Surprising that Dr Raghuram Rajan should be arguing against manufacturing-led growth for India. The Production Linked Incentive Scheme (PLI) is one of the very few workable schemes of the government today and could lift India out of its slow growth today despite the not-so-benign environment for growth. India is the last bastion of low wages, and we need a way to engage idle labour. Manufacturing linked to exports – to the world and TO CHINA (as their wages rise) – would have to be the way forward. Nay, it will be so, if the government can give the right push and remove the barriers that have been there from the mid-sixties and continue to the very day –inversion in tariffs, high cost of non-tradable inputs, and non-competitive exchange rates.
Macroeconomic policy too in India, especially under Rajan with its aggressive inflation targeting, acted as a severe brake on the economy. (Inflation was overestimated due to the use of erroneous data). Had these been corrected, India would have been where China is, or at least shared the upper middle-income space with China. The point, unlike what Rajan says, is that Export led growth (ELG) is a win-win – since the recipient country stands to gain via the fall in the relative price of manufactured imports – and hence is politically possible. The current animosity against China is due to the massive disruption caused by the Global Financial Crisis and the crudity of the Trumpist attack on China, not so much because of its economic or export success but because of its ability to develop frontier technologies and its gathering military might.
Now consider manufacturers from the demand side. Even China would need manufacturers not to speak of India, Africa, and Latin America as their incomes rise, though with elasticities somewhat less than 1. That should give space for India because it has the largest reservoir of idle labour ready to work, and also, being among the poorest, would have the highest demand elasticity for manufacturers. And for labour to get on to manufacturing is easy, especially in electronics and so many other labour-intensive products.
The point which misses Rajan is that much of manufacturing is highly tradable and is also amenable to vast labour productivity increases, which greatly reduce the domestic demand constraint for firms picking upscale and productivity gains. (Auto, pharma, and light engineering are already nice success stories from India). What about services? As yet, the tradability is low. So other than IT, ITES, and remote back office, most services being non-tradable are internally directed, so would have the constraint of low demand /low price, resulting in poor prospects of scaling up, expansion, and hence productivity gains. External access is ruled out for most services. If, of course, street cleaning, truck driving, and massage services in the rich countries are possible for Indian workers sitting here in India (the movement of people is practically ruled out under the WTO), then Rajan would have a point. Maybe this would happen with META and “mimic robots” (such as a stick frame with arms and legs that are in a truck and be driven from an Indian Studio). Even then, why throw out manufacturing? Why shy from a double engine of growth?
Now comes the environmental “argument”. The national interest hurting green commitments of governments repeatedly limits India, even in the highest growth scenario, to an emission level of GHGs that would be a mere fifth that of China. Why should India bear the cross of Greenhouse Gas (GHG) reduction (moderation) so disproportionately? Are our lives lesser? At a philosophical level, no economy would produce things unless they are demanded and consumed. So clearly, the GHGs of China and the factories are due to the consumption in the rich world, and GHG being non-local in their effect, the perspective of global consumption as the driver of GHGs is important. At least a perspective that allocates GHG emissions to consumers in proportion to the consumer surplus is what the Indian (Chinese) and emerging country elites should have been driving for in global negotiating fora.
Why constrain India’s manufacturing? In any case, a “free-market” economist should discuss removing the constraints on Indian manufacturing. (PLI is partial compensation for the debilities). One is almost sure that India then would rather quickly pick up the growth and manufacturing mantle from China to then lift a billion people into middle income. Rajan must realize that the world economy is WIN-WIN ever since the industrial revolution. As India increases its share of manufactures, China will reduce its share. However, both would have absolute increases, and both cannot happen unless the world grows, and capitalism cannot exist without growth. So simple consistencies would believe what Raghuram Rajan is saying and to say that India should not grow would be cruel.
Note: The opinions are that of the author and not representative of Manufacturing Today