Raghuram G. Rajan
Says More…
This week in Say More, PS talks with the University of Chicago’s Raghuram G. Rajan and Rohit Lamba of New York University Abu Dhabi and Cornell University, co-authors of Breaking the Mold: India’s Untraveled Path to Prosperity.
Project Syndicate: In your new book, Breaking the Mold: India’s Untraveled Path to Prosperity, you argue that the export of services – both direct services and higher-skilled manufacturing-related services – should be central to a distinctively Indian development strategy. And, as one of you recently pointed out, India has already “started providing a much wider range of remote services, including consulting, telemedicine, and even yoga instruction.” How do high-income jobs in tradable services lead to the creation of lower-income domestic jobs and contribute to social mobility across generations?
Raghuram G. Rajan and Rohit Lamba: This is a very good question, and there seems to be much confusion about how India can generate jobs for the future. The received wisdom is that state-subsidized manufacturing – the development path taken by most East Asian countries – is the only way. But manufacturing’s share of jobs in India has not changed much since the early 1980s; those leaving agriculture have instead been absorbed largely by the services and construction sectors. In line with this experience, we see enormous potential today to create a huge number of jobs in tradable services (both direct services and those embedded in manufacturing), as well as more traditional services (such as retail and transportation).
As you note, India is already emerging as a global leader in services exports, accounting for around 5% of global trade in services, compared to less than 2% of trade in manufacturing. Improved communication technologies (think Zoom and Webex) and changes to the rules of business etiquette (meeting a new client virtually is now seen as perfectly acceptable) have made it possible to provide even direct services, like consulting or telemedicine, at a distance.
But services are also embedded in the products firms sell. A lot of multinationals (1,600 at last count) have set up Global Capability Centers (GCCs), which employ over three million people in India and generate more than $100 billion dollars in revenue annually. Big banks like Goldman Sachs and JP Morgan, for example, employ tens of thousands of Indian university graduates to create risk-management and trading models, write legal contracts (JP Morgan has thousands of lawyers in India doing this for their global operations), and even trading in financial markets. Other GCCs focus on research and development. India currently has some 300,000 engineers designing chips, without fabricating a single one.
While high-skilled services exports will be at the vanguard of this development model, the underlying improvements in human capital will also enable India to boost value-added manufacturing. For instance, if Indian producers leverage local design and innovation to capture the commanding heights of the value chain, many more manufacturing jobs can also be created in that chain, which India will effectively “own.” Large subsidies, like those seen today, will not be needed.
High-end jobs will also emerge in domestically oriented education and health care. Each of those jobs has the potential to create 4-5 other lower-end jobs, such as drivers, cooks, and security guards. As wealth increases, urbanization will accelerate, creating many more jobs in lower-end services (such as plumbers, electricians, and caregivers) and more public-service jobs at all levels (such as police) – all of which are vital to support urban life. Rising domestic and international tourism will create still more low-skilled jobs, especially in hospitality. We can go on…
PS: Your vision for Indian development requires greater ownership of intellectual property (IP) – what you call the “high ground in today’s business battles.” To this end, you argue, India must move from incremental R&D to fundamental research and product development. What should policymakers do to facilitate such a shift, and how can India’s diaspora help?
RGR & RL: Yes, India must place the highest priority on creating and owning IP in high-skilled services and even manufacturing.
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Today, 20-25% of all chip design globally is happening in India, but because it is being done for foreign firms, not much of the surplus is being captured domestically. And while India has long been at the forefront of generic-drug manufacturing, it has so far failed to make the leap to new drug development. These amount to major missed opportunities. Seizing them will require a huge push toward research, with India allocating more funds to universities, working to attract top talent (especially scientific talent) from the diaspora, and building links between research and industry, which will commercialize the research.
This would represent a significant break from the cookie-cutter manufacturing-first development model that is currently being pursued. But India is well-positioned to capture high-value-added segments of supply chains. Though it is still relatively poor, certain desirable conditions are already in place, including a head-start in services, a decent pool of engineering talent, several good universities, and many ambitious startups. It just needs to ramp up its efforts radically, while focusing on improving quality.
PS: The job of “policymakers is to enable business activity,” you noted in 2016, “not to dictate its course.” In Breaking the Mold, you call India Stack, which seeks to create a unified software platform, a “truly effective government-created public infrastructure.” How has India Stack improved the country’s business environment, and what can it teach policymakers about designing appropriate “enabling frameworks” for business?
RGR & RL: It is essential to distinguish between enabling frameworks and interventionist policies. Enabling frameworks are meant to empower individuals and expand the capacities of business to do more, whereas interventionist policies aim to produce specific, government-determined outcomes.
The India Stack – which has given more than a billion Indians a digital identity – is a great example of a successful enabling framework. Thanks to their digital identities, Indians can open bank accounts more easily, carry out digital payments (12 billion in February 2024 alone), access government and private services, give various service providers permission to access relevant data, and much more. The India Stack has made the delivery of goods and services from the state to citizens much more efficient, and facilitated new kinds of businesses and business activities. For example, a fintech firm can now use digital sales data – collected from the Stack (with the appropriate consent) – to guide lending to street vendors. The Stack’s big strength is that it is run as a public good, allowing citizens, the state, and businesses to layer their intended actions seamlessly on top of the digital framework.
Some regulatory bodies also contribute to enabling frameworks, but ironically, they do so by prohibiting certain actions. It is no secret that India’s growth is top-heavy, with a few firms controlling a large amount of capital and generating few jobs. The body currently tasked with ensuring competition, the Competition Commission of India, has exhibited little capacity or willingness to achieve its mission. But with sharper teeth and a stronger backbone, it could play an important role in enabling the kinds of business activity India needs.
We are less convinced by the blanket use of interventionist industrial policies, intended to favor specific firms or activities. This is something that India has rarely done well, yet it is now trying again.
BY THE WAY . . .
PS: In Breaking the Mold, you observe that India’s current government – led by the Bharatiya Janata Party, which appears likely to win the ongoing elections – has proved adept at implementation, especially when the required actions are clear or when frameworks were initiated by previous governments. But many of its own initiatives, you argue, have missed the mark. For example, you criticize the deal agreed by the government last year to construct a Micron semiconductor plant near Ahmedabad. What kinds of projects would achieve the same goals more effectively?
RGR & RL: Yes, the current government has been very effective in implementing certain welfare and infrastructure tasks – the Achilles heel of previous governments. The Indian state has increased its capacity to build roads, railways, and ports, and to deliver various goods and services, from food to cash. When the current government has tried to break ground on its own initiatives, however, it has sometimes been found wanting. The 2016 demonetization, which broke the back of the informal economy, and the 2020 agricultural reforms, which had to be rolled back due to protests, are cases in point.
Massive subsidies to government-favored industries will most likely turn out to be similarly misguided. You mention Micron. The central government and the Gujarat state government are providing direct subsidies worth $2 billion to establish this assembly plant for memory chips (which are not the same as sophisticated logic chips). That is more than one-third of the central government’s entire annual budget for higher education. And for what? According to the government’s own estimates, the project will create approximately 5,000 jobs. That is $400,000 per job. And the plant is not even set to pursue R&D.
Overall, India’s government intends to allocate nearly $10 billion to subsidies for various chip-fabrication plants, even though India’s comparative advantage seems to lie in chip design, which is a higher value-added and less capital-intensive activity. A better approach – which plays to India’s strengths – would be to allocate these funds to establishing a few world-class universities and encouraging collaboration between them and cutting-edge domestic chip-design firms. This would likely generate large benefits for other sectors of the economy. Given this – as well as India’s many urgent spending needs, such as to reduce childhood malnutrition – subsidizing capital-intensive chip manufacturing should be very low on policymakers’ list of priorities.
PS: You write that India’s “inclusive liberal democracy” gives it a decisive advantage over authoritarian countries in realizing “creative, high-value-added breakthrough growth.” Why? Countries like China and Vietnam seem to be doing just fine. Or are they growing the wrong way?
RGR & RL: Every country is different; its polity and society have their own distinct temperament. China and Vietnam are growing in the way that is perhaps right for them – a way that is focused on manufacturing, which they can do well in the phase of catch-up growth. India is a large and diverse country with multiple languages, religions, food, cultures, and strong regional identities. It is also a democracy.
Democracy enables the mediation of potential conflicts between communities. The ability to discuss and debate differences and meld them into a better whole could be equally applied to ideas. Arguably, democracy makes the free debate and thinking necessary for innovation at the technological frontier easier, and historical studies do seem to support this conclusion.
India also enjoys tremendous goodwill and soft power on the global stage, not least because it has remained a democracy despite being poor – a powerful example for the rest of the world. Just last week, one of our young directors, Payal Kapadia, won the prestigious Grand Prix at the Cannes Film Festival. Interestingly, Payal had a big run in with the authorities in 2015: as a student at the Film and Television Institute of India, she protested the central government’s appointment of the institution’s head, who some students thought was unfit for the job. Creativity is a form of protest, and democracy is necessary for both.
Democracy also encourages trust from other countries. You probably won’t care much where your vacuum cleaner was made, but you will care where your medical and financial records are stored. Here, it is likely that an Indian provider – if it can credibly communicate that it is operating in an environment where the rule of law is strong and privacy protections are robust – would be far more attractive to an American buyer than a Chinese, Russian, or Vietnamese firm.
PS: Of course, as you acknowledge, India’s liberal democracy is under severe strain. The “possibility of abuse of power,” you write, is “embedded in India’s state structure,” and the ruling party has embraced “divisive majoritarianism.” Which governance reforms would do the most to bolster India’s democracy and root out innovation-stifling cronyism?
RGR & RL: India’s liberal democracy is under stress, but under such circumstances, Indians have always pushed back. India’s founders created a highly centralized system of governance that put a lot of trust in the country’s top leaders. This may have been necessary soon after independence, when the primary task was keeping the country together. But that is less of an issue now, so these powers have been weakened gradually, often through public pressure. Still, India needs many more checks and balances.
The biggest and most important policy reform is to decentralize governance at every level. Local-government officials must be elected and have significantly more powers delegated to them. This would create a natural check on federal- and state-government excesses, much as one sees in the United States.
As Yuen Yuen Ang and Chang Tai Hsieh have separately argued, even China long had a highly decentralized system of governance, which supported a sort of competitive cronyism whereby local mayors competed to have firms set up shop in their regions. Local leaders who delivered growth were promoted up the ranks of the Communist Party. Because India has so far remained overly centralized, it has been missing this incentive-driven, locally-led framework for growth.
Another key reform would be to put some distance between certain institutions – such as the Election Commission, the tax authorities, investigative agencies, and the Competition Commission – and the executive. These institutions should function more like the Reserve Bank of India: the top management must be experts in their domain, and once appointed for a fixed term, they must be given a free hand to execute their constitutionally mandated tasks.
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