Don’t just make for India: Why Raghuram Rajan’s pessimism about Make in India’s focus on exports is misplaces
The critical question that Rajan does not address is how precisely a highly labour-abundant India can escape the path that every successful labour-abundant economy has followed to achieve economic transformation.
In his recent Bharat Ram Memorial Lecture, Reserve Bank of India Governor Raghuram Rajan offered a puzzling proposition: that the global economy "is growing more slowly, and is more inward-looking, than in the past means that we have to look to regional and domestic demand for our growth-to make in India primarily for India." Rajan, in effect, rejected export-led growth as a feasible strategy for India. A corollary of his proposition: mass manufacturing cannot be the backbone of the Make in India campaign.
To be sure, mainstream economists can hardly disagree with many of Rajan's policy recommendations. Export subsidies-which in any case are prohibited by the World Trade Organization-are not a smart way to stimulate export growth. And import substitution industrialisation through higher trade barriers isn't a winning strategy either. Indeed, I would go a step further and argue for the resumption of trade liberalisation that has been stalled since 2007-08, when the peak tariff was last reduced.
However, the critical question that Rajan does not address is how precisely a highly labour-abundant India can escape the path that every successful labour-abundant economy has followed to achieve economic transformation. India now has a 500 million-strong workforce, and it is growing by 12 million a year. Being still quite poor, the country has a limited stock of capital and the bulk of its workforce is, at best, low-skilled. Under these conditions, how do we provide good jobs to the masses? Today, half of the workforce depends on agriculture, which generates less than 15 per cent of the national GDP, while another 40 per cent or more toils in informal sector jobs.
Is there a path, therefore, that does not go through a massive expansion of low-skilled labourintensive manufacturing such as apparel and services such as construction, yet generates decent private sector jobs for about a third of the workforce in the next decade? Rajan does not outline such a path and I am hard-pressed to think of one as well. Many in India revel in the thought that it can jump the manufacturing stage and turn into a US-style services economy; they don't realise that it will take decades of first-rate higher education before we can get our workforce to do what the American workforce can. For now, the bulk of services jobs will be low-paid and in the informal sector. A 2006-07 National Sample Survey found that of the 15 million services enterprises, the largest 626 produced 38 per cent of the services output but employed barely 2 per cent of the workers in the sector.
There is a common fallacy that exports can expand rapidly only in a rapidly growing world economy. Factually, from 1995 to 2013, when the Chinese exports grew by leaps and bounds, the OECD countries together grew only 1.4 per cent annually. Conceptually, slow global growth can hinder export expansion only if several countries are expanding export of the same goods at the same time. This, however, is almost never the case. Historically, only a handful of the developing countries, at most, have simultaneously taken the path of growth led by the export of labour-intensive products. In the 1960s and 1970s, these were South Korea, Taiwan, Singapore and Hong Kong. Then, as wages in these four East Asian tigers rose, China replaced them in the 1980s. And now that Chinese wages have gone up, we are witnessing the emergence of Vietnam and Cambodia as competitive exporters of these products.
Rajan is right in saying the world cannot accommodate two Chinas, but it does not have to in order for India to become a successful exporter. Today, China exports 12 per cent of the world's merchandise and India less than 2 per cent. But given its massive labour force and considerably lower wages, why can't India grab another two percentage points from China over the next five years? That alone could give a huge boost to the 'Make in India for the global economy' campaign.
Unless we dream big, we won't do what it will take to capture the world markets for labour-intensive manufacturing products. Given his export pessimism, it is no surprise that reforms of myriad labour laws, so crucial to translating our comparative advantage in such products into reality, find no mention on Rajan's otherwise long list of reforms. Our export pessimism then becomes self-fulfilling and we confuse our policyinduced failure to compete in the global markets with their saturation, notwithstanding the fact that the same markets continue to absorb Chinese exports like sponge.
Arvind Panagariya is professor of economics at Columbia University, USA.