Former RBI governor Raghuram Rajan, who co-authored ‘Breaking the Mould: Reimagining India’s Economic Future’ with economist Rohit Lamba, aims to engage a wider audience and foster debate, presenting alternative narratives to challenge the prevailing one. In an interview to TOI, he said that as a big software exporter, India should not put tariffs on computers and that interest rates may remain elevatednext year.Excerpts…
Why is it necessary for a country to choose between prioritising manufacturing and services?
It doesn’t have to be. Services now give an opportunity which never used to exist before. You can provide it all over the world. Second, software code is now embedded in products like cars and is often the most valuable component of the product. Today, you can have C-suite people sitting in India in addition to low-skilled labour in services. All we’re saying is to be a little careful of how much you want to subsidise.
Others, like Vietnam, have done well in manufacturing through incentives.
Every country will offer some tax subsidies; often it is blanket for local manufacturing, allowing investment write-offs. Selecting specific industries implies an industrial policy; it starts with protectionism, and then you pick favourites within chosen sectors, and then you pick entities. How do I know who you’ll put tariffs on next? It might be my input, which you’re putting tariffs on to get production there. The flip side is you have people like Walmart and Amazon who want to come in a big way, and you are putting up roadblocks. You need a common, consistent policy. Do you want foreign direct investments? Do you want them to create jobs or something else? We are a big software exporting country that now exports telemedicine, legal, and financial consulting, the basic input for all these industries is a computer. Do we want to go back to the days when Narayana Murthy writes about when he would have to go to Delhi to bargain for buying computers?
Your book speaks about unemployable graduates. How do we then create human capital?
We have allowed a lot of colleges to come up without any scrutiny of quality. The problem is they also coalesce to keep out good institutions. I have been associated with two institutions, ISB and Krea, and both had a really terrible time getting licences. So, on the one hand, we will constrain entry because incumbents fear competition. On the other, the incumbents are not providing that higher quality of education, which means everybody is looking for IITs and IIMs – the public institutions. Why don’t we do import substitution here? The cities succeeding in the US are typically cities with big universities; Boston, San Francisco, Los Angeles, Chicago, and New York have universities that add to the human and intellectual capital.
Will rates being higher for longer cause a lot of pain?
There will likely be some. The markets are excessively optimistic about a rapid economic slowdown, anticipating sufficient slack for the Fed to cut rates. Economies, including India and especially the US, are growing faster than anticipated. With China’s subdued recovery, oil and commodity prices remain low, benefiting us. This suggests that rates may stay elevated next year. The Fed might only consider cutting by March or April if there’s a calamitous drop in activity.



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