It’s a mixed victory for Indian Prime Minister Narendra Modi. While the Bharatiya Janata Party leader hoped to win nearly 400 seats, Modi and his coalition secured only a narrow majority with around 290 MPs. The Prime Minister, however, intended to take advantage of an economic report which he has continued to praise and which many consider positive. A strong symbol, India became the fifth economic power in the world in 2022, overtaking its former colonizer, the United Kingdom.
In Breaking the Mold: India’s untraveled path to prosperity (Princeton University Press), economist Raghuram Rajan takes a more nuanced and critical look at Narendra Modi’s economic record. For L’Express, this former governor of the Reserve Bank of India and professor at the Chicago Booth School of Business explains why the development strategy advocated by Modi does not allow the country’s full economic potential to be fully exploited.
L’Express: The Indian economy could soon overtake those of Germany and Japan and enter the top 3 in the ranking of the world’s major economic powers. Yet you argue that India should do better. What do you mean ?
Raghuram Rajan: India is a young and poor economy, with a per capita GDP of around $2,400. Poor economies can grow faster by catching up, and that is what is happening in India. Under Modi, the country has experienced catch-up growth, with the development of infrastructure, roads, bridges, ports, etc.
However, despite respectable growth of 6 to 6.5% per year, India faces a very high unemployment rate, especially among young people, who struggle to enter the job market. This indicates that current growth is insufficient to provide jobs for all. And in fact, if Indian growth is a reality, India should and could do better.
In your opinion, the strategy of Modi and his government is to try to copy the growth model of East Asian countries. What is it?
The growth model of East Asian countries is very well established: they developed thanks to exports of manufactured products. As they develop, they produce increasingly sophisticated goods and move up the value chain, leaving the manufacturing of less complex products to other countries.
This model worked perfectly until the arrival of China in the manufactured goods market, which produces both very sophisticated and less sophisticated goods. For example, in the textile, clothing and leather goods sector, Chinese companies are extremely competitive.
Why do you think this strategy is not the right one for India?
What made this strategy successful for East Asian countries was that their competitors were rich Western countries, where labor was expensive. They had a major competitive advantage: their cheap labor. Today, India is in direct competition with Chinese, Bangladeshi, Vietnamese labor…
The other difference is that the West has become more protectionist. More and more Western countries want to retain part of their manufacturing industry and, if they have to buy abroad, they favor nearby markets. Europeans are turning more towards Eastern European countries, Americans towards Mexico, Asean countries (Editor’s note: Association of Southeast Asian Nations) towards Vietnam… India is not close to any of these blocks.
Modi and his administration are doing everything they can to promote manufacturing, for example by offering huge subsidies for companies to come and set up operations in India. But for all the reasons I’ve explained, it doesn’t work: the share of manufacturing jobs in the economy has remained relatively stagnant over the past forty years. India must find a new development strategy, and that is the whole point of our book Breaking the Mold.
What would this new development strategy be?
Rather than persisting in its manufacturing strategy, India should instead shift towards a strategy based on the development of a qualified service economy. To do this, it must invest heavily in improving its human capital, because at the moment only a fraction of Indians have the training and skills required by Indian and foreign employers.
Public money which, until now, was invested in subsidies where redistribution by the State could be invested in training and apprenticeship, in order to increase the quality of the Indian workforce, and make it more attractive on the market. Since the pandemic, it is in the field of more qualified services, which are recruiting massively, that Indians have the best chance of finding opportunities. And increasingly, Indian lawyers, Indian consultants, Indian doctors are providing services remotely. There are even online yoga classes! There is therefore great potential to develop in these remote services.
Of course, this will not give employment to all Indians, but it could help develop an important sector of the economy. There are already examples of success. For example, JPMorgan employs 3,000 lawyers in India.
How do you explain this lack of attractiveness of so-called qualified labor?
India has considerably developed its higher education in recent years, but the quality of this education is not always up to par. There are very high-level universities that train highly qualified and highly valued students on the global job market. However, there are also a large number of average to mediocre quality higher education institutions that produce students who earn degrees, but whom no one wants to hire. Most often, the gap between their skills at the end of their studies and the demands of the market is not that significant. But not all employers are willing to invest in these students to catch up.
Some companies have done it, and successfully, which proves that the potential is there, it just needs to be exploited correctly. It is for this reason that I think India should invest in training and apprenticeships to make these students more attractive in the job market.
Concretely, what should be done, beyond training and apprenticeship, to develop the qualified service economy in India?
If India wants, as I advocate, to concentrate on the export of qualified services, it must invest in its strengths. Its demographics, first of all. A large population can be a real advantage, provided it is educated, healthy and well-fed. To do this, we must first improve public services. This does not necessarily have to go through the State. Whatever system is put in place, Indians must have access to childcare, health and education services that are accessible and of quality.
Another fundamental point is the quality of our democratic life. The industrialized countries to which we will export these services want to be sure that they are buying from a country that will respect data protection, privacy… You will never see a French person buying medical services from a Russian or Chinese supplier, because the consumer would be rightly concerned about the uses that could be made of its data. But if India could assure its partners that it is reliable on these issues, then it would be a trustworthy supplier. In this sense, the election results give me hope.
How do you analyze this mixed victory of the Bharatiya Janata Party?
It should be remembered that the Indian economy is doing relatively well. If we look at growth over the last thirty years, it was more than 6%, which is honorable. But many Indians feel they are not seeing the fruits of this growth, largely because of high levels of unemployment. Young people are, more than other categories of the population, dissatisfied with the policies of the Modi administration.
For a long time, government economists claimed that the problem of unemployment was not a problem. The Indians, through the election result, tell us the opposite. More generally, this election reminds us that economic frustrations always end up, at one time or another, being expressed.
How do you explain that these frustrations are expressed so late?
Until now, the Modi administration has managed to contain these frustrations through a strong “welfare state” policy, for example with free distributions of cereals. And the government has distracted Indians a lot from economic issues, for example by insisting on the fact that, thanks to Modi, India has regained a certain international stature. Modi also, even during the campaign, largely exploited community tensions by playing on the fear of minorities…
“We can make as much propaganda as we want, after a while the reality of daily life imposes itself.”
But the election results in a state like Uttar Pradesh, with great social and cultural diversity, show that these strategies have their limits. We can make as much propaganda as we want, after a while the reality of daily life imposes itself.
Should we understand that you are optimistic?
Our goal is to put these ideas in the public space so that they can be debated. Today, having government officials defend and justify subsidies to manufacturing industries is a good start. This means that they are held accountable, as must be done in a democracy, and that Modi’s development strategy is at least discussed, if not contested.
I am pleased that more and more Indian editorialists are starting to talk about the fact that India represents 5% of global trade in services compared to less than 2% of manufacturing… This helps show people that there is another path than that traced by this administration. In addition, the world is watching closely what is happening in India, because with environmental issues, we cannot afford to have a second manufacturing power like China.
Raghuram G. Rajan, Rohit Lamba, Breaking the Mold: India’s Untraveled Path to ProsperityPrinceton University Press, 2024, 336 p.
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