India is making a big mistake believing the “hype” around its strong economic growth since there are significant structural problems that need to be fixed for the country to meet its potential, former central bank Governor Raghuram Rajan said.
The biggest challenge a new government must grapple with after elections is improving the education and skills of the workforce, Rajan said in an interview. Without fixing that, India will struggle to reap the benefits of its young population, he said, in a country where more than half of the 1.4 billion population are below the age of 30.
“The greatest mistake India can make is to believe the hype,” he said. “We’ve got many more years of hard work to do to ensure the hype is real. Believing the hype is something politicians want you to believe because they want you to believe that we have arrived.” But it would be a “serious mistake for India to succumb to that” belief, he added.
Dismissing Prime Minister Narendra Modi’s ambition to make India a developed economy by 2047, Rajan said it was “nonsense” to talk of that goal “if so many of your kids don’t have a high school education” and drop-out rates are high.
“We have a growing workforce, but it is a dividend only if they’re employed in good jobs,” he said. “And that’s, to my mind, the possible tragedy that we face.” India needs to firstly make the workforce more employable, and, secondly, create jobs for the workforce it has, he said.
Rajan cited studies showing a drop in the learning ability of Indian school children to pre-2012 levels after the pandemic, and that only 20.5% of grade three students could read a grade two text. Literacy rates in India also remain below other Asian peers like Vietnam.
“That is the kind of number that should really worry us,” he said. “The lack of human capital will stay with us for decades.”
India needs to do a lot more work to get to 8% growth on a sustainable basis, Rajan said, dampening some of the recent optimism about the economy’s prospects.
Foreign investors have been flocking to India to take advantage of the rapid expansion, which the government predicts will reach more than 7% in the coming fiscal year, making it the fastest-growing major economy in the world.
Rajan said policy choices made by the Modi government to spend more on subsidies for chip manufacturing than the annual budget for higher education were misguided. The subsidies to semi-conductor businesses to set up operations in India was an estimated 760 billion rupees ($9.1 billion), compared with 476 billion rupees allocated for higher education.
Chip manufacturing
The government was too focused on high-profile projects like chip manufacturing instead of doing the work to fix the education system so it can produce well-trained engineers needed for those industries, he said.
“The ambition of the government is real, to become a great nation,” he said. “Whether they pay attention to what needs to be done is a different question. I worry that we’ve become more fixated on prestige projects, which suggest more great nation ambition, such as chip manufacturing, while leaving the underpinnings that will contribute to a sustainable chip manufacturing industry.”
A professor of finance at the University of Chicago Booth School of Business, Rajan is a well-known commentator on the global economy and an outspoken critic of India’s policies. He left the Reserve Bank of India for academia in 2016 after his term as governor wasn’t extended, having come under attack from hardline politicians for his views.
He recently co-authored a book titled Breaking the Mould: Reimagining India’s Economic Future and has been releasing a series of videos on his LinkedIn profile to provide perspective to India’s growth outlook.
Beyond improving education, Rajan highlighted a number of policy priorities for the new administration, including reducing inequality and increasing labor intensive production. He also said India’s governing system was too centralized, and devolving control to states will help improve development.
“What we need is a pragmatic approach,” Rajan said. Quoting China’s former leader Deng Xiaoping, who spearheaded that country’s economic reforms, Rajan said if India learns anything from China, it should be that “it doesn’t matter whether the cat is black or white, it matters whether it catches mice,” he said.
