Raghuram Rajan (University of Chicago Professor) – 5th AIPC National Conclave in Raipur, Chhattisgarh (Jul 2022)
Chapters
00:00:30 India's Economic Underperformance: Causes and Solutions
India’s Current Economic Situation: India is rebounding from the pandemic, but the consequences of war, inflation, and rising interest rates are casting a shadow. The growth is from disastrous numbers posted in the last two fiscal years. India’s poorest citizens and especially their children continue to suffer. Slow growth is not all the fault of the pandemic, but predates it for about a decade. India has a scarcity of jobs, especially for women, with female labor force participation among the lowest in the G20.
India’s Past Economic Success: In the two decades after the 1991 reforms, India had 7% growth for 20 years. Notable successes include the Aadhaar scheme, Universal Payment Interface (UPI), farmers’ achievements, ISRO’s satellite around Mars, unicorns, and the Thomas Cup badminton team.
Factors Contributing to Past Success: 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. Tearing down the license permit raj and implementing economic reforms.
Challenges and Issues: Authoritarian leadership with few checks and balances will hold back India’s growth. The recent underperformance of India’s economy indicates a need for rethinking. Majoritarian authoritarianism divides the country, creates internal resentment, and weakens India against foreign meddling. Slow growth, inability to create good jobs, and lack of opportunities for women are major concerns. India’s female labor force participation is amongst the lowest in the G20.
Conclusion: Strengthening liberal democracy and its institutions is essential for India’s future growth and prosperity. Liberal democracy enables people to flourish socially and politically. A liberal argumentative democracy is needed to create a just and prosperous society.
00:08:45 Economic Growth in India: Past and Present
Past Economic Growth: India experienced significant economic growth over the past few decades. Factors contributing to this growth include increased education, liberalization of tariffs and regulations, infrastructure investment, and government reforms. The implementation of Panchayati Raj and the Right to Information Act empowered citizens and reduced government control over the economy. This resulted in a shift towards letting market forces and competition drive economic growth rather than government intervention.
Current Government’s Vision: The current government emphasizes the concept of Atmanirbhar, or self-reliance, as its vision for economic growth. Positive aspects of this vision include a focus on improving connectivity, logistics, and infrastructure, similar to past reform decades.
Criticisms of the Current Government’s Vision: The focus on physical capital, protectionism, subsidies, and favoritism resembles failed policies of the past. Neglect of human capital development, particularly in education, is a major concern. The COVID-19 pandemic has exacerbated the issue, with many children dropping out of school, leading to a loss of human capital. Inadequate resources are allocated to remedial education to address this crisis. The government’s reliance on state governments to address educational issues is insufficient, as evidenced by the large number of dropouts in Tamil Nadu, a state with a relatively strong education system.
00:13:07 Shifting Focus from Manufacturing to Service-Led Growth: India's Path to
What is PLI and Why is it a Reversion to the Past?: PLI, or Production-Linked Incentives, is a government scheme that provides subsidies to big manufacturing industries to boost manufacturing in the country. It aims to address concerns about India’s uncomparative manufacturing sector due to inadequate infrastructure, power, design capabilities, R&D focus, and worker skills. PLI offers tariff protection and subsidies to domestic manufacturers to make them competitive with the world.
Concerns about PLI: It is unsustainable as it raises prices for consumers, burdens taxpayers, and relies on foreign manufacturers’ willingness to produce in India for subsidies. It lacks transparency and discretion in selecting industries for PLI, leading to potential misuse of taxpayer money.
Inefficiencies and Disadvantages of PLI: PLI may not lead to efficiency improvements in manufacturing, as industries may become complacent due to ongoing protection and subsidies. PLI increases costs for other sectors, such as chip manufacturing, making them less competitive. The broader aim of becoming a manufacturing powerhouse may be hindered by increasing protectionism worldwide, limiting market access for Indian products.
Alternative Approach: Service-led Growth: Instead of manufacturing-led growth, India should focus on service-led growth, leveraging its strengths in IT, healthcare, education, and finance. This approach would involve investing in people’s capabilities, increasing access to opportunities, and governing with a dynamic and sensitive touch. Service-led growth could help India leapfrog the manufacturing stage and position itself as a global leader in services.
00:23:03 Prioritizing People: Ensuring Equality and Human Capital Development
Putting People First: India needs to treat all its citizens fairly and equally, including women, religious minorities, and disadvantaged castes and tribes. This is not only morally right but also economically sensible, as a discriminatory society is weak and prone to unrest.
Prioritizing Investments: Given India’s strained fiscal resources, it must prioritize its investments. Instead of spending money on risky ventures like chip factories, the government should invest in education and human capital. This could include funding new universities, upgrading existing ones, or improving high schools.
Empowering People: India needs to empower its citizens to drive change and improve their lives. One way to do this is through cash transfers, which give people more control over their finances. Another way is to improve public goods and services, such as healthcare and education.
00:26:14 Community Empowerment and Economic Opportunity in India
Cash Transfers: Cash transfers directly to individuals empower them by giving them the ability to command money, purchase better services, and demand more from service providers.
Decentralization of Government: Transferring power and decision-making to local panchayats and municipalities increases local control and responsibility, leading to better services and governance.
Emphasizing Individual Rights and Freedoms: Reforming draconian laws like UAPA and Section 295A to protect individuals from misuse and oppression, encouraging free speech and dissent.
Improving Access to Opportunities: Expanding market access, self-employment opportunities, finance, and infrastructure development, especially in rural areas, to enable people to create jobs and entrepreneurship.
Simplifying Business Regulations: Reducing the burden of regulations and inspections on businesses, minimizing corruption, and creating a transparent and conducive environment for entrepreneurship.
Creating a Learning and Transparent Government: Promoting transparency in government operations, encouraging feedback and accountability, and empowering citizens to hold the government accountable for its actions.
00:30:40 Service-Led Growth: India's New Path to Economic Success
The Importance of Good Governance: Raghuram Rajan emphasizes the need for a government willing to experiment, gather data, listen to criticism, and be responsive to changing circumstances.
Transparency and Data Collection: Rajan highlights the lack of reliable data in India, particularly regarding unemployment and COVID-19 deaths, stressing the importance of data for effective policymaking.
Free Speech and Criticism: The author argues that free speech, criticism, and debate are essential for good governance as they allow for the identification and correction of errors.
Liberal Democracy as an Effective Model: Rajan asserts that liberal democracy offers the best environment for governments to learn and be more effective, citing the trend of strengthening democracy in complex countries.
A New Path to Job Creation: Rajan suggests a shift in focus from manufacturing-led growth to service-led growth, emphasizing India’s comparative advantage in services exports.
The Changing Environment for Service Exports: The pandemic has made it easier to provide high value-added services remotely, opening up new opportunities for globalization of services.
India’s Advantage in Providing Services: Rajan highlights India’s liberal democracy as a key asset in providing services, particularly those involving data privacy and protection.
Data Protection and Assurance: Transparent and tolerant democracies with strong data protection laws have an advantage in providing data-intensive services.
The Growing Importance of Services: Rajan emphasizes the increasing demand for services globally and the need for India to focus on expanding its service exports.
Recognizing Indian Degrees and Qualifications: The author calls for the recognition of Indian degrees and qualifications worldwide to facilitate the export of services.
Negotiations for Healthcare Services: Rajan proposes negotiations with countries to allow their national health systems to cover medical services provided by Indian doctors, reducing the burden on their own healthcare systems.
00:39:18 Services-led Growth: India's Path to Economic Prosperity and Global Trust
India’s Growth Path: Raghuram Rajan proposes a growth path for India that emphasizes services rather than manufacturing. He argues that this approach will create jobs for India’s well-educated young people and provide opportunities for social and economic advancement. Rajan believes that India can become a Vishwa Guru, or global leader, by demonstrating the success of its new vision for growth.
Creating Jobs: Rajan emphasizes the importance of creating jobs of any kind with reasonable incomes. He notes that high-level jobs in India typically create five or six more jobs in related fields. He also points out that these jobs allow households to educate their children, leading to a leapfrog effect for the next generation.
Education and Health Care: Rajan stresses the importance of education and health care in promoting economic growth. He believes that these investments will allow India’s next generation to leapfrog their parents and create a stronger, richer, and better economy.
Governance and Trust: Rajan argues that India’s growth path must be built on liberalism, debate, criticism, and argument. He believes that this will improve the quality of India’s governance and make India trusted by citizens elsewhere in the world.
Challenges and Manifesto for Change: Rajan acknowledges that the proposed growth path will not be easy, given the current ruling ideology. He suggests that it can be a manifesto for change and is happy to answer questions from Dr. Tharoor. Rajan ends by expressing his belief that India’s best days are still ahead, but that work must start now to make it so.
Abstract
“India’s Crossroads: Embracing Liberal Democracy and Service-Led Growth for Economic Resurgence”
India stands at a pivotal juncture, with its future economic prosperity hinging on critical decisions and reforms. The country’s economic trajectory, marred by recent underperformance and challenges, calls for a strategic shift towards strengthening its liberal democracy and pivoting from a manufacturing focus to a service-led growth model. Noted economist Raghuram Rajan advocates for this transformative approach, emphasizing investment in human capital, fair treatment of all citizens, and leveraging India’s global reputation in service exports. This article explores India’s economic challenges and successes, the rationale for a liberal democratic approach, and the potential of service-led growth, drawing insights from diverse sectors and proposing a vision for a prosperous, inclusive India.
Main Body:
India’s Economic Landscape: Challenges and Triumphs
In the wake of the pandemic, India’s economic recovery has been masking deeper issues such as youth unemployment, sluggish female labor force participation, and an imbalanced K-shaped recovery. Despite achieving historic growth following the 1991 reforms, including digital innovations like Aadhaar and UPI, India is now compelled to reevaluate its growth strategies to address these underlying challenges.
Liberal Democracy as an Economic Catalyst
The recent underperformance of India’s economy highlights the necessity of a new approach, focusing on strengthening democratic institutions. This is imperative for countering authoritarianism, which breeds division and undermines national unity. A fair and democratic society is essential for both social and economic resilience.
Putting People First
India’s commitment to treating all its citizens fairly and equally, including women, religious minorities, and disadvantaged castes and tribes, is not only a moral imperative but also an economic necessity. A society rife with discrimination is weak and susceptible to unrest.
Prioritizing Investments
India, with its limited fiscal resources, must be strategic in its investments. Rather than allocating funds to high-risk ventures like chip factories, the government should focus on enhancing education and human capital, which could involve funding new universities, upgrading existing ones, or improving high schools.
Empowering People
Empowering citizens is crucial for fostering change and improving livelihoods. Methods such as cash transfers can give people greater control over their finances, while improving public goods and services, like healthcare and education, can significantly enhance quality of life.
The Pitfalls of India’s Current Economic Path
India’s faltering growth can be attributed to deviations from previously successful reforms, such as the dismantling of the License Permit Raj. The current shift towards Atmanirbhar (self-reliance) risks a return to protectionism and neglects vital areas like human capital development.
Education and Infrastructure: Key Growth Drivers
Education, infrastructure expansion, and economic liberalization have historically been the catalysts for India’s growth. The Tamil Nadu government’s Ilam Thedi Kalvi program underscores the urgency for educational reforms across the nation.
The Controversy of Production-Linked Incentives
The Production-Linked Incentive (PLI) scheme, aimed at bolstering manufacturing, risks repeating the mistakes of past protectionism and inefficient industry subsidization. Economists like Raghuram Rajan advocate for a transition to a service-led economy, which they consider more sustainable and in line with global trends.
A New Path to Job Creation
Raghuram Rajan proposes a paradigm shift from manufacturing-led to service-led growth, highlighting India’s comparative advantage in service exports.
The Changing Environment for Service Exports
The pandemic has facilitated the remote provision of high-value-added services, presenting new opportunities for the globalization of services.
India’s Advantage in Providing Services
India’s status as a liberal democracy is a significant asset in service provision, especially in areas requiring data privacy and protection.
Data Protection and Assurance
Nations with transparent and tolerant democracies and robust data protection laws hold an advantage in providing data-intensive services.
The Growing Importance of Services
Rajan underscores the escalating global demand for services, emphasizing the necessity for India to expand its service exports.
Recognizing Indian Degrees and Qualifications
The author advocates for global recognition of Indian degrees and qualifications to streamline the export of services.
Negotiations for Healthcare Services
Rajan suggests negotiating with countries to integrate Indian medical services into their national health systems, potentially alleviating their healthcare burdens.
Rajan’s Vision: Fairness, Investment in People, and Empowerment
Rajan stresses the importance of treating all citizens equally, arguing that discrimination undermines economic progress. He advocates for prioritizing investments in education and public services over industry subsidies. Empowering individuals through decentralization and rights protection is seen as essential for societal and economic prosperity.
Cash Transfers
Direct cash transfers to individuals empower them by enhancing their ability to make purchases, access better services, and demand more from service providers.
Decentralization of Government
Transferring power to local bodies like panchayats and municipalities enhances local governance and service quality, leading to more effective administration.
Emphasizing Individual Rights and Freedoms
Reforming restrictive laws like UAPA and Section 295A is critical to protect individuals from misuse and oppression, thereby encouraging free speech and dissent.
Improving Access to Opportunities
Expanding market access, self-employment opportunities, finance, and infrastructure development, especially in rural areas, is key to enabling job creation and entrepreneurship.
Simplifying Business Regulations
Reducing regulatory burdens on businesses and minimizing corruption fosters a transparent and conducive environment for entrepreneurship.
Creating a Learning and Transparent Government
Promoting government transparency, encouraging feedback and accountability, and empowering citizens to hold the government accountable is crucial for effective governance.
India’s Service Sector: A Global Competitive Edge
India’s prowess in service exports, particularly in high-value sectors like technology and healthcare, offers a significant growth opportunity. The global shift towards green economies and service consumption complements India’s strengths and democratic values.
Proposed Actions for a Service-Led Economy
To harness the potential of a service-led economy, enhancing workforce capabilities and achieving global recognition for Indian qualifications are crucial. Engaging in negotiations with foreign governments for the integration of Indian professionals into global health systems could unlock new economic avenues.
A Vision for India’s Future
India’s future lies in embracing its liberal, debate-rich culture to refine governance and build global trust. Aspiring to become a “Vishwa Guru” (world leader) in green, service-based, inclusive development is pivotal. Overcoming ideological hurdles and current policy trajectories is essential to realize this vision.
India’s potential for economic resurgence is undeniable, yet it requires a concerted effort to pivot towards a service-led, democratically enriched growth model. The road ahead involves nurturing human capital, embracing global service opportunities, and upholding the principles of liberal democracy. By doing so, India can secure a prosperous and equitable future, fulfilling its promise as a global leader in innovation and inclusive development.
The Importance of Data, Free Speech, and Criticism in Effective Governance
Rajan emphasizes the need for a government willing to experiment, gather data, listen to criticism, and be responsive to changing circumstances. The lack of reliable data, particularly regarding unemployment and COVID-19 deaths, underlines the importance of data for effective policymaking. Free speech, criticism, and debate are crucial for good governance as they enable the identification and correction of errors. Rajan asserts that liberal democracy offers the best environment for governments to learn and be more effective, citing the trend of strengthening democracy in complex countries.
India’s Growth Path
Raghuram Rajan proposes a growth path for India that emphasizes services over manufacturing, creating jobs for well-educated young people and providing opportunities for social and economic advancement. He envisions India as a Vishwa Guru, demonstrating the success of its new growth model.
Creating Jobs
Rajan highlights the importance of creating jobs across various sectors to generate reasonable incomes. He notes that high-level jobs in India often lead to the creation of additional employment opportunities in related fields. These jobs enable households to educate their children, resulting in generational socioeconomic advancement.
Education and Health Care
Rajan underscores the significance of education and health care in promoting economic growth. Investments in these areas are seen as essential for enabling the next generation to surpass their parents’ socioeconomic status, leading to a stronger, more prosperous economy.
Governance and Trust
Rajan argues that India’s growth path must be founded on principles of liberalism, debate, criticism, and argument. This approach is believed to enhance the quality of governance and establish India as a trustworthy nation globally.
Challenges and Manifesto for Change
Rajan acknowledges the difficulties in implementing this growth path due to the prevailing ruling ideology. He suggests this approach as a manifesto for change, expressing optimism that India’s best days are ahead, but emphasizing the need for immediate action to realize this potential.
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