Economics is closely connected to political outlook. Rajan was appointed by the MMS government, so the rightists hate him and berate him without losing a single opportunity. To them, he is not even an economist. Most rightists and supporters of the present dispensation also deplore Dr. Manmohan Singh, he is not even regarded as an economist. Such people use the choicest adjectives for both Rajan as well as Dr. Manmohan Singh. I do not have any issue with their feelings and hatred for Dr. Rajan and DR. MMS. Like love, hatred is also not debatable. It’s a state of mind and can not be debated in a logical manner. If people do not like their economic policies, I can understand. But what I can not understand is if someone says that Dr. Rajan and MMS are not economists.
A meaningful and logical discussion is simply not possible when people are soaked and engrossed in such hatred against Dr. Rajan and MMS. But if people keep an open and rational mind, I am ready to deliberate on this question. However, under one condition - my entire deliberation would rest on the premises that Dr. Rajan is an eminent economist. People who do not accept this condition can and should stop reading ahead.
It could sound audacious if I say that I didn’t and don’t agree with or like each and every economic policy of Dr. Rajan and MMS. Yes, it happened on quite a few occasions when I had reservations about Dr. Rajan’s policies. However, it need not mean that Dr. Rajan was wrong and I was right. Dr. Rajan is an eminent economist who made the advanced forecast and prediction of the great depression of 2008. And if an economist can predict the world economic recession a few years in advance, I can not doubt his essence or substance as an economist. Plus he had the great advantage of being the RBI governor, and the Chief economic advisor of the government, Chief Economist of the IMF - so he has always been in an advantageous position to know things and have a complete overview of things that a common man can never have even if the common man is an economist. yes even if that common man is Dr. Subramanian Swamy. No, it is not that Dr. Swamy knows less about economics. But the problem with Dr. Swamy and so many others are that they never had the exposure to practical implications, and applications as well as that of running an organization or formulating economic policies for the nation. They all can talk about theories without having to make deliveries. Even Dr. Swamy was not found worthy of being given the responsibility of the finance ministry or any other assignment of economic importance by his own party. So despite his huge knowledge Dr. Swamy is untested water and he can not be evaluated. On the other hand, Rajan at least can be evaluated, and Dr. Manmohan Singh can be evaluated.
There are people who add value to their chair and there are people who are important only because of their chair, The second set of people have no other identity. They seldom have left with any identity the day they leave office. Then they are known as retired such and such. On the other hand, the first set of people glorifies the chair, their identity is not dependent on the chair. India has had so many chief election commissioners, how many names do you remember? But you remember only one of them T N Seshan. Why? There have been so many police commissioners in India, how many names do we know or remember? But we remember Kiran Bedi. Because they are the people who worked in defiance of government power in a rightful manner.
Do you know how Kiran Bedi earned her the nickname "Crane Bedi"? On 5 August 1982, she ordered to tow away an Ambassador car (DHI 1817) belonging to the Prime Minister’s Office, as it was wrongly parked outside the Yusufzai Market at Connaught Place. This she did in naked defiance of any fear from the power. But what is more important is that PM Indira Gandhi or later Rajiv Gandhi never punished her for this act nor she was transferred to Arunachal Pradesh on immediate notice. Nor was Kiran Bedi's seniority or job record negatively influenced. It is sad that today people like Rajan are thrown out and a lackey has been appointed in his place.
Dr. Manmohan Singh was not famous as RBI governor. He became famous only after becoming finance minister and PM. We don’t remember who all were RBI governors. But Dr. Rajan stands out. Possibly he is the only Ex. RBI governor to get significance even after demitting office long back whereas he had the smallest term as the RBI governor. You may like him or dislike him, but his opinions matter. His significance is because of his domain expertise, not because of his chair. Even his detractors are not being able to ignore him. I have digressed a little from the question. However, this foreword was important to dissuade those viewers who think Dr. Rajan is not an economist. They can jolly well stop reading further. I have already written an answer on the same topic, let me borrow from it. But there are following cautions.
- I am discussing purely on the strength of Dr. Rajan’s arguments
- I am neither supporting his views nor speaking against them. Further, I have already said that I do not agree with many of his policies.
- This is a dispassionate analysis.
- I have no way of knowing his entire proposition on the subject and what are his arguments in its favor. So we are looking at it from a one-sided view.
- Last but not the least people who want to berate him should remember that he is an IIT-D ( gold medalist), IIM-A, and MIT alumni. He was IMF Chief Economist, and Chief Economic Adviser to GOI, and lastly Governor of RBI. He is the son of a former RAW officer. So people need to check their own credibility and domain expertise before talking ill about him in any manner.
“First of all, we should look into the whole context of his saying, not at a particular statement in isolation. So I would like to look at it from other angles as well. Secondly, globally highest employment generation happens in the tertiary sector which means the service sector. Even in developed countries like the US and UK, the service sector generates the highest employment. In some countries, the service sector generates as high as 80% of employment.
Most importantly Indian manufacturing industries mostly produce intermediate products only. This means possibly most operate on crude-level technology creating pollution. Fourthly manufacturing is capital intensive which requires huge capital and with high gestation period. Fifthly capital intensive industries produce very little employment where most of the functions are machine-driven. Sixthly we already have an edge in the service industry. Seventhly it would be difficult to beat China in manufacturing both in terms of price and quality even when it comes to capturing the international market. Even for domestic consumption, we are hugely importing from China.
Possibly these are some reasons why he made such a statement. However irrespective of what he says we have to work on the right mix strategy. However, I suggest people to please compare the Chinese economic model and GDP contribution. In China also service sector has also taken over the Industry sector in GDP contribution. And this is despite China being a power horse in manufacturing.
Distribution of the gross domestic product (GDP) across economic sectors in China from 2011 to 2021
When I made the above comments, I had my base for making so. And this I am speaking on India perspective. The Services Sector contributed over 50% to India's GDP, highlighted in the Economic Survey 2021-22. Sector-wise GDP of India -The services sector is the largest sector of India. Gross Value Added (GVA) at current prices for the services sector is estimated at 96.54 lakh crore INR in 2020-21. The services sector accounts for 53.89% of India's total GVA of 179.15 lakh crore Indian rupees. With a GVA of Rs. 46.44 lakh crore, the Industry sector contributes 25.92%. While Agriculture and allied sectors share 20.19%. At 2011-12 prices, the Agriculture & allied, Industry, and Services sector's composition is 16.38%, 29.34%, and 54.27%, respectively. Employment in services as a percentage of total employment (as estimated by the ILO-International Labour Organization) in India was reported at 32.33 % in 2020, according to the World Bank. And this is the fastest-growing sector. The industrial sector contributed about 25% of employment.
Employment in manufacturing, mining and real estate, and construction accounted for 30% of all employment in 2016-17, according to the CEDA-CMIE bulletin. By 2020-21, this was down to 21%.
I am not aware of what Mr. Raghuram Rajan said and in what context. So possibly we have to take Raghuram Rajan’s statement from a bigger perspective”
What I would like to add is that there is a need to do a deep dissection of the entire statement rather than having a knee-jerk reaction on the matter and deploring Dr. Rajan.
Here’s a list showing the top ten countries with the most international patent applications by the end of the year 2021. China has authorized over 2.53 million patents in the past five years, with a 13.4% average annual growth rate. In 2021, the country accredited about 695,400 patents. The average ownership of invention patents in China reached 7.5 per 10,000 people, almost twice as much as that at the end of 2017.
Country and Approximate Number of Patent Applications
China - 695,400
United States - 595,700
Japan - 502,600
South Korea - 206,780
Germany - 173,220
France - 72,800
United Kingdom - 58,410
Switzerland - 53,860
Sweden - 44,530
Netherlands - 41,270
India doesn’t even come in the list of top ten countries. We are not even trying to prove Dr. Rajan wrong. If we have to be strong in the manufacturing regime we have to have to be technology driven. However unfortunately we are not doing enough on that front. Manufacturing is capital-intensive, and India is struggling through a huge liquidity crunch. So we are lagging on two major dimensions - technology and capital. Tesla has a total of 3304 patents globally. These patents belong to 986 unique patent families. I am not sure how many patents Adani has. Somewhere I read that his organization has only 37 patents ( I would seek more information on this). You can understand what is our global competitiveness.
Source - PIB.GOV.IN
Let’s look into another area of foreign exchange earning. the above is the picture of India’s balance of trade position in the current financial position and how our manufacturing sector does. Apple's annual revenue for 2021 was $365.817 B, Sixty percent of Apple's revenue comes from international business. This means roughly $ 222 Billion came from international business. Roughly around 50% of Microsoft's revenue comes from international business. Reliance’s international revenue is around $27 B contributing only 8% of India’s merchandise export. While Reliance imported about 1.4 million barrels of oil per day in May. Even if we consider that the entire import is from Russia (which is not) at $78 per barrel, its annual oil import bill would be around $ 40 B. So it is a net negative foreign exchange earner. Adani is a net foreign exchange consumer. In comparison, TCS earned a revenue of $25.7 billion in FY 2021-22 only from the US market. And this is mostly net foreign exchange earnings. Over and above the service contributes a huge remittance earning. India is the highest remittance earner in the world earning $87 billion net in the last financial year.
Now let’s come to another area which is employment generation. TCS ranks the biggest private-sector employees in India and 4th in the overall ranking with 5.9lakh employees. Reliance comes at No.10 with 2.36 lakh employees. Adani doesn’t even come in the top twenty list.
The information technology industry in India comprises information technology services, consulting, and outsourcing. The share of the IT-BPM sector in the GDP of India is 7.4% in FY 2022. The IT and BPM industries' revenue is estimated at $227 billion in FY 2022. The domestic revenue of the IT industry is estimated at $49 billion, and export revenue is estimated at $178 billion in FY 2022. The IT–BPM sector overall employs 5 million people as of March 2022.
So if Dr. Rajan is asking us to focus on the service sector he is not entirely wrong. There are huge advantages for us to grab - the service industry is not capital intensive, it generates massive employment, it is a net foreign exchange earner through export, and it earns additional foreign exchange through remittance. Most importantly we have a fair level of access and dominance as well as cost & quality advantage in the international market for the service sector. We are a dominant player. There is a huge potential to leverage this edge and grow our service sector to make a quantum jump. Which could be of very crucial significance to tide over our deteriorating BOP situation. And the turnaround time would be much shorter since we have a huge reservoir of skilled resources. What we need is focused investment from the entrepreneurs.
This is not so for the manufacturing sector. The battle for the trade market of goods is much more intensely fought and there are all kinds of trade and tariff restrictions prevailing between the nation. Neither do we have cost and quality advantages. We are losing our domestic market share quickly to the foreign players. And we need to quickly address this on the highest priority building our manufacturing sector. This will help us to cut down our import growth as well as to cut down the trade deficit. However, this would be a time-consuming process since we are deficient in technology innovation as well as capital inadequacy to compete with the manufacturing giants. We lack an edge both on cost and quality parameters. So our customers prefer imported goods over domestic ones. The FDI inflow has mostly been in the equity investment form to be withdrawn as and when they want. In the last one year, India has witnessed massive withdrawal from the Indian market pulling down the Forex reserve as well as depreciating the rupee.
I am sure Dr. Rajan must have gone much deeper in his analysis with his in-depth understanding not only of Indian macroeconomics but also of world economics as a whole. So there is a very high possibility that he would have a much better explanation for what he said.
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