Which Policies Will Develop India’s economy?
Photo: People lined up to apply for jobs in India. Courtesy Wikimedia Commons
January 7, 2024
By Romar Correa*
Qualified economists within a government must be coy in their criticisms. In India, they must be silent. Echoing the economist Albert Hirschman’s “exit, voice, and loyalty” as three positions agents can take within an organization, it is only when they exit do they find voice now that their loyalty is not committed.
Last year, Raghuram Rajan, former Governor of the Reserve Bank of India (RBI), published an article questioning the contribution of Indian manufacturers to the value of Indian exports. It was co-authored with Rohit Lamba and Rahul Chauhan. Local enterprise is taken up with assemblage of imported inputs in the fabrication of final goods which are then exported to complete a trade circle, they claimed. The article, published in The Wire, apparently incurred the wrath of Indian government officials.
I will confine myself to the “amusement” and “dismay” expressed by Rajiv Kumar, former Vice Chairman of Niti Aayog, which formulates India’s economic policy. Writing in The Times of India, Kumar confuses microeconomics and macroeconomics. He finds the concept of value added, subscribed to by the authors, “self-defeating” and “vexing”.
Macroeconomics IS value added in a given year, and Kumar’s frustration reflects his ignorance/confusion. Since value added is a snapshot of an economy in a given period, Kumar’s recourse to “gestation lags” in the fruition of the production-linked incentive (PLI) scheme is disingenuous. To recall, the PLI was the harbinger of Industrial Policy which has been in the making for two years. In turn, both were reflections of a National Manufacturing Policy announced in 2011 according to which the share of manufacturing in GDP was to increase to 25% from 17% and create 100 million jobs by 2022. Neither of these goals were met.
We proceed to study an interview of Raghuram Rajan, who is back as a Professor at the University of Chicago, and Rohit Lamba, a theorist at Pennsylvania State University. The interview was conducted by Akash Singh, a college chum of Lamba. They discuss Rajan and Lamba’s book, Breaking the Mould: Reimagining India’s Economic Future, which was published last month (Price: hardcover Rs 602, $7.25; e-book Rs. 426, $5.10.)
There are two reasons for the sharp uptick in GDP in the first half of the current 2024 fiscal year, according to Rajan and Lamba. The first is government expenditure on infrastructure increasing markedly. The second is the ‘rising tide lifting all ships’ observation. Large economies of the world have done well in the quarter. India is a large economy and is part of the world. Ergo, India has done well. India was “lucky”, Rajan avers.
The infrastructure cited is roads, ports, toilets, bank accounts. Do these express the preferences of the Indian people? Investment in ports apparently ensure supernormal profits to the Adani Group, the monopolist in the business.
Unused highways and superfast trains are there for all to see. “Why are Indians shunning the country’s shiny new metro lines?” queries an article in the Economist last month. “Costly fares, inconvenience and poor planning play a role” is the answer. “Not one of India’s metro rail systems has achieved even half its projected ridership.” Taking the metro to work involves walking, buses, shared autorickshaws and more walking.
A second reason is that metro systems in India save time only on trips of 10 km or more, but around three-quarters of trips in most Indian cities are under 10 km, and half are under 5 km. Bus services are far cheaper and more flexible for route-planning than metros.
Similar problems persist with other infrastructure achievements. Several studies have reported the non-abatement of open-air defecation, with accessible toilets used for storage; bank accounts in form but no substance. Income must be earned for consumption to take place with savings deposited in banks. Clearly, social cost-benefit analysis has not informed these infrastructure expenditures.
Rajan and Lamba dichotomize the production process into “brain’ and “brawn” and vote for the former for India. Apple illustrates the first, “high value” in a chain, Foxconn the second, “low value” in the chain. Rajan traces a topography with Apple at the peak of the hill and Foxconn in the dale with nothing in between.
However, the production process is best conceived of as joint-value input-output chains or a hill connecting mountain top and valley. It would be as fallacious to consider the informal and formal sector in India as independent. They are connected by innovative intermediate inputs supplied by the former to the latter. From many accounts, the latter price gouge the former in an exploitative relationship.
Rajan cites the $3 trillion value of Apple and the $50 billion value of Foxconn. I resort to a Google search for my preferred statistic and come up with the total number of employees in Apple in 2023 of 1,61,000, a number that has been decreasing over the past few years. In 2022, the total number of employees in Foxconn was 767,062.
The following sequence, noted by Rajan and Lamba, is elitist and ungrounded. Ideas are generated ‘outside’. Thereafter, their applications are a problem to be solved by applied scientists. When successful, they are bought by firms. The sequence ends with worker bees buzzing around unimaginative physical routines. In fact, innovations in production processes arise from working in teams. The outcome of long hours doing the same thing is ‘learning by doing’, entrepreneurship on the shopfloor.
Rajan and Lamba are consistent with their model, with education consisting of top-class institutions of higher education being set up in India. They would be the ideas factories. However, an economy comprising of individual unit entrepreneurs is nonsense. For every single idea that fires and achieves success, thousands are doused in the marketplace.
The capital demands of AI is staggering. It is naïve to believe that competitive forces will prevail in India when the examples cited by Rajan in America are oligopolists. We must conclude that, for India, he implicitly endorses the American model of venture capital-private funding and promoting massive monopoly/oligopoly enterprises.
To their credit, Rajan and Lamba sweep away the rubbish of Indian authorities’ forecasts. People should not be blindsided by poppycock like India becoming a US$ 5 trillion economy by 2047. At the currrent 6% growth rate, the size of the economy must quadruple to get there. The country wants to achieve developed economy status in a decade. It took China two decades of “spectacular growth rates” to earn that status. With the current per capita income of US$2,500, India’s per capita income will be US$10,000, short by US$3,500 of that of China.
Middle income status is all that India can aspire to. Also, policy makers should worry that the demographic dividend is being whittled away, with the problem of ageing staring the country in the face. The average reproduction rate of the population is decreasing. Old age care is especially frayed in the threadbare cover of social security in India.
More importantly, it is “shameful” that 35% of Indian children are malnourished. The sure prospect, therefore, is that a third of the workforce in India will be physically- and psychically-stunted. This data is known but “swept under the carpet”. A democratic regime is one that shares this blight with the people with the resolve to solve the problem in five years.
Photo: Raghuram Rajan, University of Chicago
The wealth of nations over time is described by the transition from agriculture to industry to services. Forces are at work behind the backs of people and policymakers. Manufacturing was heralded for welcoming the rural workforce ejected from the countryside with its dwindling opportunities.
The stages theory of development is long-term. Rajan’s framework is short- to medium-term (“near-term”). In the short run, all policy makers are alive. RR glosses over the distinction and is “shocked” and “astonished” about the role played by agriculture in the economy. Scholars have long recognized that both the agricultural and industrial revolutions in India are uncompleted.
An assault on agriculture would entail no less than “standing development economics on its head” as Amit Bhaduri states in a recent note. Attention should be directed at increasing the productivity of small-scale agriculture. Specifically, the task is to increase the productivity of land, not of labor, says Bhaduri. Land must be generously defined to include subsistence and commercial produce, poultry, fishing and animal husbandry; forests, rivers, medicinal plants in water bodies, marine products of the commons.
In sum, what is the primary economic task to which the Indian government should be devoted? Rajan and Lamba join everybody else in the incontrovertibility of employment. Zico Dasgupta and Amit Basole provide an especially clear statement of the jobs crisis in India.
Usually, hands are waved towards market forces to deliver. No serious economist subscribes to the notion of rarefied markets even as a first approximation anymore. What can we learn from history about the direction and employment of resources? Rajan and Lamba and the Indian government tout ‘mission-orientation’ without elaboration.
“Mission-oriented’ technical change is the subject of the pioneering scholarship of Mariana Mazzucato at University College, London. An alternative evocation of her work is the ‘entrepreneurial state’. Governments initiate ‘directed technical change’, in the direction of job creation in the case of India. Markets are created where they are needed and ‘missing’. Government institutions, notably in America, have set the conditions under which innovations could flower.
Relatedly, Dani Rodrik at Harvard is at work with ‘modern industrial policy’. The connotation of the term includes agricultural policy and services policy. The share of labor in world income is abysmally low with wages lagging labor productivity and the share of capital income rising. Spheres in which employment and productivity can be increased must be identified by the state, writes Rodrik. The private sector will fall short with its moods and myopia and focus on profits. Competition must be generated and fostered.
Risks arising from climate change investments are gargantuan and only states can embrace the extent of the imponderables and roll with the punches of dead ends. Otherwise put, mechanisms must be devised for states to cover the downsides but partake of the upsides, socializing both risks and rewards.
Photo: Rohit Lamba, Penn State University
Money is not part of the discussion but the model can only be enriched by connecting it with community banking being rediscovered in different parts of the world.
In a new definition of conditionalities, the focus is on repeated interactions between a government and a firm, whereby the government provides a payoff to the firm in the form of loans or equity investments, procurement contracts, training, infrastructure and so on in return for the firm orienting itself towards a defined public purpose.
As an illustration of a subsidy out of sync with any policy, Rajan and Lamba report a subsidy to Micron, an U.S. computer chip manufacturer, of Rs 16, 500 crores ($2 billion) to fabricate chips in Gujarat, the home state of Prime Minister Narendra Modi. As a comparison, they note that the total budget of all institutions of higher learning in India is Rs 44, 000 crores ($5.3 billion). In other words, the subsidy to one company is a third of the education budget. The total number of jobs to be created by Micron is five thousand.
The Government of India is remorseless in its optimism and grant of subsidies … An additional Rs 10, 000 crores in subsidies, according to a report in The Economic Times, is aimed at creating a supportive ecosystem for the chip packaging units being set up by the likes of US-based Micron as well as Tata Group and Kaynes Corp which mark “the first leg of India’s ambitious journey towards becoming a global hub for electronics manufacturing and design.”
The balance between state autonomy on the one hand and a government’s embeddedness in the production process on the other is not easy to strike. The success of South Korea on the one hand and the relative lack of success of India and Brazil on the other is not due to policies but in learnings in the industrial policy of South Korea. The additional reasons are unwillingness of major domestic and foreign investors to risk investing the hundreds of billions of dollars of capital required; lack of access to advanced technology; and few, if any, workforce training programs. Also, change was easy to manage in South Korea, being a relatively small country with a population (51 million) less than a quarter that of Brazil (214 million) and less than 4% of India’s 1.4 billion people.
Rodrik is a keen observer of India. An example cited by him is the partnership between the Haryana government and Ola and Uber, since 2018. The government cleared obstacles in the path of the ride-hailing service providers, shared data about potential employees, and organized job fairs on the clear understanding that the firms would create a reasonable amount of jobs. The contract is implicit allowing for modifications based on changing circumstances. In less than a year, over 44,000 jobs have been generated for Haryana’s youth.
Rajan is cheery about rising digitalization in India and takes pride in UPI (Unified Payments Interface) being developed under his tenure. 95% of all payments run through nonbanks, he exults. Rapidity is a desirable feature in payments mechanisms. But a deep dive raises questions about the implications of the success of fintech for banking.
‘Unbanking’ is growing rapidly in India. The word is devised to distinguish it from financial disintermediation because the connection between nonbanking financial intermediation and output and employment is predatory.
‘Unbanking’ means commercial bank margins are being squeezed to death. On the one hand, regulatory rings around lending get tighter; on the other, seducing borrowers gets costlier. Nonbanking financial intermediation means financial innovations escaping the eye of the RBI and SEBI (Securities and Exchange Board of India). Commercial banks and the central bank (RBI) with which they are organically connected are the originators of the capital to fund the growth and development process in the Indian economy.
Rajan’s claim to academic fame is his scholarship in banking. So, his silence on the negative causal connection between the modern dynamics of money and finance is disconcerting. Fresh looks at bank nationalization, unlearning the old and learning anew for the purpose of directing credit being pondered upon in different parts of the world, are welcome.
The interviewer’s last shot to Rajan and Lamba was demonetization. It is worthwhile to recall that demonetizations in history are often pushed by hyperinflation where the value of the currency in the morning was not worth the paper it was printed on in the evening. They were not unexpected. Rajan answered that while he ran the RBI, the central bank had responded to a government query on demonetization with a note elaborating “pros and cons”. I would have asked Rajan about the pros.
* Romar Correa retired as the Reserve Bank of India professor of economics at Bombay University.
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