Raghuram Rajan Finds India’s Manufacturing Push 'Concerning,' Says Authoritarianism Will Increase If BJP Comes Back To Power

In a recent article published in Foreign Affairs- a US based journal, former Reserve Bank of India (RBI) Governor Raghuram Rajan along with senior economist Rohit Lamba has asked for a change in the economic policies currently followed by the BJP-led National Democratic Alliance (NDA) government in the centre. 

While highlighting the achievements and shortcomings of the present government as they saw them, the economist duo also said that BJP returning to power would mean a rise in authoritarianism.

“If this election produces a strong opposition, no matter its identity, India has a fighting chance of securing the economic future its people desperately want,” Rajan and Lamba said.

It is pertinent to note here that Rajan, presently a Professor of Finance at the University of Chicago Booth School, was among the several activists and academicians who had joined the major opposition party- Indian National Congress’s (INC) Bharat Jodo Yatra in December 2022.

As per Rajan and Lamba, where NDA gets its economic policy right is credit to the previous Congress-led United Progressive Alliance (UPA) government. The Modi-led NDA government ‘has continued, improved, and expanded programs initiated by previous administrations,’ the authors said.

At same time, the former RBI governor opined that India’s growth rate among the G20 countries appears higher as it had more to catch up with the ‘developed ageing economies.’ To ensure that India grows at the pace with which China grew once, the economist duo suggest that the country must give up its ‘fetish’ for manufacturing and rather concentrate on getting more people employed in ‘mid-skilled’ service sector jobs.

As per Rajan and Lamba, here are some of the major achievements and shortcomings of the ruling Prime Minister Narendra Modi-led NDA government:-

Achievements

1) Infrastructure Development

Rajan and Lamba noted that the union government under Prime Minister Modi has significantly advanced India's physical infrastructure, making transportation quicker through extensive development of roads, ports, railways, and airports.

This expansion, according to them builds on programs launched by earlier governments like the Golden Quadrilateral highways and the Rural Roads Program initiated by the Atal Bihari Vajpayee led NDA administration between 1999-2004.

2) Digital Revolution

The authors credit the ruling dispensation with ensuring transparent and paperless direct transfer of government aid to beneficiaries. However, according to them efforts towards expansion of digital infrastructure had begun in the term of former Prime Minister Manmohan Singh led United Progressive Alliance (UPA) government when the latter initiated work on ‘India Stack’- an application programming interface (API).

Among the key components of the API while the task of providing Aadhar (a social identity number provided to each citizen) and Electronic Know Your Customer (digital procedure used by banks for online verification) was initiated in the Singh years, United Payments Interface (a digital feature which enables transactions from multiple bank accounts through a single application) was implemented by the Modi-led NDA government.

3) Welfare Programs

Rajan and Lamba note that the Modi-led NDA government expanded the ambit of the National Food Security Act passed by the previous UPA government. Effective implementation of free food grains distribution and gas cylinders as per the economist duo has directly benefited millions of Indians and reduced corruption. 

4) Policy Initiatives

The authors credit the PM Modi-led NDA administration for carrying out important policy reforms that were long due. Some of those reforms as per Rajan and Lamba are the inflation-targeting framework adopted by the RBI along with the Insolvency and Bankruptcy Code (IBC) enacted in 2016, and the Goods and Services Tax (GST) implemented in 2017. 

According to them, these reforms have helped contain price rise, enabled banks to recover debts from borrowers and unified Indian markets in terms of tax collection.

Shortcomings

1) Job Creation and Economic Growth

According to the authors, despite high overall economic growth, the country is failing to generate jobs required in proportion to the population arriving at the working age. 

“The share of jobs in India is growing in just two sectors: construction, partly as a result of the government’s infrastructure push, and agriculture. The latter sector’s growth is alarming. Usually, as countries develop, workers leave agriculture for manufacturing and services, not the reverse. But even before the pandemic, Indian workers have been going back into farming,” Rajan and Lamba said.

The economist duo further notes that unlike China and Korea at similar stages, India's job creation has been inadequate, leading to a significant risk of squandering the country's population dividend.

2) Impact of Demonetization and GST

As per the two senior economists, medium and small scale businesses are yet to recover from the dual shock of demonetisation in 2016 and enforcement of GST. These policies disrupted the operations of these businesses, leading to closures and job losses, exacerbated by the pandemic's economic impact.

“Although the union government offered some assistance to indebted firms, they were largely left to fend for themselves when the government imposed a long lockdown. As a result, even more enterprises went out of business,” Rajan and Lamba said.

3) India’s Manufacturing Push

The government's strategy to boost manufacturing through subsidies and tariffs, modelled on China's growth strategy, has been criticised by the authors. 

“Reimagining India, requires a departure from the manufacturing fetishism that currently dominates government thinking,” Rajan and Lamba said.

According to the authors, while the union government’s policy of giving subsidies for electronic manufacturing firms has generated jobs to some extent, India’s market share in labour intensive sectors such as textiles and leather manufacturing has gone down. To elucidate the same, Rajan and Lamba point out that 11 of the 23 categories of manufacturing products that make up India’s Index of Industrial Production had lower output in June 2023 than in June 2015.

Further, the economist duo opine that the global markets will not be able to absorb manufactured goods produced by a country like India if it’s manufacturing capacity grow’s to that of China. Instead, Rajan and Lamba suggest that the country should focus more on the services sector where there is more space to grow.

4) Underinvestment in Human Capital

Rajan and Lamba juxtapose the amount devolved by the union government for financial subsidies to companies to that spent on education. According to them, there has been insufficient investment in improving the capabilities of India's vast population. 

“Part of the reason that so many graduates are unemployed and looking for government jobs is that their degrees are of low quality, which means the private sector is not interested in hiring them,” the economist duo noted.

To highlight the gap between the requirements of employers and those seeking jobs, Rajan and Lamba pointed out that as per estimates of a survey firm named Wheebox- 50 percent of Indian graduates are unemployable. 

This problem, according to the two senior academicians, can be overcome if the government initiates more training and apprenticeship programs. “This apart, more vocational programs could allow them to find profitable self-employment as artisans, mechanics, plumbers, carpenters, and gardeners,” the authors said.

5) Economic Inequality

According to the authors, the benefits of economic growth have not been evenly distributed, with significant disparities in income and opportunities.

“Large Indian firms are still doing well, taking market share ceded by small and medium enterprises. Their growth is the reason the country’s GDP continues to tick up. But these typically capital-intensive companies generate far more profits than they do employment opportunities,” Rajan and Lamba said in their article.

Citing the recently released report on rising inequality in India which claimed that the top one percent rich in India earned 22.6 percent of the Gross National Income (GNI), the economist duo opined that the middle and the lower middle class in India was struggling to improve their lives.

“Rich Indians, many of whom are employed by big companies, are doing exceptionally well. In the last fiscal year, for instance, Mercedes-Benz recorded its highest-ever sales in India. Whereas sales of the products used by the middle-class, such as motorised two-wheel vehicles, are yet to surpass pre-pandemic levels,” the former RBI governor and his co-author said.