Exclusive Interview/ Raghuram Rajan, former Reserve Bank governor
Raghuram Rajan revels in his post-RBI governor status as a sort of conscience-keeper of India’s political economy, ignoring trolling and allegations of ‘Modi bashing’. It helps that he is not present on any of the popular social media platforms except LinkedIn.
But as Rohit Lamba, economist at Pennsylvania State University and co-author of Rajan’s latest book, Breaking the Mould, tells me, “People should engage with the message, not the messenger! We wrote this book because we seriously think there is a political economy path vision problem, and we are proposing a different path forward.”
In the book, Rajan explains, point by point and with examples galore, why India is on the wrong path with its post-pandemic focus on manufacturing, with its production linked incentive (PLI) schemes and China + 1 focus. One highlighted example is incentives offered to Micron to set up a semiconductor plant in Gujarat. “You are spending Rs16,500 crore to set up a chip plant that is not even cutting edge, spending more than one-third of the entire education budget of the central government to generate just a few hundred or thousand jobs,” argued Lamba. “Where are your priorities? Do you have a vision broad enough to tackle growth and jobs for the coming decades for India?”
Rajan himself had more to say. Excerpts from an exclusive interview:
Q\ You’ve given a thumbs down to the economic model of PLIs and manufacturing. How do we strike a balance, how do we go about trying a new model?
A\Services is where India needs to focus on. Not just the old-style services, but new services related to value-added part of manufacturing, the intellectual property, the content and the creativity that goes into that. The problem the China model is running into is creativity. The authoritarian government does not create an environment where creativity can flourish.
India with its democracy has an advantage here. If we strengthen our democracy, if we allow all this creativity to flourish, it can capture the high ground. What we are worried about is that we are spending so much money trying to capture the low ground [of manufacturing] where we will be competing with Vietnam and China, and not the space that is available for the taking, where we are competing a little bit with the west.
Think, for example, a consultant. Today if you hire a consultant in the west, they will cost you $200,000 upwards a year. But if you hire a brilliant consultant from IIM Ahmedabad, they will cost you maybe $40,000-$50,000 a year. This is a huge possibility of high value-added labour arbitrage, if we can get many more kids through institutions like the IIM. So, the need of the hour is not so much factories like Micron, but intellectual capital factories like IIMs, but [with] higher quality.
Q\ Perhaps since our education levels are not so high, the government thinks that low skill manufacturing is something we can do. Most Indian states have a dismal record when it comes to education as well as health. The pandemic would have been a great point to reset, but I don’t think it really happened.
A\ It takes a really long time to get any improvement in health care, to get any improvement in education. The emphasis seen in the recent elections is all about freebies, as opposed to much better school and health care. The provision of social goods takes back seat to the provision of freebies.
Now, we are not entirely against targeted transfers, because they can give people spending power, especially the poor, and they can use that to get some of the social services that they don’t get. But that said, I think government has to focus on improving the quality of social services. To my mind, that requires changes in government also. This is a holistic approach. We need decentralisation, so that people can hold somebody to account. If you are not getting a good school, if the teacher is absent, if the dispensary doesn’t open regularly, if the medicine is not available, they have to have somebody to protest to. That is where local governments become much more important.
Our sense is that our (centre-state government) structure was set up post-independence when national integration was more important than anything else. And now that national integration is largely assured, we need to think about what is the best government for the 21st century. It is not about changing the Constitution. But within the Constitution, can we do some things that we always thought we will do, the third layer of [localised] government that has sort of been arrested in the country at the state level for now.
It is a two-pronged approach, both directly on measures to improve education, health care, finance, but also, the governance that allows those things to flourish, that allows the bottom up pressure to come, that allows the system to respond. The system will respond, but the pressure has to come.
Little value addition: A mobile phone assembling plant at Greater Noida, Uttar Pradesh.
Q\ The current focus is on improving GDP numbers by manufacturing and infrastructure development, as seen by reforms initiated during the pandemic. Because, if you focus on education and health, it will be a generation before those dividends start to show.
A\ We need to learn the lessons from the pandemic. Many countries instituted inquiries to find out what they did well and what they didn’t; we haven’t. Because we claim we did really well!
As you know, there is a lot of discussion about the statistics, whether we grossly undercounted our deaths. If we properly counted it as per WHO says, maybe we had a disastrous performance. We need to better understand what we did and that goes back to the point that data should not be suppressed, but used to inform, so that we can improve our governance.
Yes, anything done well is going to take time. But we had 10 years of this government. Since Atal Bihari Vajpayee started the thrust on primary education in the early 2000s, it has been two decades. Time builds up, and we benefited from the Vajpayee push. The question is, do we need to do more now, to compete in the global economy?
We are not against low-skill manufacturing by any means. We should encourage it. But what we are saying is that there are diminishing returns to going there, because we are not competing with the west anymore. We will be competing with Vietnam and China that already have well-educated workers that are moving up the value chain. And it will be very hard to carve a niche for ourselves.
Take all this talk of cellphones that are coming through PLIs―we are importing most of the parts! This is not a huge value add! This is the lowest part of the value add in the chain. Let’s be clear―we are spending a lot of subsidies in getting this low value-added manufacturing in here. Improving our infrastructure will bring some of it; our large market will get some of it. But we don’t need to pay to get it. What we should pay for is scaling up improvements in education and health care, which will create the labour force that people will want to employ. They will bring factories in.
In a sense we are saying [the current government policy] is very short-term thinking, and very much focused on subsidising manufacturing to a great extent. And what happens when you find at the end of the subsidies they are not willing to stay? Because they are not bringing in a huge amount of investment if you look at the numbers. While subsidies are there, they will be happy to stay. But even if you are looking at the China + 1 pressure, companies looking at an alternative to China, we are not getting a large part of those.
Q\ Are we frittering away our demographic dividend with this focus on low-skill manufacturing policy?
A\ I would say we are in danger of frittering away our demographic dividend not so much by the low-skill manufacturing policy, but by not investing enough in education and health care.
Take the pandemic. When you take the data of some of the states, it is alarming how poorly kids are doing in school. They haven’t come back to school in the same numbers; many have dropped out. They are not learning because they have forgotten a lot of what they learnt, because schools were closed during the pandemic. What kind of labour force are we expecting to have, when these kids have dropped so much behind and are dropping out?
As a country we must look to our human capital. What are we missing? Forget creating a 21st century labour force, even to create a 20th century workforce, we need to repair the damage that has been done by the pandemic. The key resource in the 21st century is going to be brains; not brawn, not buildings.
Q\ You hint in the book that the GDP growth is too unreal and does not reflect ground reality.
A\ We don’t want to enter that debate because there are more learned people than us engaged in that debate. What is true is, if you are a relatively poor country, you are going to grow faster. The fact that we are the fastest growing GDP in the G20 becomes less meaningful when you recognise that we are also the poorest country in the G20.
The key question is, are we growing enough to provide the jobs, to take advantage of the demographic dividend? There, almost surely the answer is no, if you look at the growing unemployment, if you look at kids trying to take the civil services exams, trying to enter military service, any kind of government service. There is an enormous number of people applying for government jobs because the private sector is not creating enough jobs.
You would think that in an economy which is growing as splendidly, jobs would be plentiful. Of course, there are good jobs, there are lots of good stories coming out of India. But that is not enough right now.
The only way we can do far more is by focusing on the factories of the future, which are schools, medical clinics, hospitals, universities. Those are going to be the factories that will manufacture human capital. And that is where we need to be focused on right now. Because we are just not doing it right.
Q\ A K-shaped recovery has seen many sections of people falling off. You make the startling observation that our youth are jobless but distracted by cheap mobile data videos.
A\ The narrative is so ebullient, newspapers full of this being inaugurated, that being inaugurated, that there is a sense that if I am not participating in it, there must be something wrong with me. Meanwhile, the intellectual class is benefiting from the tremendous upper-level job growth―their kids are being employed by the likes of Goldman Sachs in Bengaluru! So in that sense, they are doing fine.
The real question is how long this sort of separation can persist. [These are] parents whose kids are dropping out of school because they did not get enough attention during the pandemic, the ones who are going back to agriculture because there are no jobs in industry? At some point, this will start to blow up. What we are seeing right now are small mutinies―Manipur, tussle over reservations. These are examples of the way in which they come out in our country. Frustration then looks for immediate sort of cause, and sort of boils over.
Once many more reach workable age and we don’t provide the jobs for them, it turns into a demographic curse. And the most worrisome will be if youth don’t get jobs and they are not distracted. Then that will be a problem.
Q\ From critiquing ‘vishwaguru’ to criticising every point of the present government’s narrative, you have now crossed over firmly into ‘Modi bashing’ territory. Does it bother you?
A\ There is an attempt to portray me as being with some party or the other. I actually worked with Yashwant Sinha, who was finance minister in the BJP government. What I want is, really, how India can do better. India’s strengths are its democracy, its willingness to talk, its willingness to debate, and these are going to be huge strengths in the 21st century. And we should not give these up lightly in an attempt to go the China way. And from all that we hear, that seems to be the closest model we are moving to―manufacturing-led, infrastructure-led, and more focus on buildings than on debate and brains.
Let us focus on India’s strengths, and if we can do that, India will become a vishwaguru. There will be an outpouring of knowledge from India, which will make people point to India. In fact, a whole lot of companies are coming to India to exploit that availability of our smart young people. But we can do far more. We can own that intellectual capital. And we can grab the higher value-added parts of the supply chain. Why should Satya Nadella be only in Microsoft? Can’t we replicate him in Indian companies and make a huge movement upward?
We should also recognise that 75 years after independence, there are some changes we should make, given that the challenges we face are different from the challenges after independence. But it’s not in the direction of giving up on inclusion and moving towards majoritarianism. It is by trying to get governance into people’s hands. Becoming more democratic than less democratic. Getting more information, more power into people’s hands. We should continue on that trend rather than reverse it.
Breaking the Mould: Reimagining India’s Economic Future
By Raghuram Rajan and Rohit Lamba
Published by Penguin Random House India
Pages : 336; Price: Rs799