Breaking the Mould: India’s Untraveled Path to Prosperity by its title alone breaks the mold, the “tried and trusted way of development which has emerged post-World War II and typically been followed by emerging markets in Asia.” This is a direct quote from one of the two authors of the book, former Reserve Bank of India Governor and IMF economic counsellor Raghuram Rajan in one of the recent podcasts at the Fund. The other author is Cornell University professor Rohit Lamba.
In one of his social media posts, tweets if you will, Lamba amplified on this tried and trusted mold, underscoring the challenge to India as it approaches its 100th year of independence. That challenge is to achieve a great economic expansion and the broadest prosperity among its people, now the world’s biggest population. India’s prospects are bright because of its demographic advantage and according to Lamba, consistent adherence to democracy. He pointed out that only India has kept its democratic tradition in the years since 1950 among nine economies that managed to grow by around 4.5% in real per capita income.
But we should not get this wrong. Such a steady march to economic growth may continue for the rest of the century, but it will not transform the Indian economy and meaningfully disperse prosperity. With India’s “deep societal and cultural cleavages,” its reliance on the usual strategy of “vesting agricultural surplus into low skilled manufacturing such as textile, and then eventually high skilled manufacturing and services may fall short of what is required for structural transformation.
True, India succeeded in specializing in high-skilled services as its largest value-added economic component. The services sector has emerged as the biggest employer in the economy. In contrast, manufacturing has not caught up in driving India’s economic expansion and dispersing wealth creation.
Thus, in the podcast, Rajan was spot on in admitting that India has the best and the worst in economic development. India produces exceptional students in its institutes of technology who are recruited by the Googles and Apples of this world because they can do everything. But there are also Indian “kids in third grade who can’t read at second grade level.” There are schools in India where teachers are absentees and therefore no learning activity takes place.
This is something to be expected from India’s traditional economic strategy. India succeeded in servicing the domestic market and then the global market by leveraging on its advantage in low-cost labor and economy of scale. It is cheap labor that compensates for India’s poor infrastructure and institutions, so typical of many developing and emerging markets. Not exactly the best way to achieve sustainable economic growth and more democratic means of income distribution.
The global market has also become more complex. Key economies have become less willing to relocate their manufacturing to other parts of the world. They are now most intent on keeping production domestically by intensifying protectionist measures or going into automation, AI, and robotics. That leaves India and many developing and emerging markets competing against the more advanced economies’ robots, or against each other in terms of cheap labor.
To break new ground, Breaking the Mould suggests capitalizing on a head start in direct service exports and expertise in services embedded in manufacturing. Lamba cites as an example the opportunity for India going into highly skilled programming of codes written into Tesla cars, or any computer-powered electric vehicles, or even the sophisticated insurance policy covering them.
This is the essence of what Rajan talked about, moving away from low-skilled manufacturing to perhaps “premature de-industrialization.” To him, it’s neither a problem nor a bug, but perhaps a new form, an alternative mode of development. The imperative for many similarly situated economies is weak industrial policy and its poor execution.
Bringing foreign direct investment in manufacturing is effectively subsidizing manufacturing through a host of fiscal and other incentives. Rajan even pointed out that it is possible to create some industries based on incentives and subsidies but once these are withdrawn, or even minimized, such industries could simply vanish.
In the podcast, IMF Asia-Pacific Department Director Krishna Srinivasan questioned the former IMF economic counsellor on whether this new paradigm could handle the likely 14 million people joining India’s labor force every year. Rajan was quick to retort that manufacturing itself “hasn’t increased for the last 40 years” as a share of the total workforce. Labor-intensive manufacturing like textiles or leather has actually shrunk in the last decade.
“Servifying” the global economy is what could break the mold; it could serve as an alternative to the tried and tested methodology of growth. This means having a strategy in job creation in services in hard manufacturing. How to do this could be as simple as identifying the gaps in the skills sets and investing in filling that gap.
It’s not so much that job slots are not available in manufacturing, it is more of a lack of appropriate skills sets to motivate growth. Despite the huge workforce of India — and for that matter many emerging markets like the Philippines — industries fail to find people with suitable capacities and a government most willing to invest in people. There is a dearth of skills in chip design and financial modelling, for instance, that could be easily employed in innovative industries aspiring to be global leaders.
To firm up this new paradigm, Rajan suggests that the first act is to focus on human capital. The national budget should support bridging the disconnect between education and degrees on one hand, and non-employability for lack of relevant high skills. This tack addresses the demand of new and innovative industries with great promise of jobs creation and prospects for greater prosperity.
The next issue is how to create jobs for the current skills of the labor force. Since human capital creation begins at a very young age, Rajan suggests getting all mothers with some high school diploma to train and play with young kids and in the process encourage the thirst and drive for learning. Creating jobs requiring the current skills sets of the labor force is another way of absorbing labor. Last, it is incumbent upon Government to improve the quality of public health and education which, in turn, could generate new jobs in healthcare and education.
In the transition, the idea of apprenticeship should be explored. Here, there is so much value added if industries could be involved, IT could be part of the process. Rajan feels strongly about creating the last mile, but possibly game changing, skill building.
Monetary incentives ought to be considered to sustain training and trainees’ holding on to jobs. Training institutions can be retained provided their training proved effective in equipping their trainees with employable skills. They get the incentives only when proof is verified. Let those who invested in human capital have the first option to choose the apprentice they trained.
Government should also be prepared to explore lowering the relevant taxes on training or in the firms’ direct payments, providing some form of stipend to apprentices and ensuring there are jobs waiting for them.
Finally, Srinivasan queried Rajan on Breaking the Mould’s point about the need for decentralizing power close to the grassroots in order to achieve strong durable inclusive growth. Rajan pointed out that in India, the more decentralized states tend to have stronger provision of services like in health and education. The example was of China empowering its provincial government to compete in inviting investments into their localities which has actually resulted in clearing the way for more business activities.
Rajan calls this competition in China “comparative cronyism.” This is some kind of safeguard against inefficiency and protection of local elite. Social oppression should not be allowed to exist. He calls for the Government to address corruption, promote more transparency, and demand greater accountability.
As Lamba put it, the ultimate challenge is to be able to find the political entrepreneurship required to liberalize factor markets — land, labor, and capital. It’s all about easing the cost of doing business in terms of easing access to land and other logistics, skilling labor, and simplifying hiring of labor and democratizing capital away from a few large firms to smaller and budding entrepreneurs.
Breaking the mold is no less than a tall order, but it looks promising with all the givens.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.
