Introduction:
Raghuram Rajan, former Governor of the Reserve Bank of India and Chief Economic Advisor to the Indian government, delivered a lecture on the importance of liberal democracy for Indian development. He emphasized Rajan’s practical experience in applying economic theories to real-world situations, especially in the context of India.

Rajan’s Lecture:
Rajan began his address by posing the question: “What is happening to liberal democracy in India? And is it really that necessary for Indian development?” He asserted that liberal democracy is essential for India’s development and proceeded to explain his reasoning.

Necessity of Liberal Democracy:
Rajan argued that liberal democracy provides a framework for peaceful conflict resolution, allowing diverse interests to be accommodated within a single political system. He highlighted the role of liberal democracy in promoting economic growth by fostering innovation, entrepreneurship, and human capital development. Rajan emphasized that liberal democracy safeguards individual rights and freedoms, preventing the concentration of power in the hands of a few and ensuring equal opportunities for all citizens.

Conclusion:
Rajan concluded his lecture by reiterating the importance of liberal democracy for India’s development, asserting that it is not merely a Western concept but a universal value that benefits all societies.

Democracy does not hinder Indian growth:
The claim that democracy holds back Indian growth is based on an outdated development model that emphasizes goods and capital, not people and ideas. India’s recent economic underperformance suggests the need for rethinking the current approach.

Strengthening liberal democracy is essential for India’s growth:
Weakening liberal democracy will not lead to growth. Majoritarian authoritarianism divides the country, creates internal resentment, and weakens India against foreign meddling. A just, liberal, democratic society enables all citizens to flourish. Liberalism is not anti-religion; it seeks out the good in everyone, just like major religions do.

Economic rationale for liberal democracy:
India’s rebounding economy highlights the need for reforms to sustain growth. Liberal democracy fosters innovation, entrepreneurship, and creativity. It provides a level playing field for businesses, attracts foreign investment, and promotes economic stability. A strong democracy ensures checks and balances, prevents corruption, and holds leaders accountable.

Conclusion:
India’s future lies in strengthening its liberal democracy, not weakening it. Democracy is essential for sustained economic growth, social progress, and global competitiveness.

India’s Economic Growth:
India’s economic growth has been slow in the past decade, and the underperformance predates the pandemic. India’s slow growth has led to a scarcity of jobs, particularly for the youth and women. India’s female labor force participation is amongst the lowest in the G20.

India’s Economic Successes:
India had 7% growth for 20 years after the 1991 reforms. India has notable successes, such as the Aadhaar scheme, Universal Payment Interface (UPI), and the success of ISRO, unicorns, and the Thomas Cup badminton team.

Factors Contributing to India’s Past Growth:
Enabling people with capabilities and empowering them to seek better futures. Freeing up access to opportunities. Governing with a dynamic and sensitive touch, openness to criticism, and willingness to learn and correct course. Increasing years of schooling, liberalizing tariffs and regulations, and investing in infrastructure. Implementing Panchayati Raj and the Right to Information Act.

Current Government’s Vision:
The current government’s vision centers around the term Atmanirbhar, or self-reliance. The focus is on better connectivity, better logistics, better roads, and devoting more resources to these areas.

Background and Overview:
Raghuram Rajan argues that India’s Atmanirbhar policy, which focuses on self-reliance, is a misguided and regressive approach that takes the country back to its failed past. He highlights the neglect of human capital and misplaced priorities, particularly in education, and contrasts this with the government’s emphasis on subsidies and protectionism.

Neglect of Human Capital:
Rajan points out the tragedy unfolding among school children, especially the poorer ones, who are dropping out of school after two years of disruptions due to the pandemic. This neglect of human capital, which is the most important asset for India’s future, is alarming.

Inadequate Resources for Remedial Education:
Rajan criticizes the government’s failure to devote adequate resources to remedial education, which is essential to help children catch up after the pandemic-induced learning loss. He highlights the innovative scheme implemented in Tamil Nadu, where 1.75 lakh local workers are hired to provide remedial learning and bring children back to school.

The Problem of Dropouts:
Rajan reveals that even in Tamil Nadu, which has one of the better education systems in India, over five lakh children have dropped out. This situation is likely much worse in other parts of the country, underscoring the urgent need for more attention and resources to address this issue.

Misplaced Priorities: Production Linked Incentives:
Rajan questions the government’s focus on Production Linked Incentives (PLI), which are subsidies provided to big manufacturing industries. He argues that this scheme is a reversion to the past, emphasizing physical capital rather than human capital and protectionism instead of liberalization.

Focus on Manufacturing Jobs:
Rajan acknowledges the government’s concern about creating jobs, which is the motivation behind the PLI scheme. However, he argues that the scheme is not forward-thinking and overlooks the importance of human capital and education in driving long-term economic growth.

PLI Scheme: Protecting Industries, Raising Costs:
PLI (Production Linked Incentive) scheme offers tariff protection and subsidies to domestic manufacturers to boost manufacturing in India. Example: Cell phone import tariffs increased from 10% to 20% in 2017, and PLI provides a 6% subsidy on invoice price to manufacturers. Consumers pay more for domestically produced goods, benefiting manufacturers. States offer additional subsidies, attracting foreign manufacturers.

License Permit Raj: A Cautionary Tale:
PLI resembles the failed License Permit Raj, where protectionism and subsidies discouraged efficiency. Firms lobby for PLI extension, fearing competition after subsidies end. Ending subsidies will endanger Indian workers and tempt politicians to extend the scheme.

PLI’s Impact on Other Industries:
PLI for chip manufacturing could increase chip costs for other Indian manufacturers, reducing their competitiveness. Spreading these costs across the economy can lead to high costs and inefficiency, as seen during the License Permit Raj.

Competition and Discretion in PLI Allocation:
PLI allocation process lacks transparency and is discretionary, raising concerns about favoritism towards well-connected industrialists. This undermines the merit-based competition that reforms aimed to create.

Manufacturing-Led Growth: A Question of Markets:
Protectionism in Western countries limits export opportunities for India’s manufacturing sector. Even if PLI succeeds, finding markets for India’s manufactured goods remains a challenge.

A New Indian Way: Service-Led Growth:
India should focus on service-led growth rather than emulating China’s manufacturing-led path. India can leapfrog the manufacturing stage and go directly to services.

Putting People First: A Foundation for Growth:
India needs to draw from the capabilities of all its citizens, including women, religious minorities, and disadvantaged castes and tribes. Equal treatment and empowerment of all citizens are essential for economic growth.

Prioritizing Human Capital Over Industrial Subsidies:
Rather than investing $10 billion in production-linked incentives for chip factories with uncertain success, Raghuram Rajan suggests reallocating this funding to 100 new universities or upgrading existing institutions. By investing in education and research, India can produce 10,000 new chip engineers who can contribute more value to the chip industry compared to relying solely on chip factories.

Addressing Deficiencies in Public Goods:
Rajan emphasizes the need to address deficiencies in public goods, such as healthcare and education, to improve the quality of life for citizens. He argues that empowering people through cash transfers and decentralizing government can lead to better public service delivery.

Empowering People through Cash Transfers and Decentralization:
Cash transfers, as implemented in Chhattisgarh, provide individuals with the ability to demand better services by paying for them directly, thereby empowering them to hold service providers accountable. Decentralizing government functions and funds to local panchayats and municipalities can lead to more local control, responsibility, and responsiveness to the needs of the community.

Continuing the Decentralization Experiment:
Rajan highlights the need to continue the decentralization experiment initiated by the Congress in the late 1980s through Panchayati Raj. He suggests expanding the transfer of funds, functions, and functionaries to local areas, as demonstrated by Chhattisgarh’s decision to grant panchayats decision-making power over sand mining.

Conclusion:
By prioritizing investments in human capital, empowering people through cash transfers and decentralization, and continuing the decentralization experiment, India can improve the quality of public goods, increase local control, and ultimately put people first in its development agenda.

Putting People First:
Emphasizing individual rights and freedoms, especially by amending or repealing draconian laws like UAPA, the Sedition Law, and Section 295A. Allowing people to protest and criticize local governments without fear of imprisonment.

Improving Access to Opportunities:
Expanding access to markets, self-employment, finance, technology extension services, investment, and marketing support. Addressing the difficulty of doing business by reducing corruption and unnecessary regulations.

Creating a Learning Transparent Government:
Experimenting with policies and programs, gathering data on their successes and failures, and being willing to change course when necessary. Listening to criticism and advice from experts, Parliament, and the public. Avoiding suppressing unfavorable data and promoting free speech and debate.

Focusing on Service-Led Growth:
Recognizing India’s comparative advantage in services exports. Continuing to build infrastructure and expand manufacturing but also focusing on service-led growth.

Services are Now More Globalized:
The pandemic has shown the ease of providing high-value-added services remotely, opening up opportunities for services like consulting, legal and financial advisory, education, and telemedicine to be delivered globally. Services delivered online cannot be stopped at physical borders, unlike goods.

Protectionism and Services:
The largest suppliers of services in the world are the United States and Europe, making overly protectionist policies against services not in their interest. India can provide services with strict data protection controls and transparency, which are important in data-intensive services.

India’s Asset: Liberal Democracy for Data Protection:
India’s liberal democracy, governed by the rule of law, can assure other countries of strict data protection and privacy. This advantage allows India to enter data-intensive services, which China cannot due to the lack of checks and balances on its government.

US Example:
The United States does not allow China to provide financial services in the US due to concerns over data protection and lack of transparency.

Data as the New Oil:
In the digital age, data has become the new valuable resource, similar to oil in the past. Countries with strong data protection measures and privacy regulations will have an advantage in providing data-driven services. India, known for its software engineers and service industry, can leverage this advantage to its benefit.

Shifting to Services in a Greener World:
The global economy is moving towards more service-based industries and a greener future. Manufacturing cannot expand at the same pace as services due to the limited consumption of goods. Services offer a more sustainable growth path for India, aligning with the global trend.

Improving Capabilities and Recognizing Indian Qualifications:
India needs to focus on improving the skills and capabilities of its workforce, particularly in the services sector. Indian degrees and certifications need to be recognized internationally to facilitate global service provision. Streamlining the process for Indian professionals to qualify in other countries, such as doctors, is essential.

Negotiating with Foreign Governments:
To expand India’s service exports, the government needs to engage in negotiations with foreign governments. Bilateral agreements should aim to ensure that Indian professionals can provide services in those countries. The government should emphasize the benefits of utilizing Indian services, such as reducing the burden on their healthcare systems.

Key Points:
India should shift its focus from solely manufacturing to services, considering the needs of service providers and opening doors for them globally.

Economic Growth and Job Creation:
Expanding into services can create jobs for various professionals, including doctors, consultants, and lawyers. High-level jobs typically create additional jobs in supporting roles, such as nurses, assistants, and clerks. These jobs provide incomes that enable families to invest in education for their children, leading to significant advancement for the next generation.

Education and Social Upliftment:
Education and healthcare are crucial for improving the lives of individuals and elevating the next generation. Educating children and providing them with opportunities for higher education can help them secure better jobs and achieve greater success. Creating jobs with reasonable incomes allows families to invest in their children’s education, leading to a more educated and skilled workforce.

India’s Unique Growth Path:
India should capitalize on its strengths and capabilities, including its cultural tolerance and respect for all. Building on India’s liberalism and ability to debate and criticize will improve governance and foster trust among citizens and with other nations.

Services-led Growth:
India can become a global leader (Vishwa Guru) by adopting a new vision for green, inclusive, local-led growth and development. This vision should focus on services rather than manufacturing and demonstrate its effectiveness to the rest of the world.

Challenges and the Path Forward:
The current ruling ideology may pose challenges to implementing this new growth path. Despite the challenges, this vision can serve as a manifesto for change and inspire action toward a better future. India has the potential to achieve its best days, but it requires concerted efforts and immediate action.