there is a desperate need to create jobs, especially as many of the new entrants to the labour market are coming from the poorer states. GDP growth is now more rapid in the country than in the cities and this lack of jobs will become a huge challenge for the government.’

This article originally appeared in the July/August issue of Citywire Global magazine

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Brett Diment
Brett Diment
18/128 in Bonds - Emerging Markets Global Local Currency (Performance over 3 years) Average Total Return: 7.55%
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100/217 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 20.99%
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