Former RBI Governor and economist Raghuram Rajan and economic theorist Rohit Lamba on their new book, trajectory of Indian Economy, and how India should not push its tiger warrior image to become an antagonistic superpower. The session was moderated by Udit Misra, Associate Editor, The Indian Express
Udit Misra: You are often seen as a leftist in India, which is exactly opposite to how you are seen in academic circles. What do you make of this understand-ing of left of centre or right of centre in India?
Raghuram Rajan: Economically, everybody’s left of centre in India, while I would be considered centrist to right of centre. I think, socially, I am left of the centre, in the sense that I would like as liberal a social structure as we can possibly get. I do believe that inequality is a huge problem that we need to deal with. The unequal treatment of different groups is a huge problem. Some of it is historical, some of it is new, and we need to deal with that. I also believe that most opportunities are obtained when there’s free access and competition, we don’t favour some big entities versus the rest, and we use the power of competitive markets. But to be able to use that power, you first have to get people there, which means you have to focus on health and education for everyone. If your population is not well educated, and healthy, how on earth will they develop? My philosophy is pretty straightforward.
Udit Misra: In your book, Breaking the Mould: Reimagining India’s Economic Future, you say ‘if we break the mould to follow a truly Indian way, our future could be one of extraordinary well-being within a couple of decades’. It’s eerily similar to what PM Modi says: that in the next two-and-a-half decades, we will become a developed country. What is the ‘truly Indian’ way?
Rajan: Ambition is great. So, I welcome PM Modi setting those targets. The question is, how do we get from here to there? What we’re worried about is: are our fundamentals okay to get there? How do we strengthen our fundamentals to be able to do that? And that means taking if not every Indian along, most Indians along. You can’t leave half of them behind and get the other half to the 21st century, because the ones that are still left in the 19th century are going to pull you back.
I was against demonetisation. I didn’t think it would be a useful thing to do. And I tried to explain why I didn’t think it was useful… The timing of the demonetisation was a decision from the top. It was not a decision made by the RBI
I also think that the pathway is: do we follow the old path, which is the low-skill manufacturing-led growth, and then move up the skill chain? Or do we recognise that the path has narrowed tremendously? One, because China’s already there. We’re competing against China, not against industrial workers, not against US workers, or workers in the UK, like China was when it started. The second problem is we are also competing against robots. A lot of automation is taking place, which is why this re-shoring is happening in the US. Third, the world has moved on and is no longer prepared for another China to come and send hordes of exports of goods into their country, because they already know what happens, there’s de-industrialisation. I don’t think it’s a bad thing. But I think they’re very resistant to something else happening like that. We have to find a different road.
Lamba: Aspiration is great, but just in terms of the basic math, how do we get to, let’s say, $13,000 per capita income, where China is at. We have $1,000-$2,000 right now, and to get to five times, if we are seriously thinking, one won’t be able to emulate the China path. If our aspiration is to be where China is by 2047, it is not obvious at all. It is a combination of three things — politics, society, and economics. That combination is what is going to give you the India way that we are imagining. One should not think of the combination of democracy and India being good at services as a problem. It’s not a bug but a feature of the India story. And what we would like to see is a little more of double downing on this feature, rather than considering that as a constraint the way certain policymakers are.
Udit Misra: China does not have an iota of the kind of democratic and political freedoms that India has. But hasn’t China shown exactly the opposite?
Rajan: In the path of growth it has followed till now, yes. But a lot of Chinese scholars, to the extent they can talk, are starting to say that maybe democratic freedom is important for the next phase of growth — which is ideas, creativity, intellectual property. That is what you’re shutting down in China today. And that is almost surely going to be a problem. Not for defence or other state-led initiatives. But it comes (into the picture) when you start talking about consumer-led innovation. In drugs (pharmaceuticals), video games even, China was, with its mixed economy, flourishing, until they started clamping down towards the end of Hu Jintao’s term. And now in Xi Jinping’s term. So, now, the scholarly voices are saying, look, when you say we need a better chip, and you put all the resources there, maybe we get a slightly better chip. But the question is, how can we keep innovating? And for that, we need more open dialogue. For example, there’s a lot of concern about AI; that China doesn’t want AI to give the wrong answer — which is that the party may be wrong.
The private sector in China has shrunk relative to the public sector in the last few years. Not surprisingly, Chinese growth has also started falling off considerably. They don’t want to let the market work, they don’t want to let ideas flourish. That will imply that China will peak. Even though they have fantastic universities now, they will peak relative to the US, because the US still has that freedom.
The state of women labour force participation in India is well-known and sad. Conceptually, there are both supply and demand factors. Also, there is an issue of cultural norms, which is hugely at play
Rajan: No. We’re saying a lot of work needs to be done to become an Apple, but the rewards of becoming an Apple are significantly larger than becoming a Foxconn. That’s one. Two, the mistake to make is to think there are no low-skilled service jobs. The biggest service job in India is that of security guard, which requires you to be awake and have some physical capability, but doesn’t require serious skill building.
Udit Misra: How much are the two factors — xenophobia in the western world in particular, and the rise of AI — capable of holding us back?
Rajan: Both are concerns. And that is why it almost puts a greater pressure on us to move up the human capital scale. Almost surely, what AI will do is create some displacement. Some jobs will be replaced. This will put an even greater premium on moving up the value chain, which is why we have to use AI. Look at who’s in charge of the companies that are at the forefront. Satya Nadella, Sundar Pichai, and behind them are a huge number of Indian engineers. Why aren’t we using the diaspora to get a march ahead? Let’s think 20 years ahead rather than think 50 years behind.
Anil Sasi: You mention in the book that India probably democratised early. Perhaps what you’re prescribing is to focus on manufacturing and clamping down on democracy.
Lamba: It’s just a fact, it’s not a moral judgement that when you are kind of an authoritarian or semi-authoritarian state, it is just easier to do manufacturing, with all the reasons that we all understand reasonably well. Raghu and I think India choosing democracy was a good thing. Now we have reached a stage where we are thinking that maybe we should turn the clock back both on polity and economy because that’s the model that worked for some other countries in the 20th century. It is both unfortunate and dangerous.
Rajan: The other important thing to remember is that ideas flourish in democracy. And to turn back on democracy, when ideas become the currency of the future, is just the most blind thing to do. It would be just sacrificing a future for an illusory past. We’re trying to capture the pathways of the 20th century, when in fact, we should be looking to capture the pathways of the 21st century. And so that is why democracy is really important. It’s not just that radical who’s protesting on the street. It’s also the radical who’s protesting in the lab and says, ‘I don’t believe your scientific theory’. It’s not a coincidence that a lot of these rebels in Silicon Valley had long hair. Look at Steve Jobs in his early days — long haired, hippie-style clothing, but he was really thinking thoughts that were out of the ordinary. So it comes as a package. You can’t say, I want you to be really obedient and never protest on the political side. But you will do extraordinary work on the intellectual side, you will be a creative artist, a creative director, and a creative scientist. In fact, history shows that creativity happens when there’s freedom. And that’s why turning the clock back on freedom is absolutely the worst thing we can do for our future.
Harish Damodaran: Whether it is IITs or agricultural universities, from the ’50s to ’80s, the governments invested in higher education which would yield returns after many years. But today, the voters are more transactional — money and hard infrastructure (expressways, the metro) appeal more. You’re talking about building human capital, the returns of which will come after 15-20 years. So how does one correct this?
Rajan: I would disagree in a little way, which is that look at what the Aam Aadmi Party has done in Delhi, right? It’s put education and healthcare as one of its big contributions because, in some ways, the question is, why does it do it? While some other states don’t, right? And I would argue that one of the benefits of Delhi is that it’s small. And you can see the effects quickly. I think governments feel impelled to make that change, because it’s much more decentralised. We need far more decentralisation to make that link between the changes and the outcomes much more transparent much more quickly. It is extraordinary how much development good education can do.
Rinku Ghosh: What are the challenges you see in women labour force participation?
Lamba: The state of women labour force participation in India is well-known and sad. There are both supply and demand factors. There is an issue of cultural norms, which is hugely at play. There’s this famous line that Chandra Bhan Prasadji, a prominent Dalit scholar, had said, “They sit in Ivy Leagues and say female labour force participation has ended. If you go see our villages, it’s a matter of pride that our women don’t have to work in the Thakur’s house.” I think what is worrisome for India is that women’s participation is not coming up. Even as we are growing, it’s either plateauing or not showing any signs of coming up.
Are we generating jobs that are women friendly? Take any survey, and safety is a huge issue. When the economy gets slightly more expanded, slightly more formalised, women have to travel out to work. This is a huge constraint in India.
Shalini Langer: You spoke about the Aam Aadmi Party besides having several interactions with Rahul Gandhi. How do you see the Congress’s economic plan? Is it any different from the BJP’s or is it a matter of perception?
Rajan: I haven’t seen a recent plan. I would like to see something which emphasises some of the things that the Congress has worked on in the past. The Congress’ focus on human capital has to be front and centre. They have been talking a lot more about democracy. I think that’s important at this time, but you need to put all that together into a broad plan for economic growth. Part of why we wrote this book is to put it out for other parties to see and say, hey, is some of this something we can think about and put in our plans? We want a dialogue to start.
Kaushik Das gupta: One of the criticisms of post-independence education has been investment in higher education centres of excellence. It’s only now that some southern states and now the Aam Aadmi Party, have started investing in school education.
Rajan: Just like democracy, which we arguably had a lot of even in our early years, and some people argue we had too much, we had too much higher education in our early years. We couldn’t employ all those people we were educating, and we exported a lot of them. But I do think this is the wrong time to turn our backs on either education, higher education or democracy, because we are just delightfully positioned for the world ahead. And that means improving the quality of higher education. Obviously, we need to focus on primary education because how do you get to higher education otherwise?
P Vaidyanathan Iyer: What was your time at the RBI like? How was your interaction with the government leading up to demonetisation? Would you have stopped it? What was your interaction with the Prime Minister to impose this?
Rajan: I had a perfectly cordial relationship — both with the Prime Minister and with Mr Jaitley (Arun). And even after exiting, we had that cordial relationship. You’re talking about 2016, which was the third year of my term. We brought in UPI at that time, which is now a tremendous success. Success has many fathers. I’d like to be one small father of UPI. We put in place the inflation targeting regime, which I think has stood in good stead during this time. We implemented the cleanup of the banks, which we started in 2015. After five years, it is finally paying off in that we have banks with clean balance sheets, which are willing to take credit risk.
I was against demonetisation. I did not think it would be a useful thing to do. And I tried to explain why I did not think it was useful. I asked my people, can we oppose it? And will our will prevail? And they said, ‘No, we cannot. The government can give us directions, and we will have to obey the government’. The timing of the demonetisation was a decision from the top. It was not a decision made by the RBI.
Sukalp Sharma: Do you see resistance in this government with regard to people coming into the RBI from outside the system? Do you think they are a lot more comfortable with somebody who’s from their system who might be a lot more pliant?
Rajan: Bureaucracy is much more comfortable. Partly because the RBI governor is usually a senior bureaucrat, and the Department of Economic Affairs secretary is somebody who was his or her junior earlier. The line of relationship is very clearly defined. With some of these outsiders like me or a Dr Urjit Patel, that line is much less clearly established. Some of the conflict is not between the establishment and the RBI, but between the bureaucracy and the RBI over something as petty as hierarchy.
Aakash Joshi: You spoke of the importance of political freedom and freedom to innovate. Three presidents of three of the most prominent US universities have been summoned to US Congress to answer for protests on campus. We see versions of that here, often around identities now. Do you see this as just a blip in the intellectual arc of the institution? Or is it something of concern in a more enduring manner?
Rajan: My view of free speech and universities is that I don’t think universities should have views. Universities should be neutral places. However, the faculty and students can have views, so long as they don’t preach violence. I draw the line when you’re preaching violence against somebody else. As our president at University of Chicago used to say, ‘Where is the safer place where you can have a dialogue than within the university?’ So you should be free to offer whatever views. They can be hurtful to others. But that’s where you build your sense of self worth. You debate, you fight ideas with ideas. You can say anything, provided, it doesn’t say, ‘I want to kill you, I want to kill this segment of people’. Anybody’s sentiments can be hurt by anything. But it has to be this person who preached violence. By that metric, some of our politicians will be in jail. But some others in jail will be let out. Because these actually did not preach violence. They just preached a difference.
Udit Misra: How do you see the Hindu Rashtra element — this whole push for another kind of country?
Rajan: As a pluralistic country, we are in the best position to attract the best talent. But 15 per cent of the population cannot be given second-class citizenship. Even if you forget morality, which I’m strongly for, we should treat everybody equally, not more, not less equal. Think about our place in the world. When we trumpet the fact that we are an apartheid state, how are we going to be able to show our face in the world? With that, I’m not saying that is what Hindutva means. But taking to the extreme of those followers who want to do that, I’d much rather see the peace and the justice that Ram proposed. I don’t want India to push its tiger warrior image, because that is going to create the reaction, that China already sees. It’s best as a power to tell the world… we’re going to become a cooperative superpower and that will pave our way more easily. Our founding fathers chose well at Independence. We were the alternative to Pakistan. We should not become Pakistan.