Credit: DH Illustration
India’s strong growth since the pandemic cannot sustain for long unless consumption by the middle and lower income part of the population picks up, former Reserve Bank of India Governor and celebrated economist Raghuram Rajan said. In an extensive interaction with DH’s Arup Roychoudhury, Rajan said that the aim should be to create jobs up and down the value chain. He also said that the divergence between southern and northern states in economic and political power is a cause of concern. Edited excerpts:
What is your assessment of global economy, in the backdrop of inflation, high interest rates, and disrupted supply chains caused by wars in eastern Europe and Middle-East?
Relative to what we believed at the beginning of the year, the global economy has done spectacularly well, on the back of very strong growth in industrial countries, primarily the United States. Some of that is coming off now, partly on the back of interest rate hikes finally starting to have some bite. But you're still seeing a fairly robust global economy despite two wars. Part of what is going on is that China hasn't revved up its growth. The downside is that Chinese demand is still quiet. But the upside is that at a time when you're trying to curb demand to contain inflation, slow Chinese demand is helping keep commodity and oil prices lower, thus keeping inflation down.
So the hope for many is that we achieve a soft landing, especially by the United States Federal Reserve. But I think the problem, to some extent, is that as soon as there's any sign that the Fed may be dovish, the markets take off. And they make it harder to generate that soft landing because job growth is still quite high in the US and demand is still quite strong. So how to effect a stable landing is still a very big question. I don’t see anything different from what the Fed says.
The Indian economy has recovered strongly since the pandemic. However, many reports and studies have shown that it is a K-Shaped recovery, in that demand and consumption are being driven by the top 10 or 20% of the population. How big of a concern do you think that is?
I mean, it is a big problem. And I see that certain segments of society—I was talking to a bunch of business people yesterday—seem to be oblivious to the remaining 90%. That’s because many of their products are premium. You don't have to be a doomster to say we need to think about the rest. Because eventually, if the rest aren't picking up the demand, how long can the upper 10% drive consumption growth? The latest data shows that with government investment being the big driver, we're not seeing private investment; we're not seeing private consumption.
This is not all just pandemic-related. It has its roots, I would guess, in the whole formalisation process, which has weakened small and medium enterprises. The good side of the restraint during the pandemic was that we didn't blow the budget; there was fiscal restraint. The bad side of the fiscal restraint is that we couldn’t support demand at the bottom.
How do you create more jobs, especially among the lower-income population?
The single most important problem today in India is jobs. The second-most important problem, jobs. The third-most important problem, jobs. If you get the jobs, we get the development, we get the growth, and we reduce conflict. I mean, Manipur is a complicated issue, but some of it is about jobs. The attitude about ‘outsiders’ in certain states is about jobs. So, how do you create jobs? You can work on it on two levels. One is that we have jobs that will be tailored to the labour force we have. For example, unskilled mothers with school degrees can work in an Anganwadi. Similarly, a lot of people with basic medical knowledge, like compounders, can we qualify them quickly and make them the first responders to treating basic ailments and injuries?
The second is creating people for the jobs we can look at. And that upskilling begins right in childhood. We need to start dealing with malnutrition. We're talking about being a developed country by 2047. How do you become a developed country when 35% of the kids who will enter the workforce by then suffer from malnutrition? We keep saying that it is not a problem, but it is. And countries have dealt with malnutrition; they have done it in mission mode.
Also, how many states are focusing on the Covid children? The kids who spent two years out of school, we brought them back without remedial education. The rich kids have the internet, and their parents helped. But the poor kids are dropping out. We saw that in Tamil Nadu (Rajan is an advisor to the state government), remedial education for such children made a huge difference. One survey said that in Bihar and Jharkhand, only 20% of the students are attending school.
The single biggest thing we have to think about is that if we want to be a developed nation in the next 24 years, the current 6% rate of growth will not cut it, even if you assume there's no population growth. We can make our income four times what it is, given the current rate of growth. But that will still be below where China is today.
There has been an ongoing debate about what our focus should be in terms of job creation—manufacturing or services?
It is not either/or. The tremendous change in the nature of the delivery of services over the last few years implies that we need to look at services with a fresh eye. India has an advantage in direct services because of its skilled workforce and lower costs. There are also services embedded in manufacturing. You're embedding the service in something bigger, like cars today. A Tesla requires 40 million lines of code. Even domestically. We have so many places where services and manufacturing are being joined at the hip. So separating services from manufacturing is hard.
If you look at the supply chain, there's a smile curve, which shows you how much value is added at each part of the supply chain. Think of an iPhone. At one end of the curve are intellectual property, design, etc. The low end of the curve is manufacturing. Apple hasn’t manufactured anything since 2004. It is all outsourced to companies like Foxconn. The other end is marketing, selling, iTunes, AppleTV, etc., which is also done outside of the US. Today, Apple is worth $3 trillion, while Foxconn is worth about $50 billion. Today, when we get into manufacturing, we are targeting the low end. We also need to target the high end by investing more in R&D, at top universities, etc. To own the entire curve, we have to focus on the fundamentals.
I want to touch on the issue of federalism. Some southern and western states are the economic engines of the country, while the northern and eastern states will hold even more political power due to their population, especially after delimitation in 2026. This is the basis of concerns that the south is in effect subsidising the north and that some of the more developed states are not being rewarded for having done better in social and economic indicators. What is your take on the issue?
I think it is a problem. And I've been seeing it for 20 years as the West and the South move away from the North and the East, economically speaking. Inequality, either of economic power or political power, creates a whole set of tensions. I have no doubt that this whole process of delimitation has to be handled very carefully. And it has to be done gradually, not jhatka. The appropriate way of undoing 50 years of status quo is to bring it back over a large number of years rather than doing it in one fell swoop. You don't want the political equation to change overnight. That is my view as an observer.
Some cross-subsidy is inevitable in a country. The important thing is to make those doing cross-subsidisation feel that it is in their own interests in the long run. This is why there's a lot of talk about making some of the central transfers more performance-oriented. There has to be a reward component for improving the quality of your human capital and for improving social and economic indicators.
You, as RBI governor, started the process of asset quality review, which showed the true state of toxic assets in the banks. Today, the Indian banking system is in very healthy shape. However, Governor Das has raised concerns over unsecured retail loans. Is that justified?
It is extremely important once you spend so much money cleaning up the banks to make sure they don't get into trouble again. You always have to be cautious about credit quality. And often, the first sign of poor credit quality is rapid credit growth. Banks find different ways of getting into trouble every few years because they remember the lessons from the old ones but forget the lessons from the new ones. So the RBI is right to be cautious.