Former RBI Governor Raghuram Rajan on Monday said he was not against manufacturing or increased production in India, but was concerned about the use of subsidies and tariffs. customs in a non-transparent manner. Rajan questioned the Centre’s heavy subsidies to big companies under the PLI scheme and massive incentives for chip manufacturing in India. He and economist Rohit Lamba published a book, “Breaking the Mold,” in which both argue that massive subsidies have failed to create enough jobs.
Rajan’s views on the PLI project and the chip sector are seen by some in the government as being against manufacturing in India. In a post on LinkedIn on Monday, the former RBI governor said two BJP ministers had misinterpreted what he and Lamba were trying to say in their book.
« We are not against manufacturing, nor against domestic defense production, nor against increased production in India. We are not advocating services over manufacturing. I wish more Indians had jobs outside of agriculture, and manufacturing is certainly an important possibility. I have long been in favor of improving domestic defense production wherever possible, » he said.
The eminent economist, however, said what worries him is this government’s manufacturing policies, « in which it has allowed the most labor-intensive parts of the manufacturing system to wither, while by offering huge subsidies to areas like chip manufacturing.” . He added that the non-transparent manner in which tariffs are raised and lowered is also questionable, « although it is a long-standing practice in India, predating the arrival of this government. »
Rajan, who teaches finance at the University of Chicago’s Booth School of Business, cited two reports to show the « lack of success of government policies in manufacturing. » According to a report he cited, out of the 23 components of the industrial production index, 11 labor-intensive sectors were lower in March 2023 than in 2016-17. Another report says India’s share of global trade in clothing, one of the most labor-intensive exports, has declined by more than 20% since 2015, while that of Bangladesh and Vietnam was on the rise.
The professor said that while these employment-intensive areas suffer, the government is splurging on subsidizing chips, « an area in which we have little expertise and which is not essential to progress on other aspects of manufacturing. “How will manufacturing older generation 28nm chips improve national security when we will still be dependent on the rest of the world for the parts of the supply chain that lead to chip production? Also, when will we make the 3nm and 2nm chips that go into chipmaking? State-of-the-art cell phones? How many additional grants will this require? » He asked.
Rajan suggested that the grants could be better used to improve schools and colleges so that more Indians can design chips and, just as importantly, have decent livelihoods as plumbers, mechanics or laborers in clothing or shoe factories. « You could say we have to start somewhere. But if we can surpass many past generations by starting now, can’t we wait and start later (surpassing several chip generations), when we have more resources to do it? Could we get into chip manufacturing at a more opportune time?
“In summary, far from being against manufacturing, I am more concerned about the use of subsidies and tariffs in a non-transparent manner, with costs paid by the people of India. After the revelations about electoral bonds, it is all the more important that the government emphasizes transparency,” said the former governor of the central bank.
Although Rajan did not name the two BJP ministers, he may have been referring to EAM S Jaishankar and Ashwini Vaishnaw, who reacted to his arguments on the manufacturing sector. Jaishankar recently said that there has been a considerable shift in India’s thinking on manufacturing, which is contrary to Rajan and Rahul Gandhi’s view that « we are incapable of it and we cannot shouldn’t do it.”
The foreign minister said the government was confident the country was capable of manufacturing and there was a need to manufacture « because without manufacturing you won’t get technology, you won’t be able to develop your technology. Also difficult be it, however difficult it may be.” That’s right, we need to get into the manufacturing game more seriously. »