Strategy Note /

India youth unemployment, fiscal deficit and Agnipath protests

  • Violent protests over new military policy for young recruits; no guarantee of ongoing service or pension after 4 years

  • India military spend as % of GDP is higher than average in large EM (ex-Saudi) but 60% is on salaries and pensions

  • Focus on military staff costs (1.5% GDP) may be driven by 10% fiscal deficit, but youth unemployment is also high at 20%

India youth unemployment, fiscal deficit and Agnipath protests
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
20 June 2022
Published by

Across several states in India, violent protests have broken out in response to the new military policy for young recruits, known as "Agnipath" — translated as Path of Fire. The trigger is the lack of any guarantee of continuing service or pension benefits after an initial four-year stint for new recruits (aged 17 to 21 years old).

The context is the difficulty in balancing the conflicting priorities of persistent defence threats, reforming to improve efficiency, fiscal deficit reduction, and dangerously high youth unemployment.

Protests that result in economic disruption and, more importantly, further disincentivise structural reform reinforce our caution on India equities relative to cheaper peers in large emerging markets.

India military spend dominated by salaries and pensions

Conflicting priorities behind the protests

There are five underlying factors, some of which are conflicting, at play here:

  1. Persistent external defence threats because disputed borders with China and Pakistan, instability in Afghanistan, and, over time, greater involvement in Asia-Pacific defence matters (eg via the Quad).

  2. Military expenditure that is higher than the average of large EM peers (ex-Saudi), but where staff salary and pension costs account for about 60% of that budget (amounting to 1.5% of GDP).

  3. Fiscal deficit of close to 10% in 2022, according to IMF forecasts, and where the need to combat inflation is narrowing the space for continuing monetary policy stimulus (negative real interest rate).

  4. Youth unemployment of 20%, which is high by Asia EM standards.

  5. PM Modi's efforts to reignite a reform agenda, derailed by the Farmers Protests and the re-focus on re-election.

India high fiscal deficits partly drive focus on military costs

India military spend above large EM average (ex-Saudi)

India military personnel is low relative to population size

India youth unemployment is high relative to Asia EM peers

We prefer other large EM equities over India

This development does not help the investment case in India equities because of the economic impact of any lingering civil disruption and the disincentive for the government to engage in more difficult economic reforms.

This compounds the challenges of the withdrawal of policy stimulus (monetary even more than fiscal, as inflation expectations increase), and a valuation that is more expensive relative to the historic average than is the case for large EM peers.

India's loose monetary policy support for equities can't last

Among large EM peers, there is cheaper valuation on offer in, for example, China (which also has the rare capacity for policy stimulus) and Brazil (which is on the exporter side of the commodity trade).

India valuation higher relative to history vs large EM peers

Related reading

India domestic economy and politics

India inflation shows its loose policy can't last, May 2022

India's stimulus may not be sustainable, Feb 2022

India: Reform and Illiberalism after Modi's BJP state elections success, Mar 2022

India foreign policy and defence

Why India abstained on the Russia vote at the UN, Mar 2022

Military spend and conflict after Russia-Ukraine, Feb 2022

India, China, Pakistan detente but we've been here before so low expectations, Mar 2021

China and India: Himalayan friction matters, May 2020