In their book ‘Breaking the Mould’, Raghuram Rajan, distinguished service professor of finance at the University of Chicago Booth School, and Rohit Lamba, assistant professor of economics, Pennsylvania State University, have stressed the need to make India a hub for ideas, and pointed out that the employment opportunity lies in direct services as also in manufacturing-embedded services. In an interview with Shobhana Subramanian, they said the multiplier effect can be huge with every skilled job creating four low-skilled jobs. Excerpts:
What could be India’s potential growth rate in the coming decade?
The unemployment data isn’t encouraging – in fact, it is worrying. In the year before the pandemic, the share of workers in agriculture had gone up. So, while we may be the fastest-growing economy in the world, it should be quality growth. Whatever the growth, it isn’t enough to create the jobs that we need. We need to play to our strength, which is our human capital, and to create better work. To achieve this, we also need to spend a lot more on education and health.
If we get the focus on services exports right, what could be the job potential?
It is hard to put an exact number to it, but services are the only place where we are creating jobs. Both as a share of output and employment, manufacturing has broadly been stagnant. If we improve the kind of jobs that we are generating in both direct services and services embedded in manufacturing that are producing high value, the aggregate output will go up; that will create a lot of jobs as well as a large number of allied jobs. Research in the US shows that for every high-skilled job in India, four low-skilled services jobs are produced along with it. If we are able to generate millions of jobs, the multiplier effect will play out.
You have pointed out the PLI may not be the right way to go.
We are not against manufacturing. If we improve the quality of the workforce, people will come looking for our workers. The problem is to say that the only way we can get them to come here is to subsidise; we make the old mistake, we spend the money, they come in and leave when it’s no longer economical. It’s not as though they’re bringing in huge amount of investment. Focus on fundamentals instead of subsidising your way to jobs, because that is not sustainable.
How would you assess this government’s performance? We are on fairly firm ground in terms of macro fundamentals.
The question we have to ask ourselves is how do we look when we aggregate across time and for the kind of economy we are? When we look at the very slow growth over the last 4 years, before and through the pandemic, there is certainly an opportunity to catch up which we may be doing now. At the same time, 6-6.5% growth is certainly not enough. We need to debate where we are going to generate that growth. Poor countries grow fast, but are we growing enough and in the right direction? Are we going to grow rich before we grow old? We need to take a longer time horizon, but have had 2 decades in this century, time flies. If we don’t start now, we can’t do it later.
How will new technology impact us?
There is the inexorable force of technology, Chat GPT Plus, automation. Many countries are insuring because they are automating old jobs. To go back to 20th century paradigms when we are facing the 21st century future displays a lack of imagination. We cannot keep saying we are Vishwaguru and this and that. How much IP have we contributed to the world? We are up against competitive emerging markets. Vietnam is competing with us and Bangladesh has overtaken us, so we can’t take the future for granted.
You say we are an over-centralised economy.
Today, decentralisation is much more important than ever. Take UP; it has 240 million people, that’s two-thirds of the US. But the US has 50 states and each state has cities and counties governed by mayors. We have an excessively-centralised system which doesn’t allow us the governance to give us the public goods that we need. We can suggest all the policies we want, but without governance changes, many will be stillborn.
You have said the labour laws are onerous.
What we need is an approach that has more flexibility and also takes into account workers’ rights. As they stay longer in a firm, they should accumulate more severance pay, have more protection and there should be speedy tribunals to adjudicate in case they want to dispute the way they have been let go off. We need to make changes on all dimensions recognising that just doing one bit would create more problems.
There seems to be a regulatory dilemma when it comes to fintechs.
This has always been the dilemma for the regulator. How do you protect the customer while not stifling the access to credit? Some of these people have new ways of getting to credit histories and it can be collateral free as the RBI has found. But it is not totally unsecured in that you are putting your reputation at stake. This is a new way of lending, so we need to be careful; in microfinance we over-lent. You have to allow for experimentation but watch carefully so it doesn’t get too big too quickly. Maybe we can have sandboxes. The wrong approach is to let it become a thousands of crore business and then say you’ve done it wrong.
You suggest affirmative action for women.
Even before reservations, we need to bring the disadvantaged into the mainstream educational process. Reservations come in later in people’s lives. The real differences are made in schools and Aanganwadis and we need to work to provide an equal access. Also, the objective should be to graduate engineers from every community; the dropout rates are unacceptable. What we are saying is that where the reservation is more for an economic reason, we should to adjust for more deprivation measures such as caste and gender. Remember, we were going to revisit reservations every 10 years, but we don’t revisit them, we just expand it. We should not become prisoners to the instruments we have.
Do you think the RBI would have been better off without an inflation-targeting mandate?
Well, I am obviously a biased person here. Isn’t it a good thing that we don’t have double-digit inflation as a problem right now? What the framework did was to allow the RBI to be credible when it said it was focused on inflation. But the framework should be as flexible as possible, which was evident during the pandemic. It is to the credibility of the framework and its management that we went through the episode without the rampant inflation which would have been likely in the past.
India’s Opposition doesn’t have a concrete agenda.
We’re not partisan even though in India it seems to be either you are for us or against us. Politicians are looking for ideas, when they run out of ideas, they go back to sops. But, there’s a hunger in India today, people are tired of sops, they want to succeed. One of the reasons we don’t focus on healthcare and education is partly because we are so centralised. I am not, in a span of five years, going to see any difference, so instead I focus on freebies. But there are some good examples, take the AAP government which has made a difference to schools and mohalla clinics. We think targeted cash transfers can help the poor buy provisions, but over time, the government has to step up.
Will you join a political party and be FM if you are asked to?
I was told never to answer a hypothetical question. I have worked both for the Congress and NDA governments. And my role is not that of a partisan. I cut interest rates in the BJP regime and raised them during the Congress regime. But no one would know that, given the dialogue that’s out there.