World can’t afford India to follow China’s manufacturing model, says Raghuram Rajan

Former RBI Governor Raghuram Rajan has argued for a service-oriented export model for India instead of following that of Chinese manufacturing to grow faster.

In a lecture on globalization and climate change, Rajan focused on the positive impact of the liberalization of services which offers enormous potential for reducing inequalities.

Liberalization of trade in services benefits both industrial and emerging market economies. Since many of these services are weightless, they have little impact on the climate, which benefits climate change mitigation efforts.

“Weightless services also consume little energy on the way to the end consumer, unlike manufactured goods. Export-led growth in services will be much less harmful to the environment – ​​the world cannot afford to India to go the way of China, even if it was open to it.” said Rajan.

He said liberalizing manufacturing has diminishing returns and is politically tense.

“One of the reasons why industrial countries have downgraded on open borders is that their manufacturing workers have been disproportionately affected by global competition and outsourcing, while service workers have benefited. Both politically and economically, further manufacturing liberalization has diminishing returns.”

He explained that services, unlike manufacturing, can be spread across a country and reduce the pressure on megacities which turn into heat sinks and become increasingly unlivable.

Such a distribution of services away from major cities will increase rural incomes and provide an alternative in the event of loss of agricultural income.

“The production of these services can be distributed across a country. In developing countries, this will reduce the load on large megacities which are becoming heat sinks and increasingly unlivable. It will also generate a source of income and a reliable stock of human capital to seed rural communities that otherwise would not have the economic capacity to survive the loss of agricultural income,” Rajan emphasized.

This isn’t the first time Rajan has spoken about the benefits of a service-driven growth model. In the past, he has warned of the dangers of blindly following a China-led manufacturing growth model. He has said quite often that India needs to focus on spending on education and training its young people to create jobs that will come from services rather than manufacturing.

Rajan also called for careful analysis of the benefits of the Production Linked Incentives (PLI) program to boost manufacturing in the country, as the benefits accrue to large industrial firms rather than small and medium-sized manufacturers.

Rajan isn’t the only one talking about the importance of services-led growth. Renowned economics commentator Swaminathan Aiyar, writing for ET, has argued for a service-driven growth model, saying the future lies in services, not manufacturing. He said India needed to focus not only on services such as IT, but also on education and health, which have been grossly underfunded for years. He is of the view that the overemphasis on manufacturing subsidies will undermine scarce resources for human development.

The PLI program is one of the flagship programs of the Modi government to attract manufacturing to India. Multinationals are keen to diversify their manufacturing base out of China due to strict COVID policies as well as rising costs of doing business in the country.

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