Decades ago, the great trade economist Jagdish Bhagwati observed that India’s “misfortune” was to have almost too many “brilliant economists, an affliction that Far Eastern super-performers (Taiwan, Korea, etc.) were spared”. His point was that there were always going to be Indian economists ready to argue one view or another and frequently justify government policy, no matter how misguided. Former Reserve Bank of India (RBI) governor Raghuram Rajan has long been an exception. His RBI press conferences were renowned for clear-eyed and accessible explanations of monetary policy, and he opposed demonetisation. During his three-year tenure that began in the midst of the 2013 taper tantrum caused by sharply rising Treasury yields and ended in 2016, the rupee was stabilised and inflation brought down.
In his latest book, Breaking The Mould: Reimagining India’s Economic Future, co-authored with Penn State professor Rohit Lamba, Rajan begins well by explaining why the Narendra Modi government’s subsidies to boost the manufacturing sector are the wrong strategy. But then the authors stumble in suggesting unrealistic alternatives such as moving the economy towards high-end services, including global capability centres for large investment banks and consulting firms, while turning India’s back on competing for low-end manufacturing because the margins are razor-thin. This is an overly defeatist approach regarding prospects for manufacturing in India, reminiscent of the export pessimism former Prime Minister Manmohan Singh argued against in his PhD thesis at Oxford in the 1960s.
While it is true that Vietnam and Bangladesh have received more foreign direct investment than India in sectors such as electronics and garments, respectively, as many firms adopt China + 1 strategies to minimise dependency on China, the move out of that country will continue for many more years. Giving up on low-end manufacturing, as Rajan and Lamba seem to suggest, is a bad idea, even if global trade is slowing.
To drive home their point that India’s comparative advantage is competing for high-end activities, the authors contrast Apple’s $3 trillion market capitalisation with Foxconn’s of under $50 billion: “Apple is sixty times as valuable, even though it manufactures nothing! That is because it provides the R&D and product design services at the beginning of the global supply chain for iPhones, as well as the branding, marketing and content at the end.” What this muddled argument overlooks is: 1) no other company globally has the brand appeal or product innovation capabilities that Apple has in electronics, and no Indian company comes close; 2) At Foxconn’s peak employment levels in China, it employed one million workers; their salaries may have been a fraction of those at Apple’s headquarters in California, but Foxconn’s investment boosted incomes for lots of families in China and helped build a large suppliers’ ecosystem.
Rajan and Lamba are on more solid ground debunking the Central and Gujarat state government’s plans to offer massive subsidies to a US company to build a semiconductor plant in Gujarat. They calculate this amounts to a subsidy of ₹3.2 crore per assembly and testing job in a plant expected to create 5,000 jobs. Once again, New Delhi policymakers’ obsession with capital-intensive industries, which goes back more than half a century, is all too apparent.
This book and its attendant cross-country tour is a useful pushback against the production-linked incentive (PLI) scheme, which, partly because of its opacity, has not been given the scrutiny such a major policy merits. The PLI schemes now span industries as diverse as food processing and textiles, some consumer durables and solar photovoltaic modules. While the US and Europe are subsidising manufacturing deemed strategic, in no other major economy are the industries so haphazardly diverse and the procedures for claiming incentives so bureaucratically time-consuming.
New Delhi’s PLI scheme thus increasingly looks like a microwaved serving of the license raj. At the end of December, auto manufacturers told Mint that almost two years after the scheme was announced there remains “a lack of clarity about the process to apply for subsidies”. The scheme is creaking under the weight of requiring complex proof of domestic value addition as well as of sales and investments made by companies. Some apparel manufacturers say that instead of a subsidy they would be happier if the government concluded free trade agreements (FTAs) with, among others, the European Union, where the negotiations have been grinding on for almost a dozen years.
But, the authors do not spend many pages analysing why India’s approach to PLIs may not work as they jump to their alternative to low-value-addition manufacturing. To support their vision of high-end services, they invent a fictional character named Professor Erali, who, based in India and using virtual reality headsets, teaches “busy executives all round the world, doing an MBA while holding a full-time job”. They lead us through his mind-numbing case study of the day, involving carbon taxes in Rajasthan. “And so the case went, challenge and counter-challenge, debate and argument, until everyone, even Professor Erali emerged wiser than before.”
This is not a claim I would make for Breaking The Mould. The book’s maddening digressions while stringing together plenty of compelling facts is a huge opportunity lost. Its biggest flaw is the argument that what the economist Dani Rodrik identified as “premature deindustrialisation”, the early decline in the share of manufacturing in many developing country economies, is not a bad thing at all. Their “counter-challenge” to the PLI is primarily that India is now doing very well gaining thousands of remote financial analyst and management consultant jobs outsourced by firms in the West. This is a trend outlined in much greater detail by Neelkanth Mishra, chief economist, Axis Bank, in a report in August, which showed that our services export surplus now comfortably dwarfs our persistent trade deficit in manufacturing, making India’s external accounts much more comfortable.
But can we therefore turn away from low-end manufacturing? This doesn’t make sense, given that, as the authors themselves point out, India’s labour participation rate has now fallen to just 46 out of every 100 in the working age cohort, significantly below levels in Brazil and Indonesia. Services exports from global capacity centres in India are growing apace. Yet, the multiplier effects from that in terms of low-end service jobs, such as being a cook, street cleaner or security guard, for Prof. Erali and others as the book approvingly outlines, are nowhere near sufficient. Before we dismiss certain manufacturing jobs as low-end, perhaps we could ask workers in garment factories whether they would prefer to be Prof. Erali’s cook. And, rather than be further distracted, New Delhi needs to urgently conclude broader FTAs so our factories’ products are not hamstrung by import duties for years to come when bidding for business against Vietnam and Bangladesh, whose garment exports are now more than double ours.
Once again, even as the authors make the sensible point that one large semiconductor assembly plant will not do much for us in terms of strategic security, they distract themselves by speculating about chip supply disruptions if the democratic world turned against India. That is a much less likely prospect than China invading Taiwan, manufacturer of 90% of the world’s advanced chips, which, incredibly, the authors do not discuss.
As Bhagwati joked, eminent Indian economists often trip themselves up with their elaborate counterarguments. But, only Prof. Erali perhaps, with his virtual reality headsets, could divine how Breaking The Mould ends up reading as if it were written by a harried executive MBA student who has a deadline looming.
Rahul Jacob is a former South China correspondent for the Financial Times and writes the World Apart column for Mint.