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Rancid, Rancorous, Ridiculous: It Is Raghuram Rajan Who Needs To Reimagine His Future

Kaushik Ramasamy

The man who predicted the global economic crisis, the man who targeted inflation, the ‘rockstar’ economist, Dr. Raghuram Rajan is often hailed.

This IIT-IIM graduate has had an impressive career and has gone on to achieve the highest echelons in his line of work – Chief Economist of the International Monetary Fund (2003-07), Chief Economic Adviser to the Government of India (2012-13) and the Governor of Reserve Bank of India (2013-16).

Yet, this economic stalwart’s recent comments make one think whether he skipped his Economics 101 lectures.

Speaking about his latest book ‘Break the Mould: Reimagining India’s Economic Future‘ in an interview to The News Minute, Raghuram Rajan passionately argues that manufacturing-led growth that China follows is obsolete and won’t work for India.

“China is a huge country. The reason these countries managed to follow this route and move up is because they were initially competing with the West and the Chinese worker was one-fifth, one-tenth the pay of a Western worker and they had a lot of competitive advantage when they were fighting the Western worker. Today, the Chinese worker is still there. Because China still has people that it is employing in agriculture from the western provinces. But there’s also the Vietnamese worker, the Bangladeshi worker. This is the lowest end of the value-chain where the least value is being created because it is so competitive. What you wanna do is occupy the higher parts of the value-chain.“, Raghuram Rajan says implying that it is pointless for India to follow the same model of manufacturing-led growth because there is increasing competition in an increasingly protectionist world.

His own words from the interview note that this model has helped not just China but also Korea. Countries across the world have developed because of export-oriented, manufacturing-led growth. All of us would’ve studied that a country undergoes three stages of economic transformation – a primary sector driven economy to a strong secondary sector which then matures into a high-tech research-based knowledge economy.

Take for instance Japan. Japan was an agricultural economy before it was nuked and after World War 2, it began developing into a manufacturing hub with USA’s help often reverse-engineering the original product that was developed in the West. This strong manufacturing base helped it produce some of the best global brands across sectors:

Automobile – Toyota, Honda, Mitsubishi, Yamaha, Suzuki, Kawasaki

Electronics – Sony, Toshiba, Fujitsu, Panasonic

Same is the case with South Korea – Samsung, LG, Hyundai, to name a few. It became a manufacturing hub before becoming a research-based knowledge economy.

China too mastered the art of reverse-engineering to build its own products on a massive assembly line. China did not emerge as a global smartphone leader out of the blue. Decades of manufacturing has made it come up with brands like Oppo, Vivo, One Plus that competes with iPhone.

A country’s economy is just like a human or any other living organism. As a young baby it needs food and nutrition (agriculture). Once it becomes an adult it needs to be self-reliant that is able to sustain itself (manufacturing). Once your manufacturing heydays are over, you invest your experience and learnings gained, into research to build your own product or provide consultancy to others (services).

But for, Raghuram Rajan this is ‘old style of growth’.

He wants India to leapfrog into a services-dominated knowledge economy. How? By building more colleges like IITs and IIMs and export human capital.

He wants Indians to study in IIMs so that they become a ‘hot sought-after commodity’ abroad. So, basically Raghuram Rajan wants to create clones of himself and export them. He wants India to produce 200,000-250,000 of such IIM graduates.

“Increase the supply of very qualified people”, is his mantra for growth.

Now this is where one needs to question not just his credibility as an economist but also his intentions.

First the credibility part. Let’s take the example of a state with which he shares a connection – Tamil Nadu.

If one state has to be blamed for unemployable engineers, it is Tamil Nadu. The state has the highest number of engineering colleges in the entire country. Lakhs of engineering graduates have passed and continue to pass every year but hardly a few possess the skills of an engineer. Why? Because in 2006, the then DMK government in Tamil Nadu scrapped the filter – The Tamil Nadu Professional Courses Entrance Examination in order to increase the enrolment in higher education. This led to a mushrooming of engineering colleges with inadequate infrastructure and faculty. Engineering passouts became engineering faculty in the same college or some other college. With the advent of the gig economy, the engineering graduates end up being deliver boys.

Tamil Nadu did exactly what Raghuram Rajan advocates now – increase supply, build more colleges and invest in human capital. It turned out to be a disaster. Today, the state is employing workforce from other states to meet its labour demand in all sectors – from the fields to foundries and fancy restaurants.

Now imagine what would happen if India was to produce 200,000-250,000 IIM graduates!

A mindless increase in supply will result in low quality output, breakdown of the system or both. Does the rockstar economist not know this? That’s Economics 101!

An increase in supply will need an adequate increase in demand so that the supply gets absorbed by the system. It is a given that for a country like India, where population is both an asset and a problem, there is no alternative but to have a strong system (manufacturing sector) that can that can provide millions of jobs to skilled, semi-skilled and unskilled workers (through ancillary services that arises because of an industry).

It is shocking that a man like Raghuram Rajan can overlook this and advocate for exporting human capital.

Raghuram Rajan has for a long time positioned himself against the Modi government’s successful Production-Linked Incentive (PLI) Scheme, especially for electronics sector. The PLI scheme led to a significant increase in production, employment generation, economic growth and exports in the country. As of March 2023, a tangible investment totalling ₹62,500 crore has been achieved, leading to increased production and sales exceeding ₹6.75 lakh crore, as well as the creation of approximately 325,000 jobs. Additionally, exports have seen a significant boost of ₹2.56 lakh crore by the end of the fiscal year 2022-23.

But for Raghuram Rajan, this is not economically worth it because the value of goods produced/exports doesn’t justify the subsidy given to the companies to set up their shops here and employ low-skilled assembly line workers.

To put in a nutshell, Raghuram Rajan wants government to provide subsidized education at IIMs to 250,000 people so that they can become ‘hot commodities abroad’ but doesn’t want the Indian government to subsidize manufacturing to increase India’s production, exports and jobs.

This is where one doubts his intentions. May be Dr. Subramanian Swamy was right about Raghuram Rajan not being an Indian at heart, given the fact that he is a US green-card holder.

Raghuram in his interview with Dhanya Rajendran of The New Minute goes on to compare Apple with Foxconn, to make his point.

“What you wanna do is occupy the higher parts of the value chain. Think of the iPhone. Earlier on, the design, the intellectual property, the patents that go into it, which is what Apple does. Later on it is iTunes, the apps, the marketing, finance, which also Apple does with its fantastic Stores for example. That’s the high part of the value chain. What comes in between is the manufacturing. Apple hasn’t done any manufacturing since 2004. It’s all done by Foxconn. What is Apple’s value? $3 trillion. What is Foxconn’s value? It’s worth $50 billion. Apple is worth 60 times.”, he says.

Mr. Rajan, Apple has around 161,000 employees in total. Foxconn on the other hand employs over 767,000 people. Apart from Foxconn, you’ve Wistron and Pegatron. You yourself in the interview say that the biggest problem in India is jobs. Aren’t you contradicting your own statement?

He reeks of elitism when he talks about Indians dominating the space of consultancy and coding. They hardly comprise 1% of the total workforce. What about the rest of the population who may not have access to such opportunities or acquire the necessary skills? It is manufacturing that can provide a plethora of all kinds of jobs. If we get the manufacturing right, it will inevitably lead to the development of a robust services sector.

The only sensible point he makes in the interview is about freebies. Raghuram Rajan warns of the perils of untargeted freebies and the need to rationalize them (Disappointed Dhanya?)

Raghuram Rajan has come to be for GDP, what Congress leader P. Chidambaram is to digital payments. Incidentally, both of them are economists par excellence, from premier institutes. IYKYK.

For those wondering what the equivalence is about, remember how P. Chidambaram mocked Digital India in Parliament?

“Go to your village fair. Buy potatoes and tomatoes. And pay ₹7.50 by credit card. What will the poor lady do? Does she have a PoS machine there? Is it connected to a electricity source? Is there wifi there? Is the internet working there?“, P. Chidambaram had ridiculed the idea of Digital India.

But the people of India proved him wrong. From small tea shops to malls, digital payments have become ubiquitous with exponential growth in digital transactions. As of 11 December 2023, UPI has recorded a total of 8,572 crore transactions in the current fiscal year.

Likewise, Raghuram Rajan’s predictions have only gone horribly wrong.

In December 2022, during his conversation with Rahul Gandhi he said that growth is going to slow and that Indian exports have been hit quite a bit.

“We would be lucky if we do 5% next year”, the rockstar economist predicted.

India’s GDP growth rate rose to a pace of 7.8% y/y in the April-June quarter of 2023. His previous employer IMF has marked India as a ‘star performer’ predicting the country to contribute 16% of global growth.

So, instead of re-imagining India’s future, Raghuram Rajan should re-image his future because the former RBI Governor’s currency is on a freefall.

Kaushik is a political commentator.

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