Alternative growth path

Raghuram Rajan's idea must be debated

As India recovers from the disruption caused by the pandemic, steering the economy to a higher sustainable growth path will be the biggest challenge. The fact that the Indian economy was slowing rapidly even before the pandemic, and the possibility of returning to similar levels as quarterly projections for the next fiscal year suggest, will not help. It is, thus, critical for policymakers to assess if India needs to do something different to attain higher sustainable growth in the medium term. The pandemic has affected jobs, particularly in the unorganised sector, which may not come back in a hurry. India’s labour force participation has declined and the employment ratio is much lower than the global standards. The Indian economy was not generating jobs at the scale required, and the pandemic-induced disruption has only worsened the problem.

The government is increasing infrastructure spending to push growth. It has also announced production-linked incentive schemes in various sectors and steadily increased tariffs to encourage domestic production. It is hoped that this will increase output and growth, create jobs, and boost exports. Several economists have expressed reservations about extending protection and incentives to domestic producers. Such ideas didn’t work for India in the past. Besides these issues, former Reserve Bank of India governor Raghuram Rajan has added other dimensions to the debate. In a recent article with economist Rohit Lamba, and elsewhere, Dr Rajan has argued that the idea of becoming a manufacturing export powerhouse like China, which is the vision emerging from the Budget, may not be feasible for India. Among other things, China achieved this by suppressing wages and keeping the interest rate paid to households low. India as a democracy may not be able to do a lot of what China could, and they are not desirable either. Land acquisition to build infrastructure, for instance, is difficult in India.

So, what can India do? He suggests that India should indeed build infrastructure and increase openness. While manufacturers can focus on global markets, India should strengthen its position in services. The pandemic has increased the acceptability of high-value services in the digital medium. Since India has proven strengths in services, capitalising on them could help create more jobs. India has a track record in the information technology sector, and the scope of services can be expanded in other areas. The idea must be debated in detail. In this context, among other things, having strong data protection laws would be critical. No individual or firm would want to deal with entities in a country where data is not secured.

Expansion in activity and job creation in the services sector will undoubtedly help. However, it may not be at the scale required to meaningfully address the kind of employment challenge India is facing. There is no escaping from the fact that India needs to create low-skill manufacturing jobs at scale, which it has not been able to do thus far. Protecting domestic businesses from competition will continue to hurt. Further, in order to gain a greater foothold in diverse services, India will need to invest heavily in education in the coming years, and it’s not clear how this will happen. But India will need to be mindful to not lose sight of manufacturing even if services are doing well.