Raghuram Rajan and Rohit Lamba – the full interview

In 'Breaking the Mould', Rajan and Lamba highlight the critical challenges India faces today and urge the country to "break free from the shackles of the past and look to the possibilities of the future".

After writing a series of newspaper columns on the drawbacks of the government's flagship production-linked incentive (PLI) scheme, former Reserve Bank of India (RBI) Governor Raghuram Rajan and economist Rohit Lamba have co-authored a book building on their commentary and developing their own vision for India's economic future.

In a wide-ranging interview, Rajan and Lamba — who twice served as an economist, under Rajan and then under Arvind Subramanian when they were the government's chief economic advisors — spoke to Moneycontrol about their issue with the current set of Indian policies and what can be done to ensure that India grows at the rate it needs to.

Edited excerpts:

Despite the title suggesting that it's a book reimagining India's economic future, 'Breaking The Mould' seems to be more about how Indian politics and politicians need to change. Giving up some power — be it to the states  or local governments or NGOs — is probably the last thing any party would want to do, especially one which is confident of remaining in government for the foreseeable future. Should we perhaps be looking at reforms that are possible within the current system?

Raghuram Rajan: Our sense is we are fast going the old China way. We are trying to emphasise infrastructure build-out — which itself is a source of big growth. But in this case, it is largely government infrastructure, because the private sector is much slower to build out infrastructure. And then bring in low-skilled manufacturing with the hope that it will move up to higher skilled manufacturing, so that eventually we will become a workshop to the world, just like the east Asian countries did before us.

Also Read: Rajan, Lamba seek honesty, data, debate in Indian policymaking

The problem with this vision is that the world has sort of moved on. It is no longer open to another China coming up and flooding its market with manufactured goods. China is already there and not going anywhere. It has a lot of still low-skilled labour in its western provinces and it's bringing them into action. Yes, it had a little bit of a kerfuffle with the US, but they've realised that they can't afford that and are trying to repair bridges. But China also has the benefit of having fantastic universities and is trying to focus on the other end — intellectual property and intellectual capital. We also have competition like Vietnam. So this notion that the old, export-led growth in manufacturing is going to be available to us just like it was available to everybody else fails to recognise the current reality.

In that process, we are also giving up our greatest strength — we are a society which is open, democratic, where debate is possible, and where you can challenge the received wisdom. At least that used to be the case. As we move towards the China model and become more authoritarian, we are giving up our great strengths which are going to be very valuable for the 21st century as we build out the ideas industries — brain-based industries rather than brawn-based industries.

People need to understand that this path is not leading to the kind of development which other countries have had because it doesn't take into account history. The lowest value-added part of the supply chain today is (product) assembly. And we are starting with that and hoping to climb, when it is going to be so much more difficult to do that. Instead, we already have a presence in the high value-added parts of the supply chain — the intellectual property creation, the services for manufacturing, for example, as also the services provided directly. So why don't we look at what is needed to improve this? We can invest much more in leap-frogging rather than try a path which is, in many ways, much narrower and much more difficult.

Rohit Lamba: I understand what you are saying about building from what you have. I had two stints in government: once when Raghu was the Chief Economic Adviser (CEA) and when Arvind Subramanian was the CEA. The notion you have from the outside is that nothing happens. And when I went inside, I was amazed by how much happens. And this is often independent of who is in power.

I think what we are trying to say in the book is that our job is to infuse the eco-sphere of ideas with new possibilities. And what we are proposing is a different path. It's not an incremental change. But we are hoping that it will have takers. Even though it's not a recipe for next month or the next year, it's a different vision that we hope will help the government or any other government that engages with it – avoid spending a lot of resources on the wrong things.

The PLI scheme has been of concern for both of you. Is it an example of a policy from a government which only has the next five years in mind, or is it the result of a lack of rigour?

RR: Well, I never accuse any government of lack of application of mind. There are smart people in every government, and they apply their mind. The question is: are there better things that can be done with that money? As I said earlier, there is a logic behind this, which is, 'let's grab the low-skilled manufacturing and then we will move up'. You can virtually hear the minister saying, 'So what if we import all the parts and assemble the product? We are moving up the ladder'.

But we are moving up very slowly, especially in an environment where the world is hungry for a China+1 solution. Everybody is looking for a place that can produce what they want. But relatively, we are attracting few of those flows. If you look at FDI into India, it's actually falling rather than increasing, which doesn't sit well with the view that this is a new dawn for India. If you look at the flows that Vietnam is attracting relative to us, it's very different.

Is this path going to be feasible? Yes, it can make some headlines and you can say so-and-so opened a factory and created so many jobs. But that's not a long-term, sustainable strategy. If I pay somebody to finish the manufacturing in India, obviously they will come and do it! It costs them nothing to transport all the components to India, especially for something as small as a cell phone. But are they going to sustainably create an eco-system in India? They will say, 'We are planning to'. But look at the data, look at the reality, what have they done so far?

People say what we are proposing is for the long term. Yes, but the long-term eventually comes. We could have spent the last 10 years improving our universities, our schools, our colleges. One of the most important concerns we have is of the damage done to our kids during the pandemic. Kids spent two or three years out of school, and when they came back, they had forgotten everything. What have we done to remedy that lacuna in learning? Are we saying this is par for the course and that they don't learn anything anyway, so we are not going to change that?

If you have a labour force which is not even capable of doing 20th century work, how is it going to do 21st century work? We need to spend far more time thinking about that than about whether we persuaded Nokia or some other company to come to India thanks to hefty subsidies. Can we spend that money on schools in Jharkhand or Bihar to improve the learning there?

We have lots of examples in the book of how this works well. Look at the Delhi schools that AAP (Aam Aadmi Party) improved. Why can't we do that in government schools elsewhere? Yes, it requires money and Delhi is very rich. But it also requires things like decentralisation. So, this is a country-wide effort and it requires recognising what is missing in India. It is not buildings. It is human capital. We have 1.4 billion people. We need to do a far better job on human capital.

RL: It does require a little intellectual honesty. I understand that there is a burden on the politicians to package the message. But we should really be having a much more honest debate about the policies that are being put in place and whether they're working or not. Just to give a number: the plant that we are going to hopefully set up in Gujarat for Micron, the subsidy for that, as of now, amounts to Rs 16,500 crore. What we emphasise in the book is that Rs 44,000 crore, three times the subsidy, is the entire higher education budget of the central government. So let's engage honestly.

We constantly hear figures of India's increasing exports of mobile phones. What Raghu and I tried to emphasise in the various articles we wrote is that wherever we cite that number, let's also put how much it is taking to import parts — not as a criticism but just so that we understand what's going on, so that we know what is actually the value we add considering the subsidies we are giving. This is important for the public to know and then to evaluate whether this is working or not.

Do you think the government has to backtrack on the PLI scheme completely, which would amount to an admission of its failure, or can it shift course so that it becomes more useful for the Indian economy?

RR: The government has a lot of schemes. It doesn't need to say this scheme is a failure. But it needs to shift weights, in our view.

One must do a very careful analysis of government schools. This is a state subject, but it would be useful to engage with the states and put much more emphasis on bringing best practices to each state. We can't let any state fall behind because in our view, education is so important.

We should also have a realistic view of the weaknesses in our healthcare system. The pandemic offered a golden opportunity to understand what worked and what didn't. But we have convinced ourselves that our medical response to the pandemic was a success — perhaps based on overly-optimistic counts of deaths. Maybe a serious analysis of what went right and what went wrong would give us the data to make changes there.

RL: It's not about the government having to save face and admitting failure. It's just about having an honest discussion. Even when they are going to the people electorally, they're not going to them with the PLI but with cooking gas, direct transfers, and so on.

What Raghu is suggesting is that you can easily package this as 'now that we have to go up the value chain, we need to focus much more on skilling our people rather than providing subsidies'. Even within the same framework of providing jobs to people, you can repackage this scheme and say time is up for subsidies and let's really try to train our people well. That's what's going to generate the next round of jobs. So, I don't think it's a political hot potato.

The book has a section on the pliability of Indian media and the control the government exerts over it. Do you think the media, and business in general, is beyond saving considering the influence of civil society is probably waning?

RR: It's important to recognise that there are very many brave journalists who are working despite all the pressures to try and publish what they believe to be the truth. That's commendable. It's when that last brave journalist gives up that you have to start saying maybe things are beyond saving.

It's very important to think about what the Janata government did after the Emergency — it recognised that there were weaknesses in our system. So not only did they reverse some of the measures that were taken during the Emergency, including the 42nd Amendment, but they also put in place some more checks and balances. And that changed the dialogue in India for some time.

I think we need an honest look at where we are going and what institutions are succumbing. At some point — governments change in democracy — we have to revisit our system of governance and say 'here are the things we need to put in place as checks and balances to prevent what we had during this period'. And that requires a serious look at how the press is brought under the heel of the government. We saw it happen in the Emergency, with LK Advani's famous phrase about the media being asked to bend and it instead crawled. There are versions of that going around.

We need to look at the levers the government has over the press, and reduce them, because a free press is important for the government itself, to know where it is going wrong, so that it can provide better services for the people. Yes, a free press can come in the way of uninterrupted political sway over the people with an official narrative. But that is not going to serve the country well because we can go off-track tremendously, and eventually land up in a place which even the government may not desire.

The government rejected the tag of a new 'Licence Raj' after restrictions on laptops and PC imports were announced a few months ago. Could the government be focusing on manufacturing because it's a sector that's perhaps easier to control than services?

RR: Maybe. But I am hopeful that our government is still interested in the welfare and growth of its people. In that, this idea of limiting laptops seems very, very short sighted. What you want is not laptops but the brains that create the programmes that create the algorithms that create the AI using laptops.

The whole problem the Soviet Union had was that it was using chips which were half a generation behind the US and it could never catch up on anything. Why would you limit a tool which is of great importance? The value added in assembling some of these laptops is miniscule! By getting Dell to do it in India as opposed to doing it in the US, yes, maybe you will create a few jobs. But preventing state-of-the-art laptops from getting into the hands of our programmers or consultants or lawyers will actually be a much greater disservice. You have to ask, what are you really thinking about? Do you want to capture the lowest end of the manufacturing chain while giving up the highest end of the manufacturing chain, which is ideas and services embedded in manufacturing?

We produce, according to some estimates, 20 percent of the chip design in the world. That's a huge value-add. We need Indian firms that do that — an Nvidia or a Qualcomm coming from India. But we don't need TSMC, which is the foundry, coming to India because that's so much more expensive and relies on something we don't have strength in right now. Why are we so fixated on manufacturing chips when in fact the design is where the high-end of the value added is? This is what we keep asking: what is the vision? There seems to be a very narrow vision. If we are to become a 21st century power, our vision has to be much broader and it has to focus on our greatest strength ‑ our human capital, our 1.4 billion people, making sure every one of them has a chance.

RL: When I read the news on restrictions on laptop imports, I was reminded of Gurcharan Das' India Grows at Night, because the state is awake in the morning (and gets in the way of growth).

I understand the aspiration to be like China because you want to model yourself after success stories. But China was not exporting IT services to the world. When you are exporting IT services to the world, you're basically taxing your largest input (by restricting laptop imports). Fine, you may end up producing a few more laptops — even that is not clear. But even if you do, it is entirely possible that the externality you impose on one of your most profitable industries is going to be huge. Narayan Murthy had famously said that he had to go to Delhi four times to access a big computer in the 1980s.

There are a lot of smart people sitting in government making policy. Is there a discussion paper that they have released? Has somebody done the math? What is your estimate of how large this externality is going to be and can we still have a discussion around it? This is super important because these decisions impact more than we think — it's not just about laptop manufacturing.

The book ends on a rather personal note, where you argue as one would on online platforms. Was this chapter in response to how your columns have been received on social media?

RR: Early on, my children told me not to read the comments, and I don't. If I read them and internalise them, I would stop writing.

The reality is that we need to debate even with people we don't agree with. 'Either you are for us or against us' doesn't promote debate. And really, we are falling into the hands of that crowd if we say our path is the only true path. By all means, we have made our point. Challenge it. We have tried to provide an argument; obviously, it's skewed to our view. But let's have a debate and let's ask whether this direction is the right one.

We wanted to make the book an optimistic one. There's so much good that's going on in India that we can build upon. There's a lot of work to be done; by no means are we under-estimating the challenge. We have had great successes, including landing on the south pole of the moon.

But rather than getting stuck in WhatsApp debates about our history, let's debate the future. How do we get more Chandrayaans going rather than focus on what happened between Aurangzeb or Guru Tegh Bahadur? This, to our mind, is how the dialogue needs to move — and not a tu-tu-mein-mein (he said, she said) debate and insulting each other. If you love the PLI, put out the facts. If you think our healthcare system did wonderfully well during the pandemic, put out the numbers. Let's have a real debate about what happened. Why are we claiming victory without knowing what the truth is?

Our strength in India is debate and to some extent that will also determine whether we can take hold of the future and have a good future, or whether we lull ourselves by talking about our glorious past.

RL: We are both history aficionados. But living in it is a bit problematic. And I think a lot of people are just living in it. There's a line in the last chapter which says that history was skewed in a certain direction, that it was problematic, and we should engage with it. But being obsessed with it, when there's so much to be done? Take inspiration from your history, don't live in it.

RR: I mean, these guys often don't even have the facts right. Very few people know that I actually worked for the NDA government under Atal Bihari Vajpayee. I worked with Yashwant Sinha to push reforms. He acknowledges that in his book. If you look at interest rates, I cut interest rates when I was RBI Governor during Modi's regime. I raised interest rates during the Congress regime because interest rates had to be raised for the good of the country. And we brought inflation down. But the narrative is always that this guy is… It's either against us or you are for us, never that you can be an independent party. And that is the debate we want to start. We think it's important to talk to each other rather than succumb to pointing fingers at each other.

What do you make of the recent measures taken by the RBI to clamp down on unsecured retail loans?

RR: I have stayed away from commenting on RBI policy. But I do think the central bank's role is also to keep track of what's happening on the credit side. Problems are always created in good times when it seems like nothing can go wrong. And then you find out that there are problems down the line. So, one common view across the world is to look at both the pace of credit growth as well as the pace of asset prices. Typically, both move together along with housing loans, and not so much with unsecured retail credit. So, I think any central bank has to be vigilant and I am sure the RBI has done its homework in looking at this, and it's doing what it needs to do.

What is good is that the banking sector, after five or six years of dealing with its bad loan problems, has finally emerged healthy. It is extremely important that health is maintained and not frittered away in yet another bout of unviable lending.

Do you expect any of the suggestions in the book to be implemented? What are your hopes from this book?

RR: My experience has always been that you put the ideas out there and eventually, reasonable people on all sides read it and start thinking about how they can implement more of it. For example, when I worked with a bunch of people, including Uday Kotak, on the financial sector reforms in 2008, we put out a bunch of ideas. The RBI was implementing it gradually over time. But then I became Governor and I had a ready menu to implement. A lot of the ideas in that got implemented when I was Governor.

These ideas sit somewhere, they aren't forgotten, they start emerging eventually. So that's the hope we have, that people will start talking and debating. And that will be a great success.

RL: Our aspiration with the book is not so much that you pick up A and implement it in B frame of time. That would be great, but our hope mostly is that you read it and talk about it, infusing this eco-sphere of ideas with new arguments.

Initially, when we had just put out a piece — Raghu is used to this, I am not — my father called me and said, 'beta, I looked at Raghu's LinkedIn. There are so many comments there. You really need to write on this.'

Over time, when we wrote a couple of these pieces, I realised that people were picking up on it and were talking about value-added even when that word was not even being discussed in policy debates. This is how ideas will build.