Former RBI governor says India needs ‘significant reforms’ to keep young job seekers employed

India needs to implement significant reforms to revive its flagging economic growth and put more young job seekers to work, according to a former central bank governor.

Growth in India's economic output slowed to 4.5% in the three months that ended in September, which marked the slowest pace of expansion in six years.

There's emerging evidence that the economy might be picking up slowly, but growth level around 5% is insufficient for India, Raghuram Rajan told CNBC's “Street Signs” on Monday.

“We have a lot of young people entering the labor force. We need to provide jobs for them and even if much of the growth is job-oriented, 5% simply doesn't cut it,” Rajan, who was the governor of the Reserve Bank of India between 2013 and 2016, said.

India's industrial production grew in November, beating expectations. Along with other indicators like factory activity data, auto sales, and bank credit, some experts said growth likely began to inflect in the final three months of 2019.

Still, in recent quarters, India's growth did not result in sizeable job creation as the country faced a number of challenges including a troubled financial sector and weakness in corporate earnings and profits that likely weighed on business investment.

“India needs significantly more growth, which means significant reforms, and I think the problem in the last 15 years or so, is the reform momentum has slowed considerably,” Rajan said.

He added that South Asia's largest economy needs to revive itself to become an attractive destination, particularly for companies that are shifting their supply chains out of China and into countries such as Vietnam.

Budget priorities

India's finance minister is due to present the country's union budget on Feb. 1 for the fiscal year that begins on April 1 and ends on March 31, 2021. Economists expect the low growth number will prompt the government to announce spending measures to boost demand, despite a likely widening of the fiscal deficit.

“There are places where fiscal spending can actually produce an immediate boost in demand,” Rajan said. “Certainly, in some of the rural areas, which have not done well in the past few years. Building more roads there, more transfers, enhancing spending in the national rural employment guarantee plan. These would be ways of alleviating the stress in some of the poorest households.”

He added that he hoped the budget package would also emphasize structural reforms that India needs to revive its long-term sustainable growth.

Rajan Raghuram at Jackson Hole, Wyoming August 24, 2018. 

David A. Grogan | CNBC

Some economists predicted the government to announce income tax cuts during the budget, but some say it is unlikely to have a meaningful impact when it comes to stimulating growth.

An income tax cut amounting to about 1% of GDP could boost growth by 0.4 percentage points in the first year, Priyanka Kishore, head of India and South East Asia economics at Oxford Economics, wrote in a Jan. 9 note.

“Even if tax cuts are the more palatable option politically, it is important that capital spending does not bear the brunt of keeping the fiscal deficit in check,” she said, adding calculations showed reducing public investment by just 0.2% of GDP could halve the impact of the income tax reductions on headline growth numbers.

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In September, the government announced a surprise $20 billion fiscal stimulus package, which mostly focused on a corporate tax cut that experts agreed would make India more competitive. For its part, the RBI reduced its repo rate by 135 basis points in 2019 to stem the economic slowdown.

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