3 ways Modi can turn India’s economy around

July 7, 2014, 2:13 PM UTC
Raveendran AFP — Getty Images

Since the close of India’s election last month, investors have been hopeful that the world’s largest democracy can finally turn its economy around under Prime Minister Narendra Modi. But before the country can realize its potential as a free market economy, Modi will need to tackle critical challenges in its workforce. Investors have long viewed India’s huge population (it’s the second most populous country in the world next to China) as a plus for economic growth, but unless it can properly harness its more than 1 billion citizens, its population stands to hurt more than help its economy.

India has quickly turned into a tech society, but its workforce hasn’t kept up. About 56% of its labor force still works in farming, even though agriculture accounts for only 18% of its economy and has remained that way for nearly a decade. By contrast, the need for skilled labor in the Information Technology, telecom, healthcare and retail sectors is growing rapidly. Combined, these industries have shown a compound annual growth rate (CAGR) of 10% to 15%, compared to about 5.5% for the farming sector if weather conditions are good.

The Information Technology industry is expected to generate 20 million jobs over the next six years, growing from a $118 billion to a $225 billion industry during that period, according to the Indian government. Separately, the healthcare industry is forecast to create 40 million new jobs, expanding from a $100 billion market in 2014 to a $276 billion market by 2020; and the retail sector is projected to grow from a $490 billion to an $865 billion industry during the same period.

Clearly, India could be in for a jobs boom, but can it fill those jobs? Only 29% of Indian women are part of the workforce, the lowest of all the BRICS nations and abysmal compared to developed nations like the U.S. A lot of this has to do with a cultural attitude of keeping women in the home and a lack of adequate education for young girls that could enable them to forge professional skills.

Unless the majority of India’s workers are sufficiently educated and retrained to fulfill skilled jobs, and unless more women are invited to work, Indian companies will find themselves unable to compete on the world stage or to attract foreign capital for growth.

In order to address this, Prime Minister Modi can do three things:

Reform education

India can raise money from domestic and foreign investors to improve its primary education system, especially in rural areas. It could also create more schools for girls; establish vocational training centers for young men and women to transition from farm jobs to other technical jobs in higher demand; and create work placement programs to help these retrained workers find skilled jobs.

With India’s national debt at 66% of GDP (significantly down from 83% a decade ago), the nation has room to borrow for infrastructure development. The government runs the risk of increasing the deficit if the economy fails to grow faster than the anemic 4.6% seen this year or if inflation remains high, but without this critical investment in the future, the prospects for growth will be even dimmer. In addition, the Indian economy could get a boost of 2.4% through better labor policies and by increasing female participation, according to the OECD.

Improve Internet access

A recent UN report ranked India 122nd in the world in broadband penetration, implying that only 1.1 out of 100 people have access to fixed broadband compared to the world average of 9.9. This represents a serious bottleneck to education and job retraining, especially in far-flung rural areas, where distance learning over the Internet could reduce costs and improve accessibility but only with better broadband infrastructure.

Incentivize infrastructure development

This ties into the third thing that Modi’s government can do to strengthen the Indian workforce (and therefore the economy), which is to offer tax credits and other incentives to the private sector to bring creative solutions to the table and to invest in the nation’s infrastructure. This does not just include cutting edge teaching methods and learning aids for education, but the application of modern technology to road construction, water supply, electricity generation, and other basic necessities without which India’s workers can’t achieve their potential.

For instance, the Indian government could offer a company like Google (GOOG) a tax credit based on the number of Chromebooks sold to educational institutions at a discount, or on improved student performance at schools that utilize the company’s student evaluation tools (through Renaissance Learning, a portfolio investment of New Google Capital).  Similarly, Brita GmbH, which makes water purification systems and works with UNICEF to improve the quality of water in developing nations, could be given a subsidy by Modi to develop and apply even better and more cost-effective methods of water filtration to India’s water supply, profiting the company and benefiting both rural areas and cities.

Pandit Jawaharlal Nehru, India’s first post-colonial prime minister, famously remarked that India’s independence was its “tryst with destiny;” that destiny has only been realized partially, given the nation’s rich intellectual heritage, successful democracy, large human capital, and an easy affinity with Western economic thought.  That could finally change, but only by elevating the neglected poor and lower middle classes, and women.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

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