It Is Too Early to Celebrate India’s New Growth Path, Says Raghuram Rajan

Former RBI governor and economist Raghuram Rajan has been vocal about his ideas on policy matters in India. His latest book Breaking the Mould, co-authored with economist Rohit Lamba, is a deep dive into finer issues of the economy, including welfare schemes, job crisis, misplaced priorities of the government and much more. In an interview, Rajan demystifies the current narrative of growth in the country and why manufacturing-led growth might not be the best solution at hand. Edited excerpts:

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There is an oscillation between growth and redistribution cycles in a country’s economic trajectory, according to your book. How do you identify India’s post-2014 journey—as a period of growth or one of redistribution?

If you are talking about the current government, what we have seen over the last nine years is certainly building upon the initial India stack ideas. We have developed a much better ability to offer direct benefits transfers of various kinds, whether it is cooking gas subsidies or transfers to the farmers. In a sense, we have moved into a period where redistribution can be done in perhaps a more efficient way with less leakage along the way.

There is also an incentive sometimes to do this because politicians can get associated with specific schemes of redistribution. In the past, with the leakage that used to happen, you might risk angering people because it was not reaching them. Today, it reaches them instantaneously. That being said, I think the job crisis—and I am going to call it crisis because it is a building problem—means that you cannot stay away from growth for long. You cannot distribute enough to compensate for a good job. If people are not getting jobs, then no amount of distribution can take off some of the edge of your hunger; it cannot hold you up permanently. That is why I think there is certainly a concern about growth.

But we have seen consecutive quarters of GDP growth of over 7%, followed by record GST collections. Is it at least fair to say that India is finally beyond fears of Hindu rate of growth?  

As you know, GDP numbers have always had many issues with quarter-by-quarter analysis. A number of observers have pointed to GDP deflators being unusually low at this point. Corporate profits tend to get boosted when you have these periods of low commodity prices. What would be nice to see is this being persistent over a number of quarters.

There has been tremendous government investment in infrastructure in the first two quarters. But again, because of budgetary constraints, the question is how long we can continue to do with government infrastructure. On the worrisome side, FDI is falling off and private investment is yet to pick up. This was an issue when I was governor, and it continues to be an issue. If everything is going spectacularly, we would love to see that also contributing. It is when that starts contributing that I think we can feel a little more confident that we are really out of the growth woods.

One would like to see India persist even as the rest of the world slows down because that slowdown is also likely to come in the next year. You see credit tightening significantly in the US as well. So, these are the reasons why I think it is too early to celebrate. We need to see this continue for some time before saying we are well and truly into a new growth path.

The quality of growth ultimately boils down to how many good jobs we are creating. If we had an alternative title for the book, it would be “Jobs, Jobs, Jobs”. Making people more em0ployable requires a bottom-up effort. It involves working right from the beginning—fighting malnutrition, improving the quality of primary education, stopping the dropout rate and improving colleges.

At a lot of places in the book, there is criticism of India’s effort to emulate the Chinese model in manufacturing. Can we say that the difference of opinion between you and the current government is just on what lessons you want to take from China to become the next China?

I am not sure that sums it up. I would say that my worry about the China path is that there are lots of differences between India and China. What made manufacturing growth easy for them are some aspects of both their governance as well as the education system, which are not quite what we have. I think what is also important to remember is that China did it when there was no China. We are doing it when there is a China. We are not competing with the West. We are competing with China on many of these issues.

Of course, we have some benefit from not being China. The China Plus One idea that firms are thinking about will cause them to bring some manufacturing to India. But we have not benefited from that as much as, say, Vietnam has. For one, these competitors like Vietnam and Bangladesh make it harder for us to emulate the China model.

Another issue is that the world is moving on. You have to listen to the views of Congress people in the US on another country replacing China as the manufacturing powerhouse in the world. They will not be open to Indian goods streaming into their economies to the extent that the Chinese goods did. They have learned their lesson.

Right now, with sufficient subsidies to goods production, lots of people are coming into India. But even despite this and China Plus One, FDI has slowed down considerably. It suggests we have to be a little careful about thinking this is the right answer.

Union minister Ashwini Vaishnaw recently said that the PLI scheme on mobile manufacturing has created five lakh jobs. Do you think such job creation will eventually justify these kinds of subsidies for manufacturing programmes?

I think it would be good for the government to disclose all the data it has, including the subsidies that are paid and the contingent liabilities that have been taken on. This way, a proper public assessment can be done of whether the scheme is working or not.

Remember, we have a large domestic market, and we elevated the tariffs on mobile imports. So, everybody has an incentive to come in and produce to avoid the tariffs. But if production is only about assembly, you do not have to invest a lot to get that kind of production. The key question is whether this is here to stay or is it here so long as we give out subsidies.

Another question is whether we can minimise the amount we subsidise to create those jobs, because the subsidies are essentially saying: look, they are not coming of their own and we need to bribe them. This leads to the whole interventionist problem where the government becomes the enabler of everything, and that is a bad place to be in, as we have discovered in the past.

But industry estimates show that India’s value addition in smartphone making has increased from 6% in 2016 to more than 15% now. Is that not impressive?

The numbers do not match what I know. We need more details. Sometimes, what happens is that you add the producer’s margin and this and that, and it gets shown in India as value added. We need to know what exactly is coming under value added.

By some metric, and I talked to some industry people here, they are making the case for the cell phone, but not the components. The question is, when we take the component as value added, how much did they [component maker] import? So, these things need detailed calculations. Unless these numbers are made public and somebody scrutinises them, I do not know what is being talked about [by the government] at this point.

Freebies have been a bone of contention between parties. Where do you stand on it?

I think targeted benefits at the relatively poor, helping them invest in themselves, is not a bad thing. But using that to substitute providing public goods in terms of better schools, better healthcare and more access to finance is a mistake.

Promising something to everybody [before elections] is sheer populism. This populism constrains government resources for what it really needs to do, which is to provide quality public services.

Before the general elections next year, I do hope we have a debate about the development path which is beyond the issue of how much subsidy you are giving and how much subsidy I am giving. I would be happy if the debate is about whether we should go for manufacturing or services. I hope that a debate emerges around the book, even if people sort of want to say that we are wrong. I am happy to debate that.