As India grows richer, we have to think about the best way to grow rich: Raghuram Rajan

Right from earlier times, much more so from the Vajpayee government’s time, building the golden quadrilateral, building rural roads, ports and airports is of course very important. But at the end of the day, both in terms of our government capacity and the resources we generally have, we are still a relatively poor country. You will need to prioritise at some point. One of the examples we give in the introduction and which spoke to us very deeply was the example of the Micron semiconductor plant [in Gujarat].  

It’s great that we are producing semiconductors. Nobody is against that. But how are we utilising our resources? The subsidy required by the central and the state government amounts to Rs 16,500 crore, and the entire higher education budget of India from the central government is Rs 44,000 crore. So, about a third of the entire money that you send to the IITs, the IIMs, the TIFR, all central universities, you are going to spend on one plant which is probably going to generate a few thousand jobs. If you think of how much money we put on fertiliser subsidies—not that fertiliser subsidies are not important—but in the last year, it [the budget] was Rs 2.25 lakh crore. Again, that is more than the entire higher education and primary education budget of India. The time has come where we will need to really prioritise our resources.  

Q. I want to go back to the Micron data you mentioned. In the book, you say how, if the facility creates 5,000 jobs, with a subsidy of Rs 16,500 crore, the government would have paid Rs 3.2 crore per job. If we assume that the Micron subsidy is justified, from where else can we get the money to increase allocation towards, say, education and health care and development of human capital? Are there other avenues of investment that we can explore?

Lamba: What we try to emphasise in the book is that a lot more resources need to be put in, but also the better utilisation of resources. So it’s not that we’re not spending... we are increasingly spending reasonable amounts of money on health care. But what is it being used for? Is it being used judiciously? First, I don’t I think this is set in stone. We are trying to encourage a different way in which we would not spend Rs 16,500 crore on Micron but on higher education. In the near future, much more money needs to be spent on health and education. And we need to make much better use of the money we have already spent. 

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Q. So how can we go from having a pure American-style capitalist growth path to balancing it with building social capital, human capital and the social infrastructure that we need? What’s the formula for realising the mixed economy vision that India was set to follow post-liberalisation?

Raghuram Rajan: What we’re proposing is a change in a number of dimensions. It’s not just ‘here’s a set of policies that you should follow’. We actually think a lot of change will come from re-examining our governance system.

We moved towards decentralisation in the early 1990s with the Panchayati Raj, but we never fully carried it out. We devolved some functions, more so in some states than others, but we didn't devolve funds. Local governments don't have the necessary funds often and they don't have the necessary people. That's something we document in the book, how there are many more people at the local government level in other countries relative to India.  

And so, when we talk about investing in people, it’s better when you decentralise, because people can hold local government officials responsible if the school is not working, or the dispensary is not open. Today, it's much harder to do that. If you look at where it has been successful, an example that comes to everybody’s mind is Delhi. And why is Delhi successful? Because it’s not much bigger than a district in terms of size and so when everybody can see what is happening to the local schools, then the local authorities get some benefit, they get rewarded for that. Of course, the AAP [Aam Aadmi Party] government has benefited tremendously from making those changes, to the Mohalla clinics and the schools and I think this is the broader point we’re trying to make that if you want to do this, it’s a whole of country effort. It’s not just, here are 10 policies, follow it. We need fundamental change both on the governmental side and economic policy side. And then, we will get, not so much mixed economy.  

We don’t spend a lot of time in the book on whether it should be private ownership or public ownership. We think that’s a tired game. Go with the ownership that works best and works best under different circumstances. A lot of the time it’s about getting the incentives right.  

What we’re really saying is that we need more democratic governance bottom-up. It’s not just elections, but the ability to hold your local authorities responsible for what they are supposed to be providing. That will make a huge difference. And that will give us... I don’t know if you want to call it capitalist or socialist. But give us an economy which is much more equitable in terms of providing everybody the opportunities they need today. It's very skewed and that is a problem.

Q. In the book, when you talk about decentralisation, you use the example of China to illustrate how authorities at the local level are also empowered to take decisions. How can we work on that?

Rajan: The relevant principle is the principle of subsidiarity, which means don’t take decisions at a higher level than they have to be taken. Push every decision that you can to the lowest level at which it’s efficient to take it. For example, a state like Uttar Pradesh has 240 million people. That’s about 2/3rd the size of the United States. And Uttar Pradesh is governed from Lucknow, the capital. We need to decentralise not just to the district level but down to the panchayat level, many functions. For example, should primary schools be governed at the district level, even below that? Why should it be at the state capital level? Why can’t each district have a hospital that is governed by district authorities so that district people know who to hold responsible if the hospital not functioning.  

We’ve kept the governance structures that we had during post-independence. When the primary problem in the country was national integration, we needed to create a country. That problem is behind us. We have a country that is an integrated whole. Now, the issue is how can we make it govern better, and for better governance, one aspect is decentralisation.  

Q. You also talk about India’s rich demographic divided. India seems to be at a point where China was three decades ago. We also seem to be at the peak of our soft power. Can this help us build the hard power needed for economic growth?

Lamba: This is an anecdote we have in the book. I was in Toronto, giving a talk. It is a bit tragic that the number of Indian students going to Canada is at an all-time high. The number of requests for PRs (permanent residences) from India is at an all-time high. And we’re in a situation where we are being asked about whether we’ve carried out an operation in a different country. So we have to be careful, going forward, what kind of soft power we want to show in the world and what kind of hard power we want to use, and when to use.

India was considered part of many international organisations despite being poor and despite having a lot of constraints because we were a beacon of hope for the developing world. We were a consistent democracy and we took that very seriously all through our modern history. So, what we have described in the book is how we should continue on that path while pushing on more economic aspects. For example, since globalisation and services are going to be very important going forward, India should take a leading role in penning down the kind of treaties that we need to sign so that our doctors, engineers, lawyers and accountants can directly supply labour without physically moving to Western countries. There are no rules as of now for the terms of trade of services as they are for goods through the World Trade Organization (WTO). So there are a host of things in which India can really build and expend its capital. When it comes to both soft and hard power, we need to get our priorities right.

Rajan: If you think of soft power as being our culture, our example. As Rohit said, post-independence, we set a tremendous example for the rest of the developing world of gaining independence in a non-violent way, of having leaders of the stature of Mahatma Gandhi, Jawaharlal Nehru and Sardar Patel. These were people the rest of the world looked up to. With their example and the fact that India is the home of at least three great religions and various kinds of philosophies, that gave us an allure for the rest of the world. However, going forward, a lot of our soft power will come not just from our historical past, but also the kind of ideas that we create. You talked about a different kind of capitalism, maybe that will emerge in India, especially be focused on building human capital. Maybe a more egalitarian capitalism will emerge in India

We are a country that became democratic very early on in our development path. We still haven’t become a middle-income country. We are slowly getting there, but if we do become middle income and go beyond that to become a developed country, that will be a unique story of a country which did it all while being democratic. These are all elements of soft power that can influence the world.

Flip side, as far as hard power goes, we were a relatively poor country and our hard power vis-a-vis the rest of the world was relatively limited. If you talk about it purely in terms of military. And even today, we are quite small, militarily. We have a lot of people in the armed forces but if you look at the total spending militarily, we are small relative to the US or even China. And I think it will take time for our economy to grow for us to have a greater sense of hard power.

But I think what we should do is combine that soft power, more democratic, more talking about the problems of the world and being a contributor to their solution. Rather than muscularly flexing our muscles and saying we are the superpower. Just like the other superpowers like the United States and China are doing. As we grow richer, we have to think about what the best way is to grow rich. And how do we influence the rest of the world in a way that is more consistent with our culture. That is something we need to think about as we go forward.  

Q. Coming to jobs. The connection between good jobs and economic growth continues to be weak. The share of the manufacturing sector in GDP and employment has been stagnant, as you’ve specifically mentioned in the book. In such a scenario, if we need to leapfrog from low-skilled manufacturing that is happening today, on the lines of what China did decades ago, to a higher value-added, sophisticated manufacturing, how do we do that given our current challenges of infrastructure, skilling and R&D?

Rajan: Any solution that is solid and sensible will take time. We cannot ignore the basics. If you have malnourished kids, they are not going to be capable of anything going forward because malnutrition stunts their brain and body. And they can’t really work. So, you need to deal with malnutrition on an emergency basis. If you want higher value-added jobs, you have got to start working on the fundamentals right now and it will take time. But, if time passes and you haven’t tackled human capital, the problem becomes even bigger. The last big effort was during the Vajpayee government. The very big effort on building schools for every kid and making sure everybody went to school. We need big efforts like that going forward to improve human capital.   

Take college. We talk about being vishwaguru. Which university in India is in the Top 100 [globally]? Not one by most metrics. That is a problem. We need to do this again on a war footing. There are so many things we need to do. One of the things we keep saying in the book is that one of our biggest failings has been implementation. We need not just have big ideas; we need to implement them.  

Q. Education is very crucial to this. While India has done well in terms of enrolling kids into primary schools, we’ve faltered somewhere down the line. The number of medical school students struggling in Ukraine in the wake of the war could be an example of this

Rajan: Exactly. Why don’t we have more places for doctors? It’s not that we don’t have the funds. As Rohit said, we just invested Rs 17,000 crores in Micron. Can’t we invest that in new teaching hospitals? We have plenty of patients. And there are plenty of good doctors who can be teachers. So what is missing is a sense of urgency that we need to do so much more of this. Why are 60,000-70,000 of our medical students going abroad when there’s such an unmet demand for medical positions? People pass the NEET but can’t get medical positions because you don’t have enough places. So isn’t creating those places not only necessary, but also a job-creating process? Every teaching hospital you build is going to create a lot of jobs. So if you thought about this carefully, we’d say, let’s be more open to other ways of creating jobs than this low-skill manufacturing that we seem to have embarked on.  

Lamba: In this issue, there’s also a serious lack of imagination. Do you think of health and education in terms of training people? As an economic opportunity? Or are you just thinking of this as something society needs to do? This is the change in mindset that Raghu is talking about. By now, shouldn’t India have been a hub for students from developing countries who cannot afford to get a good education in their country or find it too expensive to go the West? So not only are we training doctors to help our population, it’s also an important economic jobs generator.   

Q. What role will startups play in contributing towards job creation and economic growth?

Lamba: The way the human capital of India is being structured and is moving, demand for firms providing direct services to the world and firms embedding services in manufactured products is only going to rise. In terms of direct services, for example, we talk about global capability centres. For example, the recent Nasscom report says that they have a market size of $46.46 million and employ about 1.7 million people. This market is only going to grow because if you need to pay $150,000-200,000 to a financial consultant or advisor at Goldman Sachs in New York, the same person you need to pay $60,000, less than half, in Bengaluru. This is the reason these jobs are expanding.

Firms like Lenskart [eyewear startup], and iD Fresh Foods [idli-dosa batter startup] if you let such ideas flourish, you don’t even have to restrict them to manufacturing or services. A lot of creative stuff is happening at the intersection. Without enough enabling framework, if human capital is not a constraint for us, then this type of market is only going to expand, because we are only limited by our imagination.  

Rajan: The biggest part that is still eluding is new products. Where is India’s TikTok? Where is India’s Nvidia and Qualcomm? Interestingly, we have people doing chip design in India. By one estimate, 20 percent chip design is being done in India. But there is no chip design company in India like Nvidia or Qualcomm. There is a real question as to why we can’t generate these kinds of companies. And the reality is that we don’t have the intellectual property producing units that other countries have, and those are called universities. We don’t have high-grade universities producing that kind of intellectual property, which then gets transferred to firms, which then use that as a basis for growth.  

So, think about Google, created in Stanford by these two people with the help of an Indian professor who was a topper from IIT Kanpur. Why can’t we get those professors back to India into the universities here and make those universities generators of intellectual property.  

Q. Since we are talking about job creation, there is a view that demonetisation and GST killed small businesses, and a counterview that it was a price to pay for the formalisation of the economy. But small-scale enterprises are an integral part of larger, more successful economies. So what can we do to strengthen small-scale enterprises in India?

Rajan: We try and find reasons why demonetisation was a good thing, but the evidence is that it was uniformly a bad thing. That said, the question of whether we need to kill small enterprises in order to get formalisation seems like a dramatic and drastic way of doing it. Any sensible economist will say that what you need to do is incentivise small and medium enterprises to become more formal, by giving them prizes to become formal. For example, easier credit. Moreover, we need to reduce the burden of becoming formal. It shouldn't be that as you become larger, for example, you have significantly increased disclosure requirements, higher regulatory penalties. Those are things we should examine. Why do people shy away from becoming formal? What is it that we can do to reduce the burden of formality? This will also help these enterprises benefit from the useful things associated with formalisation. So if we say we need to kill them because they are small and informal, we are going about it the wrong way.  

Q. Coming to the point you mentioned about making products in India. We’ve increasingly been seeing CEOs, like Freshwork’s Girish Mathrubootham and Zoho’s Sridhar Vembu, express confidence in India becoming a product nation. What is your response to that?

Rajan: If we do the homework, there is nothing that would prevent us from becoming that [a product nation]. That said, I’m always wary about us saying we’ve arrived before we arrive, because that’s almost always a recipe for us not doing what we need to do. Some of the products are there, some of them have to be better structured and marketed. It’s not that India lacks ingenuity. Some of these products require serious research and that requires industry and university collaboration in a way that we haven’t done much in the past, but we can do much more in the future. And if industry is willing to fund universities to do that, that’s great.  

We should benefit from our diaspora. We have good people in firms and universities around the world. Why don’t we attract some of them back and build new firms and structures around them? The TSMC (Taiwan Semiconductor Manufacturing Company) was built around someone who came back from the United States, who had been a high official in Texas Instruments, didn’t make it to the top and came back to start TSMC. We have so much knowledge embedded in people abroad. Why not use that to leapfrog and generate that product economy?

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Q. Your book also mentions the dismal participation of women in India’s labour force. One of the major hurdles in their way is unpaid domestic and caregiving responsibilities, which have increased in the wake of the Covid-19 pandemic. So, valuing domestic contributions or helping women get out of their home requires systemic change, a mindset shift. What actions can we take as an economy that will help?

Rajan: We have to make it easier to look for work from home or do part-time work. That’s one example of something that can be done. And now we have the technology to do that. So more interviews that can be done online, especially when women have difficulty travelling. But we also need work to be more home-friendly. One of the biggest concerns women have has been security, both getting to the workplace and in the workplace itself.  

If we can put our imagination and public policy to work, there’s absolutely no reason why we can’t do far better in terms of creating opportunities for women. And as you said, part of it is also mindset, both on the part of families but also on the part of women to feel that they can actually go out and do these jobs. That is not to say that staying at home is necessarily a bad thing, but it has to be a voluntary thing.  

Lamba: There are also some very low-hanging fruits. There is a large amount of data to suggest that women are employed in overwhelming numbers in certain sectors like textile and leather apparel, where India had a head-start. You didn't even need to give large subsidies. But certain policies have led to India falling behind Bangladesh, Vietnam and even some European countries. And not being able to take up the space that China has vacated in the textile business. So if India had a much larger fraction, for example, of the textile business in the world, it would be employing many more women. We don’t have a very good model of inter-generational childcare. As we get urbanised more, there should be a system by which older people are able to help much more in child rearing while younger women go out to work. These are low-hanging fruits, and with some policy tinkering, you could create many more jobs.  

Q. I want to talk about the chapters on inequality. There have been views among economists, particularly in the US, and I think the Economic Survey of India 2021-22 also addressed this point that a certain level of inequality is good for economic growth. For improving human productivity, social mobility, etcetera. What is your view on this?

Rajan: I think forced equality, where you cut off people who are doing well, because they are doing well, is bad. That’s one of the downsides of extreme socialism, where you inhibit incentives to do better. At the same time, having unequal chances and doing well is also bad. You are born in the wrong family, at the wrong time in the wrong place and you have no chance of getting anywhere in life because you haven’t had good nutrition, schooling and the right values drilled into you at home. And so, you are unable to compete with anybody who’s had a different upbringing. That, to our mind, is unfair. We need to remedy this inequality. Allow for opportunities to flourish but ensure that everybody has the right starting point. And the starting point is not at birth, but when the race for career starts at age 20 or 25. That you have had all the benefits a society can equip you with to run that race.  

Q. You say that one of India 's unique strengths is its spirit of inquiry and debate. How do we protect that? Freedom of speech and expression is a fundamental right. But the law says that what you convey cannot go against the interest of the security of the state. In this day and age, can showing bad feelings towards a particular government be construed as undermining the security of the state? And how do we protect the spirit of inquiry and debate?

Rajan: We must not confuse the security of the nation with the security of the government in power.

Those are two different things, and all too often, that is the confusion that seems to pervade the public sphere, including many government officials who basically say you criticising us, you're criticising the state, you're criticising the nation. No, you’re not criticising the nation, you’re criticising your incompetence as a government. A fair game in democracy is that you should be able to criticise the government as much as you want. But you should not be focused on breaking up the country. That's a different thing, and all too often, we use sedition laws against young students who are just protesting the policies of the government in power. And they should be allowed to protest all they want. After all, that is the purpose of democracy, to, in part, allow that pressure to get diffused, but in part also to hear them because they have something important to say.  

The same people who, you know, today are in power, were protesting the Emergency. I used to have a discussion with Mr [Arun] Jaitley when he was finance minister and I was RBI governor, and he used to talk about those days, about how they were in jail. Was Mr Jaitley an anti-national? Absolutely not. He was fighting for freedom of speech and expression. And at the time, Mr [LK] Advani made an important statement about the press, which we cite in the book. “You were asked only to bend, but you crawled.”

When the people in the ruling party admit that they were the protesters at one point in time, they should acknowledge that there are others who are the protesters at this point in time, who have very different views from the ruling party. But both sides care for the nation. We can't just point a finger at protesters and say they are anti-national.

In general, an authoritarian country will never create the ideas that are needed for longer-term success. It will suppress those ideas, whether they are political or scientific ideas, because these ideas hit the establishment. That is why the Soviet Union never became an extraordinary innovator. Yes, it did some stuff in defence, but consumer innovation, forget the thought. I would argue that people in China are saying the same thing, now that China’s best day in terms of innovation, at least at the consumer level, may be behind them. And I don’t think India should go that way. Let’s not take these authoritarian countries as a model and recognise there are deep problems with authoritarianism, which is why we shouldn't lose our democracy by any stretch of imagination.