Former RBI Governor Raghuram Rajan on Monday said that he is not against manufacturing or against making more in India, but is concerned about the use of subsidies and tariffs in a non-transparent way. Rajan has questioned the Centre's heavy subsidies to big firms under the PLI scheme and massive incentives for chip manufacturing in India. He, along with economist Rohit Lamba, came out with a book - 'Breaking the Mould' - in which both argue how massive subsidies have failed to create enough jobs.
Rajan's take on the PLI scheme and the chip sector is seen by some in the government that he is against manufacturing in India. In a LinkedIn post on Monday, the former RBI governor said that two BJP ministers mischaracterised what he and Lamba were trying to say in their book.
"We are not against manufacturing or against domestic defense production, or against making more in India. We do not advocate services at the expense of manufacturing. I would love more Indians to have jobs outside agriculture, and manufacturing is certainly one important possibility. I have long been an advocate for enhancing domestic defense production wherever possible," he said.
The eminent economist, however, said that what he worries about is this government's policies with regards to manufacturing, "in which it has let the most labor-intensive parts of the manufacturing system shrivel, even while offering enormous subsidies to areas like chip manufacturing". He said the non-transparent way tariffs are raised and lowered is also questionable, "though this is a long-standing practice in India, pre-dating this government".
Rajan, who teaches Finance at The University of Chicago Booth School of Business, cited two reports to show the 'lack of success of government policies in manufacturing'. According to a report he cited, of the 23 components of the Index of Industrial Production, 11 labour-intensive sectors were lower in March 2023 than in 2016-17. Another report said that India's share in global garments trade, one of the most labour intensive of exports, had declined by over 20 percent since 2015, while Bangladesh and Vietnam's were surging.
The professor said that while these job-intensive areas are suffering, the government is splurging on subsidising chips, "an area where we have little expertise, and one which is not essential for progress on other aspects of manufacturing". "How will making old generation 28nm chips improve national security when we will still be dependent on the rest of the world for parts of the supply chain that lead to chip production? Also, when will we be making the 3 and 2nm chips that go into state-of-the-art cell phones? How much more in subsidies will that take?" he asked.
Rajan suggested that the subsidies could be better utilised in improving schools and colleges so that many more Indians can design chips, and as importantly, have decent livelihoods as plumbers or mechanics or as workers in garment or shoe factories. "One could argue that one has to start somewhere. But if we can leapfrog many past generations by starting now, can't we wait and start later (leapfrogging more generations of chips), when we have more resources to do so? Could we enter chip manufacturing at a more opportune moment?" he argued.
"In sum, far from being against manufacturing, I am more concerned about the use of subsidies and tariffs in a non-transparent way, with the costs paid by the Indian people. After the electoral bond revelations, it is all the more important this government emphasize transparency," the former central bank governor said.
While Rajan did not name the two BJP ministers, he may have referred to EAM S Jaishankar and Ashwini Vaishnaw, who have reacted to his arguments on manufacturing. Jaishankar recently said 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 shouldn't be doing it".
The foreign minister said that the government believes strongly the country is capable of manufacturing and it is necessary to manufacture "because without manufacturing you won't get technology, you won't be able to develop your technology. However tough it is, however hard it is, we have to get into the manufacturing game more seriously."