Raghuram Rajan, Professor of Finance at the University of Chicago and former Reserve Bank of India Governor, in a podcast interview with Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department, discussed his new book, "Breaking the Mold: India’s Untraveled Path to Prosperity," co-authored with economist Rohit Lamba. Rajan delved into alternative economic growth strategies for India, and advocated a shift beyond the traditional manufacturing-driven growth model. He emphasised the potential of service-led growth and importance of enhancing human capital for sustainable development.
Manufacturing, and the changing global landscape
Rajan explained that "mold" refers to the post-war development model that has traditionally been followed by several Asian countries since World War II, focussing on the manufacturing-led growth strategy adopted by Japan, Korea, and most recently, China.
"The mold is the tried and trusted way of development, which has emerged post World War II and typically been followed by emerging markets in Asia. Various countries did it with some differences, but first Japan, then Korea, and most recently, China. The question is, why shouldn't other countries follow this tried and tested path? To some extent, what we're saying is that the world has changed since China did it," Rajan explained.
He elaborated on the challenges that emerging economies face today, particularly due to China's dominance in both high and low-skilled manufacturing. "China is dominating both higher-skilled manufacturing as well as lower-skilled manufacturing because it has such a large workforce,” Rajan noted, emphasising the difficulty for other nations to compete in this space.
The rise of protectionism, automation, and robotics in developed countries has made it even more challenging for emerging markets to climb the manufacturing ladder. Rajan pointed out, "...the world is becoming much more averse to seeing its manufacturing industries leave for other parts of the world, and increasingly, countries are trying to retain manufacturing, both through protectionism, but also by more automation, robotics, etc. So this path is harder. I wouldn't say it's impossible. It's just much harder than it used to be."
Service-led growth: an alternative
Given these challenges, Rajan advocated a shift in focus towards the services sector as a potential engine for growth. He highlighted the increasing feasibility of selling services over large distances, particularly in the post-pandemic world, as a significant opportunity for India. "Some of the developments in services are worth taking note of. Selling services across large distances has become much more feasible, especially after the pandemic," he observed.
However, Rajan clarified that this shift towards services does not imply abandoning manufacturing altogether. Instead, it involves recognising the growing importance and potential of the services sector, both for the export and domestic markets.
Investing in human capital
Raghuram Rajan also emphasised the critical need for investment in human capital. He stressed that the quality of education and training must be significantly improved to ensure that workers are well-prepared for the demands of the economy.
"Regardless of what you pick today, the government must improve human capabilities, because whether you pick manufacturing or you pick services, you need higher quality, much better trained personnel in both areas," Rajan asserted.
He also highlighted the gaps in India’s education system, noting that while graduates from prestigious institutions are highly employable, many other students lack basic skills, which hampers their employability. Addressing these gaps, he argued, is crucial for India’s development.
Reevaluating subsidies and improving the business environment
Regarding subsidies in the manufacturing sector, particularly in relation to strategies like the Production Linked Incentive (PLI) scheme, he cautioned against over-reliance on subsidies as a way to attract business, arguing that they may not lead to sustainable growth. Instead, he advocated broader reform to improve the overall business environment.
"It is possible to visualise a situation where you subsidise your way into a viable industry, but it is also possible to visualise a situation where the only reason you have an industry is because of subsidies, and the moment you take away the subsidies, it all vanishes," he said.
Job creation and skill development
Rajan underscored the importance of job creation, particularly through the development of relevant skills and vocational training. He pointed out that despite India’s large labour force, there is a significant shortage of workers with the skills needed by industries.
"We haven't had a strategy for job creation in manufacturing. Some of that may also have to do with the skill base. When you talk to some of our industrialists, they say, `I can't find people.' And you keep saying, `What do you mean? You can't find people? We have tonnes of people.' What they mean is they can't find people with the appropriate skills, and they're not willing to invest in training them," Rajan noted.
He called for greater collaboration between industry and training institutions to ensure that people have the skills needed to be employable in the modern economy. "Bring the ITIs into the process, so that they know how to train people up to the last mile. Create that last mile skill-building," he added.
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