Raghuram Rajan: The world can’t afford India to follow China’s manufacturing model, says Raghuram Rajan | So Good News


Former RBI governor Raghuram Rajan pushed for a services-led export model for India instead of following China’s manufacturing lead for faster growth.

In a lecture on globalization and climate change, Rajan focused on the positive effects of independent services, which offer great potential in reducing inequality in industrialized economies and supporting climate action.

Liberalizing trade in services is good for both industrial and emerging market economies. Because most of these services are weightless, they have low climate impacts that are beneficial to efforts to mitigate climate change.

“Unlike manufactured goods, non-weighted services consume less energy to reach the end consumer. Growth in export-led services is much less likely to harm the environment. The world cannot afford to let India follow China’s path,” Rajan said.

Independent manufacturing, he says, has declining profits and is politically fluid.

“One reason industrialized countries with open borders have floundered is that their manufacturing workers have been disproportionately hit by global competition and outsourcing, while service workers have benefited. Both politically and economically, the liberalization of manufacturing has eroded profits.”

Unlike manufacturing services, he explained, services can be distributed across the country, turning them into heat sinks and reducing pressure on large cities that are increasingly inactive.

Distributing services away from cities will boost rural income and provide an alternative to loss of agricultural income.

“These services can be distributed across the country. In developing countries, this will reduce the burden of large cities that become heat pumps and become increasingly inactive. It will generate a source of income and reliable human capital. To seed rural communities that lack the economic capacity to survive the loss of agricultural income,” Rajan points out.

Here’s how Rajan thinks the services will help climate action:

  • emission reduction and climate adaptation devices; Efficient design of machinery and facilities required – R&D; engineering Consider design and architecture.

  • Relatedly, glass recovered from the demolition of weatherproof buildings; Materials such as wood and concrete will need to be recycled more efficiently.

  • As such services flourish globally, every country will benefit from global best practices and thinking.

It’s not the first time Rajan has talked about the benefits of a services-led growth model. He has previously been wary of the dangers of blindly following the Chinese-led model of manufacturing growth. He has often said that India needs to focus on educating and skilling the youth to create jobs that will come from services rather than manufacturing.

Rajan also called for a careful analysis of the benefits of the Production Incentive Scheme (PLI) to boost manufacturing in the country as the benefits accrue to larger industrial houses over small and medium manufacturers.

Rajan is not alone in talking about the importance of services-led growth. Business commentator Swaminathan Aiyar, writing for ET, argued for a services-led growth model that the future lies in services and not manufacturing. He said India needs to focus not only on services like IT, but education and health, which have been underfunded for years. He felt that a heavy focus on providing subsidies for manufacturing would cut into limited resources for human development.

The PLI scheme is one of the Modi government’s flagship programs to attract manufacturing to India. Multinational corporations want to diversify their manufacturing base away from China as the cost of doing business in the country rises due to strict COVID policies.


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