Greetings!
I am including the transcript of my interview with Rhaguram Rajan here to make it easier for everyone to hear and consider what he is calling for in his new book, “Breaking the Mold: Reimagining India’s Economic Future.” Dr. Rajan is a world-renown Indian economist who is a distinguished service professor at the University of Chicago Booth School of Business, and a former governor the Reserve Bank of India as well as former chief economist at the International Monetary Fund, and the author of several ground-breaking books. I have gotten to know “Raghu,” as everyone calls him, for many years as I have attended events like the Kansas City Federal Reserve Bank’s annual Jackson Hole Symposium where he has been a participant.
(The transcript is lightly edited to correct as best I can the odd wordings that often appear in these kinds of transcriptions and end up not quite making sense. Another reason to listen to the interview itself.)
India is now in the final days of its national elections where support for Prime Minister Narendra Modi’s policies are being put to the test. He is widely expected to win his third five-year term as India’s economy continues to grow at a relatively rapid rate and the government has been widely credited for “getting things done” like building roads, bridges and other kinds of infrastructure projects. If he does, he will be only the third prime minister in India’s history to be elected to a third consecutive term. On the negative side of the Modi ledger, Dr. Rajan and many others are critical of Modi’s tilt toward what they call authoritarianism which they explain includes suppressing dissent, and undermining democratic institutions. And which Dr. Rajan argues is ultimately a negative force of India’s economy.
(If you need more info, please see Vox https://www.vox.com/world-politics/351497/india-election-2024-explainer-narendra-modi-bjp
NBC News https://www.nbcnews.com/news/world/india-elections-millions-vote-modi-rcna154051).
And which Dr. Rajan argues is ultimately a negative force of India’s economy.
So, I recommend first listening to Raghu speak. He is clear, understandable and gives in-depth explanations of the points he makes:.
Here’s the transcript:
Welcome to Central Bank Central. I'm Kathleen Hays. India is in the midst of a very important election right now, Prime Minister Modi, seeing if he is going to be elected to a third term. And this is there are many questions hanging over India's economy, questions that have been brought together in a very important book. And the book, of course, is about India and where it is and where it goes next. It's breaking the mold and it's written by Raghuram Rajan.
And of course, he is someone who is well known around the world for his work on India, for his work on central banks and so much more. He's a distinguished service professor at the University of Chicago Booth School of Business. His past policy positions include the Reserve Bank of India where he was governor and chief economist. at the International Monetary Fund. So, first of all,
HAYS - So, first of all, Raghu, welcome to Central Bank Central. It's great to have you on, especially at a time when it seems like all the issues that are facing India now have, like they're at a high temperature, right? There's just a lot of focus. And you have set the stage for what the issues are, not just economically, but I think also politically. So let's start with that. Breaking the Mold, what's the purpose of this book? Why did you write it? -
RAJAN -- Well, we wrote it to give an alternative vision for India from the one that we think the current government has. And we wrote it in time for the future. with the idea that people would start debating some of these issues. Of course, that's a grandiose aim. You hope to get into the debate, but of course a lot else occupies people's minds.
But really it was to say, look, India seems to be chugging along fairly strongly. If you look at the growth numbers, this year will probably be 8 % overall.% overall. And it seems like a fantastic sort of country to take over from China as the world's growth leader. It's already the fastest growing country in the G20.
And, you know, people in India are really very enthusiastic about what's going on. The world is coming to India. The leaders come and visit India, spend weeks in New Delhi, partly because India is seen as an alternative to China. And geopolitically, it's the same size in terms of people, 1 .4 billion people. And if you can hold it in the ranks of the democracies, that will strengthen the democracies. So what we're saying is all this is fine and good.
But from India's perspective, what really should it be doing? Is there, you know, is there room for India to follow the tried and tested growth path that Asian economies followed, which is focused on export -led manufacturing? The most recent proponent of that is China. And what we're saying is no, there's not that much room to do that anymore.
Partly because China... did it. And China did it, you know, while China and India were on par economically speaking in the '70s, China has moved far ahead by following this manufacturing -led growth path. India didn't. But now when India tries to do it, it encounters China already there. And the world doesn't have room for another China, not room in terms of... so much more in additional produced goods, and not room in terms of this will have a huge impact on the climate if 1 .4 billion Indians decide to produce goods as opposed to something else.
So what we were charting out in this book is a path no country has followed before to develop, which is focused on services. And we think there's room for that, given what's changed, what we've seen in the world.
HAYS - So let's just back up a little bit and go I think this your how you explain where China was when it dove into manufacturing and what other Asian nations who took basically kind of the same model, you know, South Korea has done great. Others have prospered.
But what's kind of surprising to me is if you have a weak labor market (in India) and a lot of unemployed people and people who can't get good jobs in India, why would the wage picture (be a problem)? Why can't India still compete on the manufacturing side? Because it's not like for those kinds of jobs that the wages would necessarily be that high.
RAJAN - It's a great question and it has to do with who else is there: when China went into the market, they were better educated than Indian workers.
You need some literacy, some numeracy to be able to do jobs in a factory. You need to know how to operate the machines, for example. And China had workers who were better educated than India, and it was a more natural country. to put your investments in. It also liberalized 10 years before India, so it had the advantage of momentum.
But it's not just the workers going into the factories (in China) . The workers also, once they learned something about manufacturing, could leave the factories and set up small enterprises of their own, to do basic pricing, to do accounting, to know what's coming in, what's going out, and how to set prices for the future. You need to get... numeracy. And Chinese workers had that. So China had a head start.
The problem when India is trying to replicate that now, I mean, India has now much better educated workers and so on, but the ground has shifted that you're no longer competing with cheap labor against Western countries.
Remember the China shock that everybody talks about? and so on, but the ground has shifted against Western countries. And China has now much better educated workers and so on, but the ground has shifted for India, it's competing against Chinese workers who still are relatively low paid and who now have the advantage of much better infrastructure and much better machines.
So competition at this low skilled end is huge. And so when you look at companies coming in, they're asking, okay, we need really well -trained workers to make up for the China advantage (of low wage, better educated workers).
And what they're finding is, they're not so many well -trained workers (in India). They're much better trained than they used to be. But one of the sort of complaints of manufacturers coming into India is, they're not skilled enough for the things we want (to produce) which seems a paradox, as you say. India can work on this. It can make its workers better skilled for the needs of companies. But it's still a task that has to be done.
HAYS -- Well, I want to jump to another point. I want to come back to many of these because education, as I read your book, I can't believe how poorly educated the poorest people are. There are people who don't get to school. And even at a higher education level, your book points out that we may see Satya Nadella at the head of Microsoft and other Indian people who have come to this country, and they run some of the biggest companies and in their prominent in finance and so many things. But back home, the kind of education people get is not necessarily so great. That to me is very surprising because, you know, I just associate well educated, highly cultured people in India with a good education.
What hasn't the current government - let's let's get to that because you want to look at Prime Minister Modi's two terms in office. and a lot of the reporting suggests that he is gonna get the third term. What hasn't that government, that administration done that needs to be done at least for education?
RAJAN --Well, start first with the 1 .4 billion people, right? Even a small fraction of that 1 .4 billion still amounts to millions. And what you're seeing across the world is those millions educated at the best schools in India. Satya Nadella is from one of the National Institutes of Technology. Sundar Pichai is from one of the Indian Institutes of Technology. These are top quality institutions with, you know, taking the creme de la creme of Indian students. And so they're very good. They're very competitive.
The strongest competition I faced was in my undergrad class in the Indian Institutes of Technology. And I've been to MIT, I've been to good schools which have really good students. So in that sense, I think it is possible to reconcile the fact that you have a Satya Nadella, you have a Sundar Pichai, you have all these great professors in universities around the United States who come from Indian schools.
And the fact that the average student doesn't get a great education because the quality below the top institutions falls off quite a bit. And so the real question is how do you upgrade the quality of human capital? One is (focus on) the people who are already being trained. Can you train them up so that they're employable.? India produces an enormous number of graduates, something like 1 .5 million students. a year.
Now, recent surveys suggest 50 % of them are unemployable because they've come from schools where they don't really get the background that they need to get a decent job. And so when you hear some of these numbers of graduates applying for low level jobs, it's horrendous. It's 1.2. million people applying for 6 ,000 jobs. as a low -level government clerk, including 100 ,000 engineers, 80 ,000 MBAs, and so on.
So these numbers are frightening, but they also reflect the fact that some of the degrees aren't very good. They also may be low -hanging fruit. If you can upgrade these engineers with a little bit of machine learning, with a little bit of AI, with a little bit of chip design, you could make them more employable.
Today, we have 300 ,000 engineers working on chip design in India. And India doesn't produce any chips. It's doing design for chips. People like Qualcomm are employing these engineers. So the education or the lack of quality as you go down the spectrum can be an opportunity in, if we... (put our) minds to upgrading.
And you asked me, what has the Modi government not done? It's focused a lot on trying to bring manufacturing to India, largely through offering production-linked subsidies and capital subsidies.. (The government offer to companies is) If you put it in here, we'll give you this dozen such subsidies. But it has paid less attention to the raw material that goes into these manufacturing outcomes. which is the workers. And India has the potential to actually have very good workers at relatively low wages. But today, the sector where that is really being seen as services, not in manufacturing.
HAYS -- you're a big proponent of, you say, India should be getting ready for the next phase. right? And focusing on brains, not brawn, and direct services exports, etc. What is that? What are you proposing? What does India need to do now when it comes to that? And again, is this something that you see another Modi administration starting to do?
RAJAN - Well, you know, it's interesting. There is an economist, a businessman economist, Gurcharan Das, who had the famous phrase, "India grows at night." And what he meant by that was India grows when the government is not looking. Because when the government starts looking, it starts impeding growth. In services, we've had spectacular growth in the last few years in services exports without government intervention.
Basically, one example is what are called global capability centers. What are these? These are Goldman Sachs setting up an office in Bangalore which does risk management models, trading models, and even some actual trading. It's J .P. Morgan employing 3 ,000 lawyers in India to do its global contract, not Indian law, but US law, European law, etcetera. It's a number of tech firms doing not just software, but actually engineering, hiring a whole bunch of engineers who are doing design for them, firms like Rolls Royce.
So what is happening is multinationals have discovered that high quality Indian graduates are really top -notch and they cost 1 /4 or 1 /5 what they cost in the rest of the world. Today, the exports from these GCCs is about $120 billion, employing 3 million people. All this has happened in a sense on the government's watch, but without the government watching.
But more than that, what is increasingly happening today is direct services. Remember what the (bad news that was the pandemic did. It allowed the consultant in Seattle to offer services in Chicago without ever going to the office, either office. Well, if they can do that, why can't they do it from Bengal to Chicago? And that's what's happening. Increasingly firms are finding, we don't just need a back office, but we can have a front office across the world in the cheapest places in the world and they can provide services directly.
Telemedicine (grew) during the pandemic because you couldn't show up at the hospital but that's now something that increasingly can be provided from India. Everybody has their favorite yoga teacher in India now doing yoga on telemedicine on Zoom. So what we're saying is there has been a revolution in services. It used to be the service was haircut. Fixed in place and time, you had to go to your barber shop to get the haircut. You don't have to go to your consulting firm to get consulting services. It can be anywhere, similarly legal and so on. So there has been an explosion in all this.
I think it's going to be very interesting. Of course, in the age of AI, what survives, what doesn't, will be an important. issue. But almost surely, being more creative is going to take you beyond the realm of AI, because AI basically can create at the margin a little bit, but being more creative is something that's going to be, it's going to take some time.
I'm going to repeat the name of the book,
HAYS -- Breaking the Mold, India's Untraveled Path to Prosperity. That's the title, there’s things India things needs to do, but it seems you're also painting a picture of india where some very good things are happening.
And I'm kind of setting you up to ask, you're concerned about the growing authoritarianism of Prime Minister Narendra Modi's government. Is it because there's so much economic prosperity (which people see) that you've gotten a lot of criticism (for this). You know, I've watched a lot of your appearances online (people saying): he's too hard on the government…he doesn't support Modi. He doesn't see that the GDP, the fact that it sprang back as much as it did after the pandemic is a very important sign that Modi's policies are working.
What is that? Under the government of Modi, what is it that you're objecting to and pushing back against? -
RAJAN -- Well, I think if you look at the overall GDP growth rate now at six to six and a half percent, when you take out all the extraneous factors that boosted IT temporarily. And that's good if you compare it with the rest of the G20. And that's, you know, India is the fastest growing large economy in the world. That's, that's not a lie.
There are two problems, however, with that number. that number is boosted by the fact that India has a lot of young people coming into the labor force. That's what is sometimes called the demographic dividend. But when other countries that are successful like Korea or China were benefiting from the demographic dividend, they were growing two or three percentage points higher. If you look at China in the early 2000s, which is when they were getting the biggest part of the demographic dividend, they were growing at double -digit rates every year. Remember, before the global financial crisis, they even hit 14 % one year? That's the extraordinary kind of growth you need to escape growing old before you grow rich.
And that's a very real concern for India. Six and a half percent doesn't cut it. That's one.
The second problem is that the nature of this growth for India is largely capital intensive. It's not creating jobs that the bulk of the people need. And as a result, you're seeing growing unemployment, one of the biggest sorts of sources of debt.
(One issue for the) election is people say, oh yeah, we get freebies from the Modi government, but where is the employment? And ultimately they might be willing to give the government the benefit of doubt, but it is not for policies they've undertaken, but for the hope that they will undertake policies that will give people the employment that they really want. So, I think from both counts, the extent of growth as well as the quality of that growth in terms of being spread across the economy, India is not doing well. And this is starting to show up in rising conflict between people within India.
Everybody wants reservations for their community. Because what are these reservations? They are mandatory of both government jobs as well as university places to particular communities. And they want that because, you know, it's just getting hard to get a private job. And the clamor to get into good public universities is very strong because the private universities charge a lot and are not that good.
And so, you know, this is where we are at the moment. And simply saying we're the fastest growing economy in the world, you know, which is the headline that the government likes to push, doesn't really accord with the reality that we're not doing that well on these more important dimensions.
HAYS -- Well, your book, "Breaking the Mold," which was co -authored with Rohit Lamba, he's an economics professor at Pennsylvania State University who has dealt firsthand with these kinds of issues, right? {My add : He worked as an economist at the office of the chief economic advisor to the Government of India}
And I think many of the examples of firms in small businesses that have started (in India) are just a very interesting part of the book. But you guys do go out of your way to look at things like , again, the Modi government is willing to adopt more authoritarian policies.
Where do you see this? And do (these) authoritarian policies, are they necessary? You know, China does it, they take, you know, control everybody. And to some extent then does it offset what people call the democratic advantage, right? That India is a democracy and for many, many citizens, many investors, this is a very important part of what India is. Modi is going through the election process. It seems like no one's complaining about that.
So, where do you see these authoritarian policies? Because again, this is something I think that unless people are very familiar with India's economy and government, they're not focused on this. And it seems like he's going to get reelected. Then maybe the Indians themselves are saying, okay, well, we can deal with this.
RAJAN -- So India will deal with it. It's not for the outside to deal with it. But let me try and say a couple of things. One, the book is full of examples of things - So India will deal with it. each of these things has been sort of affected by the government.
There have been previous governments also. And what is important is we have a lot of good news stories in India also. And it's important to see that the young people, the creativity, the kind of entrepreneurship they're showing, India could be a really important force for good. Now, you mentioned a couple of things. some people also argue that India democratized too early.
Before, you know, if you look at development time, when in per capita GDP, the country democratized, India's way before the UK, way before the US, way before, of course, the East Asian countries, all of whom democratized at later stages. once they'd become more developed. So maybe democracy was a disadvantage for India.
And we talk in the book about some of the advantages that China had in going the manufacturing route. When you know where you want to go, democracy can sometimes be a disadvantage because you've got to build consensus, you've got to take everybody with you. If you had a Lee Kuan Yew as your leader, the famous leader of Singapore, maybe you'd do one. But of course, there's also the possibility you get Mobutu Sese Seiko, who was the leader of Zair and who took it down a black hole. Either is possible. Authoritarian governments can be either very good or very bad, or sometimes just middling.
The problem I think for India and where it wants to go in the future, authoritarianism is very important – the absolute worst form of government. India needs a democracy, needs to strengthen its democracy.
Now, should one be worried, is the Modi government sort of undermining democracy? After all, we have an election. Yes, we have an election, but we have an election with the scales which are weighed in favor of the government. The government has jailed two chief ministers before the of the opposition before the election. There was a move by the tax authorities to freeze the congress party's funds, which fortunately the supreme court came in and undid. You see daily much more press coverage of government talk.
The election commission is really very, very reluctant to take action against hate speech from BJP leaders, simply because it would be going against the government. I mean, you can keep going on. This is not an election played with a level playing field. Nevertheless, it is an election. Hopefully every Indian, you know, will exercise their vote. And we will read what they actually sort of voted on. on June 4th.
But the trend is towards more and more undermining of independent institutions, of making it a much more authoritarian country with only one party and one leader in that party. And that's the absolute worst place for India to go if it wants to energize its young population to harness their creativity. to create many more sort of jobs that it absolutely needs, but also important to building trust.
Why don't the US legislators trust Huawei or TikTok? Because they fear the hand of the Chinese government behind these companies. If TikTok can have undue influence over US kids, might the Chinese government government sort of get some of that data, might it influence through TikTok U .S. kids to think in a particular way because they see certain kinds of video clips. I think that same thinking could happen with India on India's services.
If you are doing telemedicine, what kind of data are you gathering on American citizens, might you subject them to blackmail? The way to combat that is to say,
we're a democracy. We have checks and balances on the government. We have strong privacy laws. If the government ever wants to get into the private data that companies hold, it has to go through a judicial panel which typically doesn't give those permissions unless there's a crime involved. And that would reassure citizens elsewhere that Indian firms are good for it, and it can be relied on to (protect) data, and the government cannot pierce through it. This government wants to pierce through that, and that's why I think authoritarianism doesn't serve India well, that we need far better. The Supreme Court has said India needs much stronger privacy protection, and hopefully we will get that in the future, but it is not something an authoritarian government wants.
HAYS -- So in terms of the young people and what is happening there …Do you think that they're, again, as long, is this a kind of very pragmatic thing, which, you know, (their position is) if I can get a job, if I can, you know, raise a family, hen I'll put up with authoritarianism. as long as it doesn't impinge what I need to do, what I want to do. And I guess I'm asking this in a sense of, so does authoritarianism stand in the way of being an entrepreneur?
Is there some sense in which (authoritarianism) … will or could impede the kind of innovation(that is needed now)? And I know you've written in this book about it, you need to have entrepreneurship and creativity, and all those things need to be encouraged. Or is it something that you don't like, it's not good, but it's there and it's not gonna slow things down.
RAJAN -- So how does it affect the economics? That's your question. And here are three or four ways.
One, the government by suppressing criticism, which it does by suppressing any criticism in the mainstream press doesn't really hear the other voices, doesn't hear the real problems, doesn't know when it's going off track.
For example, you know, if you look at the pandemic and the deaths in the pandemic, the true deaths that the WHO estimates are between four and seven million. The estimates in India, the official estimates are more in the regions of India. ,000. We don't know that we had a really bad pandemic, except for people who were directly affected because people lost their lives. There is no inquiry into how our medical system did during the pandemic. That's bad because we don't improve.
Similarly, unemployment is a growing huge issue. You can hear it in every election interview. People are saying we want more employment, but if you look at a government white paper put out on the government's performance, the word unemployment is not actually mentioned.And that's suggestive of a government which doesn't actually hear and as a result doesn't have policies to tackle. What is the central problem in India today, which is our youth are not employed.
So that's where democracy would help. Criticism would help. it's not lone critic like me, it's many people saying, we need to make a change. Many of those people, brave people in India are shut out from the mainstream media, sent into some small corner of the internet because the government has told their employers, you shall not employ this person. So that's on the agenda. side.
Also, much of what India needs is bottom -up empowerment. People have to be able to ask for better services. That doesn't happen in an authoritarian government because authoritarianism percolates right to the bottom. Your local police inspector can put you in jail without too many questions being asked.
And what democracy does is empowers you. The local press, if you put in jail, starts asking questions and the local administration has to answer. So if your teacher doesn't show up at school, you can protest and say, why is the teacher not showing up?, without fear that you'll go to jail because the teacher is well -connected. So democracy also works bottom up.
But I would argue two other things.
One, the U .S. wasn't surprising. that the US and the UK were where the best vaccines were innovated? And that Chinese and Russian vaccines were much less efficacious, even though the broad underlying technology was well known. And I think that speaks to when you have an innovation race, a lot is innovated in these countries.
Of course, China is a great innovator on electric vehicles right now. but in terms of fundamental innovation, the U .S. still, you know, chat GPT + happened in the U .S. again, not a coincidence. I think democracy allows you the free thinking, the debate, which allows for innovation. And you can look through studies in history, which suggests that innovation happens in the free towns of Europe, not in Tsarist Russia. So that's, I think, very important to keep in mind.
But my last point, and this is reiterating what I said earlier. If you want trust in the rest of the world, if you want trust in the democracies, it helps to be democratic yourself, to have checks and balances, because people know they're not dealing with a government. They're dealing with a private sector and the government can't know its way into the private sector in that country also that you're doing business with. That would be a huge advantage for India over Russia and China, over even Vietnam. And it's important we don't lose that advantage.
HAYS -- RagHu, we've covered a lot of ground. Is there anything else that we need to cover? in this conversation? Again, this is a very, it's a big moment. That's putting it mildly for India, as all these thoughts, these challenges of all kinds are on the table. And it's all going to be expressed in this election result to a certain extent.
And again, so much of the comments people make, the analysis people do, they're pretty sure that this is, Modi will get that third term. Do you agree that's looking kind of like it's baked in the cake now?
RAJAN - I don't think it's baked in the cake. I think the playing field is tilted. So the opposition has a harder job, but I think they've come together. And after 10 years, people are asking, how much longer can you? say, wait for the goodies to come in the future? I mean, the Modi government has been very good in some aspects. It's built out infrastructure very well. It's created some construction jobs. It's also, you know, given direct transfers to people, food grains, cheap cooking gas and so on.
But ultimately, people are saying that's all very well, but I need a job, I need a good job, and I'm not getting that. So the key in this election will be can the opposition make the case that Modi's had enough time to create those jobs and hasn't done that?
How much longer are you going to continue believing him that he has ideas up his sleeve? Well, the Modi (government) had enough time to create those jobs and hasn't done that. how much benefits have you've gotten And, and yeah, we have ideas on how to do this for the future. So I still think it is possible, we may be surprised by the election results on June 4. Let us see.
What India desperately needs at this point, regardless of the identity of the winner is a strong opposition. Because strong opposition will make democracy work better. A weak opposition, which is what we've had for 10 years, has made it much less effective and has shown up some of the weaknesses in the Indian system of democracy.
Now, some of those will have to be fixed over time. We are too trusting of strong people at the center. And this was a design feature when India got independence,
when we needed sort of a strong center, today we don't need it as much. And so those will have to be changed. But I'm hopeful on June 4th, we have a reasonable result.
HAYS - RaghurAM Rajan, thank you so very much. In an enlightening conversation, we covered a lot of ground. the economics,
the politics, the big, big issues facing India now at such an important point in its history. And of course, the book that we were talking about, Breaking the Mold, India's Untraveled Path to Prosperity. Let's wish everyone in India well, and that’s what this election brings. And certainly, with people like you helping everybody understand what's going on I think that's definitely a big plus.
So, Raghu, thank you so very much.
RAJAN-- Thank you for having me.
HAYS All right. This is Central Bank Central. I’m Kathleen Hays.
Share this post