Chicago Booth Review Podcast Can India’s Economy Break the Mold?

Raghuram G. Rajan: India has actually very few people at the local level compared to the US or China. Very few government bureaucrats. We are saying send funds, functions and functionaries down to the local level. But given the size of India, 1.4 billion people, you need that third level to make government more responsive. So I'm not saying more government in the sense of more rules and regulations, more sensitive government to the needs of the people.

Hal Weitzman: With a population of 1.4 billion. India is the world's biggest democracy and already one of the world's biggest global economies, but it still has huge potential to grow its economy. So how should India grow? And what does the country need to realize the potential of its human capital?

Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. Chicago Booth's Raghuram Rajan was the governor of the Reserve Bank of India from 2013 to 2016, and given that experience, his views on the country are widely followed. In his new book, Breaking the Mould: India's Untraveled Path to Prosperity, he addresses what he sees as India's central economic challenge, shifting from assembly line manufacturing to high level manufacturing and selling direct services to the rest of the world.

In other words, avoiding China's economic path of being a workshop to the world and instead charting a uniquely Indian trajectory that builds on the country's democratic culture and its knowledge of the English language. In the book, he outlines three measures that will help India build that path, decentralization improving the quality of education and encouraging entrepreneurship and innovation.

I sat down with Rajan for the first of two conversations about the new book. Raghuram Rajan, welcome back to the Chicago Booth Review Podcast.

Raghuram G. Rajan: Thanks for having me.

Hal Weitzman: We are here to talk about your other book. You've been very prolific, Raghu. You've got another book out because last time we talked about your central bank book, but you now have a very exciting book about India, which has already been published in India, and you're now bringing to a US audience. And the book is Breaking the Mould: Reimagining India's Economic Future, which you've written with Rohit Lamba. What is the problem that you're trying to address that motivated you to write this?

Raghuram G. Rajan: Well, it's really the fact that India doesn't have a vision of how it's going to grow. It has role models, a China, which went through manufacturing export led growth, and of course every Asian country went through that. That was fast growth. And then there's the really slow growth, which the US, the UK, all other developed countries did during the 19th century.

But what happens if that manufacturing path is sort of played out? There's so many obstacles now for manufacturing-led growth, especially for a country of India's size. Moreover, India's not competing with the United States or the UK where your workers are much cheaper so you have some advantage there. You're competing with China and with Vietnam, where the workers are as cheap, but they also have plenty of infrastructure. So as a late developer, what is India's path? And we were afraid that our politicians were basically saying, "We want to be like China." And not realizing that that Chinese path is basically played out.

Hal Weitzman: And you say that we don't want to be a faux China. There are plenty of those around already. You talk about India missing the manufacturing bus. India should compete for the future rather than for the past. We've got to pivot from brawn to brain. What are you actually... It sounds great. What will it actually take to do that?

Raghuram G. Rajan: What we're saying is, there's a temptation, therefore today to invest hugely in two ways. One is good, which is infrastructure. India needs better infrastructure, roads, airports, trains, whatever. But the second is to pay companies to come manufacture in India. Lots of subsidies. In a sense, an imitation of what the US is doing with its industrial policy. Let's try and get chip manufacturers to come with enormous subsidies. Let's basically subsidize our way to building a sector. And we think this is not the right way because where India desperately needs to invest is in human capital and it's at every stage. It is not just at the stage of high quality university graduates, which India has a fair number of, but needs many more. It's at the level of the schools, where in fifth grade, 50% of the kids can't do second grade math. And if they can't do it, they don't absorb what's happening in their grade and they start dropping out.

And India has got every kid into school, but hasn't kept every kid in school. The dropout rate tends to start increasing substantially. If you want to be a close to first world economy by 2047, a hundred years after independence, which is what the current government has set, you have to recognize it's very hard to get there. If today your kids have a malnutrition rate of 35%, they're going to be there 20 years from now, 25 years from now with stunted brains that's going to be 35% of your workforce.

How on earth do you expect to become a developed economy with that level of impairment. But also impairment in terms of the schooling that we just talked about, let alone colleges. So, we need to upgrade our human capital tremendously and then everybody else will come. So what we're sort of pointing to is misplaced priorities. Don't bribe the rest of the world to come here with these funds, spend those funds on improving healthcare education, even access to finance, improve your human capital.

Hal Weitzman: Is it not happening just because the payoff is so much further out in the future and people want immediate, politicians want to cut ribbons and open new initiatives and that kind of thing?

Raghuram G. Rajan: Well, you hit the nail on the head. The problem is India is a very centralized country, centralized at the center, but also within the states. The state of Uttar Pradesh has 240 million people. That's two-thirds the size of the United States. But the United States has 50 states within the United States and within each state there are municipalities, cities and so on, all of which are self-governing. Uttar Pradesh is governed from Lucknow. And yeah, there are districts, but they're not as powerful as US counties and so on.

So the point is that if you're trying to run something from there, it's far easier to do freebies, which you get associated with. I gave you a thousand bucks per household. And see my face? It's me. You're getting it from, rather than focus on improving the quality of the local school, which takes a long time and the many slip between the cup and the lip. You start the process in the state capital. By the time it reaches the district or the local level, a lot can have changed.

So you don't have local mayors who say, "I'm going to make my name by improving the quality of local schools." That doesn't happen as much. And that's one reason why our politics is much more focused. We just had a state election much more focused on giveaways than on really changing the capabilities of our people.

Hal Weitzman: Okay, let's talk about what you want to do differently. So you talk about three kinds of reforms in this book, governance reforms, reforms to human capital formation. You've talked a little bit about that and reforms to create more of an environment for innovation. So let's talk about the two we didn't talk about very much, governance and innovation.

Raghuram G. Rajan: Well, so just like every US president has been the education president since I think Gerald Ford, everybody talks about education in India. But I think the problem with education is precisely what we just talked about, which is government is too centralized. And government-run education is not responsive to the needs of the people.

So one example we cite in the book is of one sort of state, which is very decentralized in some ways, which is the state of Delhi. Delhi became a state, it's essentially a city. So the chief minister of Delhi is like a mayor of a town. It's a big town, 20 million people, but it's still a town. And so, they can actually get a lot of benefit by improving the quality of schools and hospitals. And they've done that. And they've been elected strongly. So what we're saying is the second leg, which you said we've just talked about education. Or more generally, human capital is possible only if you fix the first leg. You need to decentralize governance. You need to make it more responsive. You need to allow the protests of people when they get poor quality to be heard and not those people sort of put away in jail because they don't have connections to the right people. So you need a-

Hal Weitzman: I guess to put the other point of view, it sounds like what you're proposing might be construed as more government. You might say what you want is less government. India is very bureaucratic. What we want is just government get out of the way.

Raghuram G. Rajan: What we're saying is decentralization. India has actually very few people at the local level compared to the US or China. Very few government bureaucrats. A lot more bureaucrats in the center and the state level, not at the local level. So government capacity is very limited. We are saying send funds, functions, and functionaries down to the local level. India didn't have a third level of government. It was brought in the 1990s through constitutional amendment.

But given the size of India, 1.4 billion people, you need that third level to make government more responsive. So I'm not saying more government, in the sense of-

Hal Weitzman: Spread it out more-

Raghuram G. Rajan: More rules and regulations. More sensitive government to the needs of the people and the people being empowered to hold government to task, which doesn't come just from elections. It also comes from being able to walk into the office of the local district official and say, "Look, you're not doing your job. Here's what you need to do to make things better." And that requires a more democratic country. So we are sort of emphasizing more transparency about what government does, more information, more right to criticize. Those are all important for India to work out well.

And that would enable the second aspect of it, which is better healthcare, better education. Of course, we in the book talk about programs that can work and offer some examples of things that are working. India needs so many good schools. How do you get good schools when it takes 20, 30, 40 years to build in the culture, etc. for a good school? Well, India could benefit from really programmed schooling, and that's an innovation which is taking place in Africa, which is also taking place in India. So this school we visited, for example, has every part of the curriculum down to a T, including videos that'll be shown in the beginning of the class. The questions that the teacher will address and the homeworks the teacher will give at the end of the class. It's all programmed. 50,000 lessons are something they've put together. And they now have close on half a million students in the schools.

This is mass education, but the quality, it's not as spectacular as a school with high quality teachers who have the freedom to teach what they want. But it's better than your average school with average teachers because it delivers a structured program. So that's an example of an innovation which can bring high quality teaching to a lot more people. And of course with AI, with the ability to provide private tutors to each kid in a class, you can think of the possibilities. They become spectacularly large. We need to do far more of that. But again, start with governance. Focus on how you improve human capital.

And that leads to the third point, which is how do you make it possible for people to start enterprises? And this way, your point about India being overly bureaucratic comes in. Yes, we have too many rules and regulations, but it's not just rules and regulations. Where are the strong universities that generate the ideas, the patents? I talked to an Indian entrepreneur who's very famous, Hamied, Yusuf Hamied, who did the $1 a day AIDS package medicines, which the US company said was not possible. He did it. But he says, "We can do me too generic products. We can't do the innovation. Even in the US, pharmaceutical firms don't do much of the innovations done by either small firms or universities, and they buy it and then market it. We could do that, but we need the Indian university system to start creating those patents and so on."

So that's number three. If you want to be an ideas economy, you have to start generating those ideas yourself, which means much stronger universities. We don't have a single university in the top a hundred, though we have a lot of universities that could be that. And we have a huge diaspora, lots of Indians across the world who could come back and teach if they were given a reasonable deal, much like the Chinese did. But India could draw on its diaspora, but also could draw on a whole lot of people who want to see what India is. If we could continue to be an attractive nation and draw all those people back, we could do a lot on the innovation.

Hal Weitzman: Well, what is uniquely Indian about all this? Because it seems like a lot of the recommendations would work, not maybe the one about the states devolving down power, but a lot of this would work in many places, many developing countries. And you and I have talked about Latin America and how Latin American countries have been saying this for decades and there just hasn't happened. What haven't they done and how is this what you are proposing different and uniquely Indian-

Raghuram G. Rajan: Two or three things. One, I think the environment for this kind of, so what we are proposing is move away from low-level assembly line manufacturing to either high-level services aimed at manufacturing, high-level manufacturing or direct services to the rest of the world when you're talking about exports. That's a different ballgame. A lot of that has been enabled in the last few years.

For example, the pandemic allowed Indian consultants now to offer their services across the globe, Indian designers to do that. So human capital has suddenly seen the market for its services expand tremendously, and I think that is something that has changed. It has changed for other countries in the world. India has an advantage. We speak English. And we have a lot of people speaking English, which is going to be a benefit in what's going to happen. The other thing that I want to emphasize, and this is part of what we're trying to emphasize in the book, India has a tradition of democracy.

It goes up and down. But this is a case for pushing it up again, for continuing to strengthen democracy. Privacy, individual rights, the ability to sue the government. All of this makes you a more trusted partner. If you are a foreign buyer of goods and services, you want to know that you're dealing with a country which you can do business with. India needs to be that, and it needs to do some work on that because we haven't... Our democracy has eroded over time, and we haven't put in place some of the new laws, for example, to do with data privacy and so on that would inspire confidence in outside buyers.

But if we do that, we have a lot of things going for us. We have a strong democracy, we have the English language, and we have 1.4 billion people. And so, that's a lot of people who, if we train even a fraction right, that creates a huge, huge base from which to build all of this.

Hal Weitzman: Are you optimistic that your recommendations are going to be followed?

Raghuram G. Rajan: So I wrote a report on financial sector reforms, and it didn't go anywhere for three or four years. And then I became governor of the Central Bank and I could implement everything that I'd written.

Hal Weitzman: That's one way of doing it.

Raghuram G. Rajan: So I'm not saying that that will happen again. All I'm saying is, these things get, once you put out the ideas, people talk about them. People say, "Ah, this is nuts." And then slowly it starts getting absorbed, and then someday, somebody will attain a position of power where they'll say, "Why don't we start implementing that?" If all we do is get India to pay much more attention to brains, to ensuring the brains of Indians don't go waste, that they in fact are used. In other words, get them away from malnutrition to actually energizing these kids. I think that would be a huge contribution even more broadly to human well-being, because even a hundred million Indians contributing to intellectual property, to creation, to creativity, would be a benefit to the world.

Hal Weitzman: Absolutely. Well, I hope they do follow your recommendations. Raghuram Rajan, thank you very much for coming on the Chicago Booth Review Podcast.

Raghuram G. Rajan: Thank you for having me.

Hal Weitzman: That's it for this episode. To learn more, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening to the Chicago Booth Review Podcast.