 "Raghuram Rajan")
Former Reserve Bank of India Governor Raghuram Rajan on Tuesday praised the “wise” Indian voters for electing a strong Opposition in the Lok Sabha elections 2024 and labelled the development a “win for Indian democracy and a win for the economy”.
“India needs to change its economic course. That is less likely if the Bharatiya Janata Party wins with an overwhelming majority because the party will see victory as an affirmation of its policies,” Rajan said in a May 28 article attached to his LinkedIn post.
The BJP-led NDA won 292 seats in the elections, in which the saffron party managed 240 seats and failed to secure the majority mark of 272 seats, which it had comfortably won in the 2019 elections.
“Conversely, if the election produces a strong opposition, no matter its identity, India has a fighting chance of securing the economic future its people desperately want,” Rajan said.
Rajan credited Prime Minister Narendra Modi for having advanced the Indian economy in his 10-year tenure, however, pointing out that the Indian economic growth has been a “mixed bag” for the average Indian.
Raghuram Rajan’s key takeaways on Indian economy under Modi:
1. “When China and Korea were similarly young and poor, they employed their growing labour force and consequently grew faster than India is today. India, by contrast, risks squandering its population dividend, Rajan said, adding that the joblessness contributes to another problem: “a growing gulf between the prosperity of the rich and the rest.”
2. He praised the Modi-led government for advancing India’s physical and digital infrastructure, and space missions, however, pointed to many ‘flaws’ in the administrative policies of the government.
3. “Perhaps most concerning is the government’s attempt to kick-start manufacturing through a mix of subsidies and tariffs — a growth strategy modelled off of China — while neglecting other development paths that would play to India’s strengths. The Modi administration has, in particular, underinvested in improving the capabilities of the country’s enormous population: the critical asset India needs to navigate its future.”
Rajan on India’s ‘jobless growth’
4. While noting key accomplishments including free food grains scheme, expansion of roads and rail networks, inflation targeting framework, new bankruptcy law among others, Rajan pointed out that the growth benchmark for India cannot be the developed, ageing countries (which make up most of the G-20) but “the growth of large, successful emerging markets when they were at India’s level of per capita income.”
5. India’s inadequate pace of growth is most clearly visible in the lack of good jobs. "The working-age population’s share in India is increasing. But it is at risk of missing out on this population dividend because it cannot employ them adequately," he said
Private sector under the Modi government
6. India has not been kind to the MSME sector, which is the primary source of private sector jobs, he said. Referring to the demonetisation of 2016, Rajan said that its impact coupled with the GST reforms “altered the economics of these businesses.” He further attributed the Covid-19 pandemic behind denting the employment landscape of India as private enterprises went out of business.
7. The growth of larger firms is the reason the country’s GDP continues to tick up but they “generate far more profits than they do employment opportunities.” Rajan further noted that the rich Indians are doing exceptionally well. “In the last fiscal year, for instance, Mercedes-Benz recorded its highest-ever sales in India… but middle-class, lower-middle-class, and poor Indians are hurting.”
“Household savings have declined and household borrowing is at an all-time high. With uncertain domestic demand, private investment to GDP is below where it was in 2014, at the beginning of the Modi administration,” he said.
8. “Even if the government’s strategy attracts more manufacturing to India, it will eventually run up against the reality that the world simply does not have enough consumers to accommodate another China-sized manufacturing powerhouse, especially as countries everywhere put up tariffs to protect their producers,” he said and pointed towards the woes of the Indian workers in manufacturing, whose total share, he noted, “has not gone up over the last decade.”
‘Need departure from the manufacturing fetishism’
9. Rajan also pointed towards the "wrong" strategies of the government such as $2 billion in capital subsidies to the US company Micron to set up a chip plant in Gujarat that is estimated to create only “5,000 jobs.” “Education and training are exactly the sorts of services the Indian government should be spending more on. Doing so would enhance the quality of India’s human capital.” He suggested spending on training and apprenticeship programs.
10. “India now accounts for around 5 per cent of worldwide trade in services but less than 2 per cent of manufacturing. An economy led by services exports would follow a very different path from the manufacturing-led-exports path the government desires. But the world has far more room for the former. A service-providing India would also be more sustainable for the climate than an India competing to make global manufactured goods cheaper,” Rajan said, emphasising on the need to boost the key raw material: India's human capital.
