Arjun Ramani and Thomas Easton Decode India's Changing Economic Landscape

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guests are Tom Easton and Arjun Ramani from The Economist. Tom Easton is Mumbai bureau chief. He joined The Economist in 2000 at the New York bureau and was appointed the Asian business editor in 2007. Arjun Ramani is on an extended stint in Mumbai and Delhi bureaus covering the Indian economy. Before this, he was the global business and economics correspondent in the London office. We spoke about various aspects of covered in a recent six-part special report on India’s economy written by Arjun and Tom.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

The India Express and its Future

I recently read the special report, “The India Express” that was published in end of April. It has six excellent in-depth essays on different aspects of the Indian economy, whether it’s economic growth, reforms, energy, the financial system, the culture, the federalism aspects, and I encourage all our listeners to read it. My broad sense was that both of you, are optimistic about India in the short run, perhaps in the next five to seven years but perhaps less optimistic or even skeptical of India’s growth story and trajectory in the longer 30- to 40-year run.

My first question is, is that accurate, or did I misread what you meant? If so, why do you think that? I imagine both of you have different answers to that question. Perhaps we can start with Tom and then we go on to Arjun.

Reasons for Optimism and Pessimism Over India’s Future

THOMAS EASTON: We do have slightly different perspectives on this. I think the way to begin thinking about this is with a very straightforward question, which is, what does India want? And wanting is not an easy thing. Wanting is really hard. Does India want to grow and is it willing to do the things that it must do so that it can grow? The country that I have been in for the past five years seems to really want to grow. It’s making all sorts of changes to enable itself to grow. Many of the changes are of the sort that people didn’t believe would be feasible in the past.

In our preliminary discussions, what we have noted is that the India of 2019 and 2020 that I came to was quite a troubled country. It had very, very high loan losses in its financial sector and it had low investment and it had created a new bankruptcy structure but the bankruptcy structure seemed shambolic and many of the things that were going to be processed were not being processed. I think there was a great deal of skepticism about how India could go forward. Then COVID happened and it seemed like everything that was—well, five financial institutions went bust that were very large.

It seemed however bad things were, they were going to get worse. In fact, it turned out to be an inflection point. Things have subsequently gotten much better. The financial sector has gotten better, the corporate sector has gotten better, leverage has come down, returns have gone up. All those things have been very positive and I think all those things in India, in many ways, have been carved out of stone. Not easy to make any of the changes in any of the businesses that have existed. I think they’ve been helped by the fact that the world is looking towards India, and these are transient factors.

The movement from China. I’m sure you’ve talked about it quite a few times but these are factors that are also affecting other countries that compete with India as well. These are short-term and I say short-term, two-, three-, four-, five-, 10-year stuff. What we’re really talking about, and what you asked, is how will it grow in the long term? Will it continue to maintain the remarkable pace—I would call a remarkable pace; Arjun, I’m sure will weigh in on this and put more context on that—that we’ve seen in recent years and continue to go forward.

Now, what I would say are signs that it might, or things that are happening that are easy to ignore, is that in areas where progress is being made, and you can look at statistics that suggest, for instance, and I think Arjun will outline these very clearly, manufacturing. If you think about what they’re doing in iPhones, more impressive than the fact that they’re assembling a lot of iPhones is how the assembly process of iPhones gave birth to itself. 

My understanding is that in May of 2020, and COVID had just begun, Tata proposed creating a facility in Tamil Nadu. In September of 2020, they broke ground in that facility. In 2021, they had a pilot plant operating. In 2022, they had a full facility going. Now, this is a rate of speed that nobody expects in India. Now, it may not be a rate of speed that you could have maintained in China, where you could have an illegal factory going up in two weeks, you can have an illegal road coming up in a month and you can have a whole industry in 11 months. But for India’s standards, this was quite remarkable. 

Tata just announced another facility in Assam to do packaging for semiconductors. Again, this is something that would not have happened in Assam in the past. The amount of employment that will be there will be 27,000 people. Now, in terms of what India needs of employment, 27,000 people is really a drop in the bucket but yet, it’s still remarkable. The chief minister of Assam came to Tata and he wanted Tata to build a hotel for tourism there, and Assam probably could use the hotels for tourism. But he walked away with a full factory for semiconductors and what may become a much more significant facility, if you combine the assembly or the packaging of semiconductors with the design of semiconductors and other factors that are going into semiconductor production in other areas of India.

Now, where do you see those? You see that there are global capability centers popping up in India. These are facilities that are owned by companies from around the world. I think in the last couple of months, multiple capability centers opened that were singularly devoted to the design of semiconductors. You’re seeing a very, very advanced manufacturing mechanism popping up that I think other countries had a very, very challenging time producing. Now, if you look at China, they have loads of great technicians. You look at many of these countries and they have lots of great production facilities.

It’s very odd to have a country move into manufacturing when you have another industry that is very, very sophisticated, that is often considered to be a different industry—software and services and stuff—that actually may have many, many synergies with the manufacturing facilities that the country wants to boom. The manufacturing that may go forward in the next 10 years, 15 years, might be quite different than the manufacturing that went up in the years before. And India will approach that manufacturing and the construction of it in quite different ways.

I am very, very optimistic that India has these pieces for long-term growth that it can combine, and I’m also optimistic that it started to demonstrate the ability to execute these projects to go forward. I feel that it has a hunger and a pride to create a new country and a new economy. I see this happening in all places. It’s not hard to be in India to see failure. Failure is everywhere. You walk through many, many streets and there are buildings that are falling apart, streets that are falling apart and systems that won’t work and power that goes out and water that goes out. The list is endless, but on the other hand, you see success as well.

You don’t go from a period of one thing to another right away. Everything that you go through is on the margin. Therefore, what I see that’s so positive that’s going forward is on the margin, whether it’s in technology transfer between a services industry and a manufacturing industry, or the ability to break ground on a project that would have been unfeasible before or the ability to get projects done. Even in agriculture, I see things going on in agriculture moving from commodity production of food to horticulture and higher-value-added crops.

I did a story once that said moving from basket case to bread basket. It’s very possible that India will become one of the great food production resources in the world. Now, if you look at Indian agriculture and I know this will come up, you could say the following things about it: It uses up too much fertilizer, it uses up too much water, it produces the wrong products and it’s been a failure. There’s all sorts of examples of that, like shrinking farms and suicide of farmers and so forth.

Conversely, you could also say Indian agriculture has been a staggering success. Nehru at the beginning, in his early years, said if you don’t have agriculture, you don’t have anything. India now is a food surplus nation. That is a remarkable decision. The decisions the country has to make when it comes to agriculture are where to allocate its energy in agriculture, not how to feed people who are starving. It’s not that some people aren’t hungry in India, because they are. There’s still great poverty and starvation.

The fact is there’s a tremendous amount of food, there are surplus food stocks and they’re moving into all sorts of things, ranging from grape exports and tomato exports into Europe and also higher-value-added wheat and so forth. Yes, legal changes that were not able to be made in recent years should be made, but other changes are happening and they’re happening directly and indirectly.

All those things make me feel far more positive about India than I feel about my own country, which is consumed with, I think, senseless riots on college campuses that won’t produce anything productive for the students involved, for the society at large or any of the societies that they want to help. I think India is a brutally hard place to spend time in but it’s an incredibly encouraging place to spend time in. Therefore, my optimism is at a very, very high level.

ARJUN RAMANI: I very much agree with Tom’s broad framing of the country wants to grow, and you see that in the orientation of the policy framework in many states across the country. It’s all about optimistic compared to what? I think India’s growing at about 6.5% a year right now, and there’s debate about this, but that’s probably roughly what it is. It’ll probably continue on that path for a few years to come. In a sense, that’s a big turn, because as Tom mentioned, at the end of the 2010s, growth had flowed to about 4% by 2019. Basically, it was in a mini-financial crisis. What you see in terms of rising spirits is basically the turn of the business cycle.

This is just like you have the boom and bust cycle that’s playing out in India now too. The question is, can you go from 6.5% to something better, or how can you sustain that 6.5% for decades to come? I think that’s going to require a lot of continual reform and momentum in terms of policymaking. I think that’s where I’m a bit more uncertain. The reason why is because if you look at—Tom mentioned manufacturing. India’s manufacturing share of gross value add has actually fallen over the last decade. It’s in the low teens right now, around 13%, 14%.

If you look at China or the Asian Tigers, when they were at India’s per capita GDP of about $2,500, they moved into a phase of 30% plus manufacturing. As a share of GDP, they were exporting heavily. The reason why that was so valuable is because you could plug into global value chains. It was very easy to adopt technology manufacturing because it’s tradable. That engine of development hasn’t quite kicked off in India. I do think the Apple iPhones is one possible success story, and I’m sure we’ll get to that more. Absent a big manufacturing boom—and I think the reason why we shouldn’t believe that it’s going to be as big as China is because China exists, and it can serve the needs of global demand.

Also, manufacturing is a lot more automated now than it was 30 years ago, which means countries like India, which have a comparative advantage in low-skilled, cheap labor, maybe that’s less valuable in terms of manufacturing than it used to be. I think that’s the reason why you should be positive about India in the short term, but in terms of getting to something much higher for a sustained period of time, it just has a harder ladder to climb than countries did a few decades ago. From that perspective, if the potential is lower and it’s getting closer to that potential, maybe you should be pretty positive.

The only thing I’ll add to this is what would it take to sustain growth or potentially punch it up a bit? There are a number of ways in which it’s still quite hard to do business in this country. We get into this a lot in the report where you have laws on land and labor, and for example, there’s this act where if you’re a firm with over 100 employees, you have to get government permission before you can fire an employee. You see this cliff in the data where once you go past 100 in a lot of states, you see a reduction in the number of firms. There’s this continuity.

This type of stuff basically discourages scaling up in productivity. A lot of this stuff still exists. Now, the reason why it hasn’t been changed is because many of these are state-level regulations. In India’s constitution, it divides rules into three groups: what people call the union list, the state list and the concurrent list. Land is a state list subject. Labor is a concurrent list subject. Agriculture also sits with the states. Basically, that means that you need to get 28 very, very diverse and heterogeneous bodies to get on board with these reforms.

That’s very difficult. This government has actually had some impulses in the direction of reforming this. We talked about agriculture in 2021. They tried to liberalize agricultural markets, probably a good idea, but they bungled the implementation of this. The Modi government basically didn’t really consult farmers or any of the states, the opposition party. They went through with these farm laws, and they eventually took them back, because it was extremely politically unpopular. I think this is going to be the key for this next government, if it wants to be successful.

They’re going to need some kind of consensus-building mechanism to get these social groups and states who might disagree with reform on board. It’s possible. I don’t want to rule this out, but I don’t see that many signs that it’s super likely. I think that’s what’s going to be needed to sustain 6% to 7% for decades or potentially boost it.

Long-Run Economic Growth

RAJAGOPALAN: Yes. I guess I’m somewhere between both of you when it comes to my optimism or pessimism. When I think about really long-run trends, when we look at the most developed parts of the world, whether it’s northwestern Europe, we look at the United States, it’s not like they had this episodic crazy growth, but they’ve chugged along at 3% to 4% real rate of growth for 120 years, or something like that. Sometimes it’s two, and sometimes it’s four, but they’ve really chugged along for a long time. When we’ve seen places which have had episodic growth, people start getting skeptical.

If it’s not backed by deeper reforms, people are now much more skeptical about China than even six, seven years ago. It doesn’t worry me so much that India is not growing right now at double digits. My source of concern is very much over the next 100 years, can it chug along at 4%? Even if one year is 4%, that’s not what really bothers me. If two years are 10%, the way we had in some of the UPA government years, that doesn’t make me particularly exuberant either.

In that sense, would you rate it as one of those solid democratic institutionally sound nations in a way that we know China isn’t, and South Korea wasn’t. But do you think India is that sort of country, and we’re just not at the point where it needs to be yet?

RAMANI: I can start on this and then I’m very curious of Tom’s response. This is a harder question because it’s essentially a political economy question in terms of stability of institutions. On one hand, I do think this government and the last five to 10 years have given more of a growth market-based orientation to the country. I think we should give them credit for that. That said, the quality of institutions has been eroded. We all know that. We’ve both heard stories of business leaders telling us that if you speak against the government in public, you’ll get a call from the prime minister’s office the next day asking you to give an interview with a favorable publication basically qualifying your words.

What that means is that feedback mechanisms around mistakes might be weaker. Now, the thing that’s good is we also hear that the back channels are quite sound. This government is very keen to get feedback from industry behind closed doors. They don’t mind getting criticized as long as you don’t do it in public. As long as that continues, maybe that limits the negative downsides of the decline in freedom of speech. Over a long period of time, absolute power corrupts absolutely. I think if this government comes back into power with a big electoral majority, who’s going to be next after Modi? He’s 73 right now. He has an implicit rule with his ministers. If you grow beyond 75, it’s past your time. I don’t know if he’s going to impose that rule for himself. 

RAJAGOPALAN: They rarely do.

RAMANI: There you go. He might want to beat Nehru. He might want to have more terms than three and be the longest-serving prime minister. You could see that happening and then you could see this government becoming complacent. I’m not sure. I think that’s hard to say. There are encouraging signs, for example, the supreme court. I do think the court system, by and large, it’s quite sclerotic in terms of the pace at which it makes decisions, but it does seem relatively independent, probably more than I even expected before I started talking to people about it.

The most recent electoral bonds decision was very much a slap in the face of the government. I think the quality of those types of institutions on the timescale that you’re talking about of many decades to hundreds of years, I think will be super critical. You have this benevolent dictator problem. Even if you have a pro-markets PM, it might not always be that way if they’re constantly in power getting majorities. We can talk more about who could be the successor and all that kind of stuff, which at this timescale could matter. That is another reason to be slightly more uncertain because I do think the quality of institutions has come down slightly and that matters on that timescale.

Is India Prepared to be a Capitalist Country?

EASTON: I think a bigger question is, is India prepared to be a capitalist country? Arjun mentioned the supreme court. It is interesting that the supreme court is now debating Article 39B, one of the provisions of the constitution, about the definition of community property and whether it can basically expropriate from everyone and under what terms it can expropriate.

There is a heavy socialist underpinning in India that has existed for a long time and actually a swooning infatuation with socialism that exists in many corners of the country. Now, one of the things in the federalist structure that India has experienced is the truly socialist areas have actually faltered, and the more capitalist areas have grown. You see Gujarat is growing, and you see Tamil Nadu and Karnataka are growing, and you see other areas—obviously, Cochin is a communist-ruled city, beautiful city. There are two communist states in India: West Bengal and Kerala, of course.

Kerala is a wonderful place. It has a terrific educational system. It has a terrific healthcare system. Most of its employees go overseas to work, and they bring home their wealth through remittances to India. Now, that has just not been a dynamic area for India’s own growth. Let’s not discount the value of remittances. This is prevailing philosophies of growth. The question is, again, does the country want to grow and is it going to be capitalist when it grows? Now, I think there are many, many areas of India that are growing and are capitalist.

You’re getting maybe even a class structure change in India with the old class structure, which was based on maybe spiritual values being displaced by wealth, which some people would decry, but I think in many, many ways is healthy for the country because rather than being proudly poor, it will become proudly rich, and that would help the poor. I actually support that capitalist evolution. I also think one of the interesting debates that goes on in India—and I’m sure both of you will have an opinion on this. As an outsider, I might really misunderstand it. If you go to an American university, they’re obsessed with the idea of colonialism.

If you go to Britain, they’re obsessed with the idea of colonialism. If you go to Delhi, you have all these Congress guys who speak beautiful English, who went to prestigious British schools, who are obsessed with colonialism. I don’t actually think a lot of the current government is obsessed with colonialism. I think the British have already handed over this stuff. “You want the rail station? It’s yours. You want the old factory? It’s yours. You want the old tea plantations? It’s yours.”

One of the most successful builders in India said 40 years ago, he had nothing. He did not come out of colonial India. He came out of Congress India, and to some extent, worked with Congress India. If you read the government white papers, if you read the government economic policies, these are not policies to overcome colonialism. These are policies to overcome the policies that they believe Congress had that held back the development of the country.

Colonialism is just not the debate that I confront when I’m in India, and it’s a much healthier debate that I do confront when it’s in India. This is not necessarily a debate. The first constitutional amendment that I saw passed when I was here, I think it was the 10th renewal of reservations, which were done for 10 years and has been renewed each time.

I’m not suggesting that reservations won’t be renewed in whatever amendment is required 10 years from whenever that happened, and after that, and after that and after that. These debates are almost, in some ways, a sideshow debate to the other broader debate, which is, is the state itself, whatever state you happen to be in, developing? Is it going forward? Do more people have water? Do more people have food? Do more people have opportunity? 

These are just really basic questions that are not being debated right now on Columbia’s campuses or Yale’s campus, or Brown’s campus, or any of the other stupid campuses that I attended as universities or that are probably happening in Britain as well. If you go to IIT Bombay, and if you go to IIT Madras, and you go to IIT Kharagpur, all these IITs and all the IIMs are just not debating how to reallocate British wealth from 100 years ago. They’re saying, “How can we create a company? How can we get a patent structure, which has just begun? How can we have technology transfer payments? How can we retain those payments?”

I’m not saying the Indian government will make all these decisions correctly or expediently or anything else, but they are the right questions to debate if you want a developing economy. I think they trump all the other issues. They trump Modi’s age, they trump the structure of federalism, they trump all the other things that are going on. If the society is in the midst of creating these things and discussing these things, then it will go forward and it will progress. All those other issues will be side issues in this broader capacity thing.

There are many, many people who will not be part of this debate, including many people who are in the supreme court. It is not going to be an easy pathway forward. Doing anything in India—it’s become much easier to start a business, but it’s still very difficult to run a business. It’s become easier to create a patent, but who knows if you can really collect on a patent? Everything you do in this country is carving with your fingers out of stone. It is hard, hard, hard, and that is not going to end overnight.

The fact is, if they want it to end, and if people want to end, and if the young people in this country—after all, what is the average age of a supreme court justice? They’re all in their late 50s or early 60s. They’re all going to cycle through the government. There’s a whole new generation of human beings who are coming up, and that generation may have profoundly different views. They’re not, at least from what I have seen, rioting in the streets, where you’ve seen anti-economic growth things.

It’s been in Punjab. Whenever I drive through Punjab, I’m really struck by as you If you drive through all the fields, you see billboards everywhere. If you drive through a field in Maharashtra, or let’s be more to the point, Gujarat, or Karnataka or Tamil Nadu, you see signs for housing developments, new societies going up. You see signs for electronics, you see signs for household products, you see signs for a better materialistic life for all sorts of matters that is going forward. If you go to Punjab, you see signs for visas and how to exit from India.

It’s just staggering. Take a class, learn English and leave India. There must be some, but I didn’t notice any signs for products. In fact, there’s a very famous shopping mall, brutalist-style shopping mall in Chandigarh. It’s probably the first shopping mall that I’ve ever been—shopping malls are known for signs for all the junk that you buy in a shopping mall, whether it’s a sari or whether it’s a blender or whatever, television, whatever the hell they want to sell. In fact, in this, every second-floor office was a place to get a visa or a place to take a class so you could get a visa, so you want to leave India.

That’s Punjab. Punjab is striking over the farm bill. Punjabis for whatever reason, want to get the hell out of the country. That’s not other parts of India that I see. I don’t know if the economic growth rate they will have will be three, four, five, seven, eight or nine. Actually, I don’t think it matters. I think what matters is you get a positive growth rate on the margin and you continue to build and build and build and build.

This goes to Shruti’s point, can you create a culture of growth and production? By the way, at the same time India is doing this, I think America might be destroying it. What does India want financially? The Indian companies are deleveraging, maybe to an excess. The Indian government wants to have a better sovereign debt rating. Right now, the fiscal deficit is close to 6%. They think they can bring it down to 4%. Their goal is really to bring it down to 2%, which would actually bring India’s credit rating up, and maybe if they could get it down that low into the A category, which would be extraordinary because it would bring down capital costs. Very, very positive. 

Which way, really, is America’s credit rating heading? It’s heading down. It is creating debt at a staggering level with absolutely no plan whatsoever to moderate that debt. You see that in its primary economic value systems, America, in many ways, is becoming a socialist country with an elite on top, and you see India going exactly in the opposite direction. Therefore, every reason I’m optimistic about this country is reasons that I’m pessimistic about my own country. 

RAMANI: I’m curious, Shruti, what do you think about this question of super long-run growth? Where do you sit between us?

RAJAGOPALAN: I am a lot more optimistic about Indians than I am about India. What I mean by that is I think different states will grow at different rates. Indians will also start doing very well abroad. As the rest of the world ages, even what we call low-skill, which is not a phrase I like very much, but I know everyone uses it, but even low-skilled Indians have very high core skills, especially the women and so on.

As the world ages and you can’t have robots helping someone take their medication or get an adult diaper on and so on, and you need people who are both aspirational, who strongly believe in not just getting handouts and redistribution, as Tom said, but some sense of pride and economic growth and doing better and making their families and communities better, I think Indians will do very well. Now, will India as a union, do very well and all happen at the same rate and happen uniformly? That I’m a little more skeptical about.

I’m not saying India wouldn’t exist as a union, but do we go the Punjab, West Bengal and Kerala way, or do we go the Karnataka way? That’s the big question. I think Indians overall make me much more optimistic culturally. I think they’ve seen enough poverty. The one thing, exactly like Tom, that makes me optimistic is I just find India’s youth aspiration level incredible. I actually don’t see it anywhere else in the world. Of course, they’re trapped in a horribly socialist, gridlocked scaffolding. It’s a question of, can they actually do what their aspiration level is?

Unemployment vs. Informal Labor Market in India 

EASTON: I want to address that at one level. One of the reasons that I think I misjudge India all the time is that, I’ve been in Mumbai for five years, and there’s a metro system that was supposed to be completed years ago, and it hasn’t been. I go through months when nobody’s doing any work on the system whatsoever. In fact, the most expensive component of a lot of that construction is the heavy machinery that’s there. It’s very, very expensive to do it. The labor is very inexpensive. I’m driven crazy by the notion the machines are just sitting unused with no facility.

Every once in a while, I’ll see someone climb into a machine and go to sleep. I’ll think this is just indicative of a society that just can’t do anything. The truth is, I finally saw some of the scaffolding going down on the metro, and maybe it’s taken three times as long as it should have taken. In fact, it is happening. It’s happening too slowly to make me happy, but it is happening nonetheless. It will be completed. I really do believe it. And at the same time, I’m frustrated about what I can’t see happening. Mumbai used to be the economic center bar none, and now it is not the economic center bar none.

People have not waited around for that terrible metro system to not do its thing. They’ve gone to other places and they’ve worked around it. Arguably, there are a lot of other places in India that are rivals for the business capital of the country. If Mumbai can’t get its act together, some other place will get its act together. Again, it’s that federalism that comes out.

Listen, but again, a foreigner comes here and they try to get things done, and they’re stunned because they can’t and they fail. I watch people fail all the time, and I watch them fail, and you can just throw up your hands and you can say, “It’s just not going to work.” That’s my experience. Yet the next day, I see people come back and push harder, and their expectations are different than the expectations of people in America, for instance.

One of the problems I’ve always had with the employment statistics of India is that if you look at the employment statistics, a significant percentage of the country either doesn’t work or doesn’t work productively. Now, I want to go back to Mumbai on nonworking or nonproductive workers. If you go to a shopping mall in Mumbai, the shopping malls, to me, don’t seem all that busy. Some of them are busy, but some are not that busy. The upper-end ones are not busy at all. If you go to Crawford Market or whatever they call Crawford now, or the Colaba Causeway, you can’t even walk down the street because they’re just packed.

People are hanging stuff off the ceilings, and they’re illegal hawkers, whatever. Then Modi comes to visit, and all those hawkers are gone because they’re not allowed to be there. Then Modi leaves, and within 12 minutes, all those hawker stands are back there, and they’re all working. People love those stands. There’ll be like 300 fruit stands, all with people who haven’t washed but their fruits will be beautiful, and none of those people have official jobs. They’re all officially unemployed by Indian statistics.

You know what? They create their fruit stands at dawn. They keep them going into night. When I’m up at 5:00 in the morning, there’s a person who walks with kegs of tea that’s highly sweetened, whatever, every morning. Again, another person who’s not working in India, but is actually working harder than any other human being I’ve ever met in my life. My sense is that for many people in India, if they don’t work, they don’t eat. I think that unemployment is actually almost nonexistent in India. The only question is, can you create higher-value employment?

A lot of these people do have higher value. I don’t think much of the economic analysis of India can understand the informal employment structure. It doesn’t understand it in a formal way, but it also doesn’t pick up how much Indians like informal employment. They really like all these informal hawker stores. They really like all these informal fruit stands. The grocery store that’s behind it is not getting the same amount of business because the shoppers just don’t like it. In other places, they migrate it. If you look at the Lower East Side of Manhattan, if you look at Goldman Sachs, Mr. Goldman loaned money to pushcart guys.

The entire Wall Street area was basically on pushcart guys who built their pushcart businesses into financial—Lehman was a cotton trading site. There were all these different firms that came up. Solomon, they were out of nothing on the street, but the Indian migration is just a different migration. They prosper in different ways. In America, one of the best ways to make money was to invest in Amazon, because Amazon could deliver stuff to your door. I look at all these tiny little stores in India that all now have two people who are hanging around there at all times who within seven minutes—I’m the only person who goes out and actually tries to buy stuff. Everybody else, they call their little kirana store down the street, and the guy comes running within seven minutes, and they do it for a Coca-Cola. They do it for actually the smallest item you can possibly imagine. 

Again, I think that it’s a structure of an economy that’s a fundamentally different structure than we recognize in the West. Would I want to hire those people? I have a Royal Enfield, and I’m constantly getting muscled outside of the road by those 10-minute delivery guys, too, who terrify me, and they drive on the sidewalk, and they’re not really pleasant. I wish that didn’t happen.

On the other hand, I really have to say I respect all those guys because who else is fighting so hard to bring someone a Coke, not that you should drink Coca-Cola, anyway. Arjun and I wouldn’t do it. We think we’re pretty hard-working people, but we would just not go through that effort to do that. I’ve also noticed all those kirana guys, they know everybody on the street. I’ve gotten to know a bunch of them, and hundreds of people seem to know them. And you walk by and you think it’s just this massive Indian humanity that you really can’t differentiate one between—but they do. They know all those people, and they know all those stores.

Again, this touches on employment an issue that I will hand over to Arjun because I think he has a lot of feelings about employment, and I’m just looking at it from a different perspective.

RAMANI: No, I think there’s a lot of truth to it. What I will say is I agree with you. Unemployment is probably very, very low in India. A lot of people are earning wages through one sense or the other. The official data basically says that it’s 20% to 25% of people in salaried work where you’re getting a regular wage, monthly wage or weekly wage or something. About 50% of people are in self-employment. That would be your kirana store owner on the side of the street selling fruit. Then you have the balance, 25%, 30% are in casual work, usually earning some kind of piece rate, not a salaried work, but they might be producing something.

I think the problem is for growth, you want to be increasing the share of people in that first bucket because that’s the set of people that are most likely working with technology, working with capital, exposed to wage growth over time. You could argue that India is developing a different model where that number, that 20%, is never going to get as high, or not for a long time going to get as high, as a country like China that could rapidly industrialize and create a Shenzhen-like city that had a few 100,000 people and then in decades turns into 12 million people. That’s very, very hard to have vast flows of people in India. We talked about why industrialization is more difficult now.

I know that the word lower skill maybe isn’t the best one, but for this group of people that isn’t in salaried work, perhaps through digital payments, through having the banking system, they’re in a sense going to be in the formal system, but not necessarily have a formal salaried job. I think that is an alternative approach. Now, how can you get productivity growth? The reason why I don’t think the current state of affairs is the optimal one is because if you actually just look at wage growth, or if you look at consumption growth per capita, it’s only like 2% to 3% per year. That’s suggestive that the labor market at this end of the spectrum is actually not that tight or not that healthy.

Now poverty rates have come down, and I think that’s in a large part due to the welfare system becoming a lot more efficient. When everyone has a bank account and a mobile phone, actually what happens is a lot of welfare now just occurs through a digital transfer, which is pretty good. That’s why measured poverty is genuinely down. That is why my take on the labor market is, maybe again, it’s a case where you can’t expect it to be perfect. The potential health of the labor market isn’t as good as you might hope because of the lack of manufacturing. It is weak and you can see that in the wage data.

RAJAGOPALAN: I’m actually more pessimistic about what’s happening in the labor market, perhaps more than both of you. It’s not because I disagree with what either of you say. Tom, when I go to Mumbai, I have the exact same reaction as you. That’s where my in-laws live. I’m there a couple of times a year. When I go to Noida, which is just outside of New Delhi and which is where my parents live, and I drive eastwards to Uttar Pradesh and the countryside of Uttar Pradesh, I see a very different picture. I see a lot of young people just either doing something quite basic without purpose or just looking for the next thing.

The problem I think there is, exactly, because it’s so incongruous with what we were talking about earlier, which is the aspiration. Maybe for a few months people are willing to live with a mismatch between their level of aspiration and their opportunity set. Maybe for two, three years you’re willing to live with that in the labor market. Are they willing to keep trying their luck and keep working that hard over a 20-year period and trying to hustle and get a job, or are they all just going to give up and move back to those underemployment jobs in the farm and in the village where they’re really not going to ever be productive?

Yes, they’ll be fed and they’ll be basically looked after. There’s a basic family, agricultural safety net and so on. That makes me very pessimistic because also all the young people are in those unproductive areas. They’re not trapped in Mumbai, they’re all trapped in Uttar Pradesh, Bihar, Odisha, Madhya Pradesh or they’re fleeing Punjab. That’s where I start getting a little bit nervous about how long is this generation willing to wait around if they can’t get a stable job in a decent service sector job or a decent industrial plant with sensible working hours and a living wage and so on.

RAMANI: I think that problem becomes slightly more difficult because there has been a huge expansion in quantity of education, but not quality. You see a huge increase in the university-going population in the number of years you go to high school, but then you actually see test scores having flat-lined.

RAJAGOPALAN: Oh, yes. They’re terrible.

RAMANI: The one place where unemployment actually is high is for new graduates in India. You basically have this issue where people’s expectations are, “Hey, I should be getting a 9:00 to 5:00 salary job because I technically have a college diploma.” If the labor market is not tight, that doesn’t exist and then that can create discontent. I think that we’re in a period right now where it can go in multiple directions and you don’t actually see that much protest or unrest. You do in some states, like in the northeast and Manipur for example.

You don’t see widespread unrest, but you could imagine that being a potential issue five years down the road. Now that the business cycle has turned, if the labor market doesn’t turn with it, we’ll see.

EASTON: I have a radically different way of looking at this. When I first got to Mumbai, I would walk past this beautiful building all the time in Fort, which was the Central Bank of Mumbai. It once was a great institution. It was a Parsi institution. It was the first bank said to be run by an Indian and controlled by Indians. It has a museum that they didn’t allow anyone into. I asked them over many months and they finally let me see it. They have beautiful writing by the founders of what a financial institution should do and what it should mean to a society.

The person who ran the Central Bank of India became head of the Indian Bankers Association. He’s quite a distinguished banker. He fought in the 1960s against the nationalization of the Indian banking system. He lost his position as head of the Indian Banking Association, and ultimately he lost his bank and it was nationalized. It became for many, many years one of the troubled Indian banks. 

That’s a broad story, but when I looked at the museum, I saw a beautiful picture of a branch. They have about five branches around the country, and one was in Uttar Pradesh. It was in Lucknow. I was in Lucknow, which is where our special report opens, and I was walking down the street, and I saw this beautiful building, and I was like, “My God, that’s the building that was the branch of the central bank that was built half a century, or more than that actually, before.” You can see the structure. Then I met a guy who ran the sari store that sublet in that building. He grew up as a child with the nationalization of the Central Bank of India.

How did that nationalization unfold? First, the bank became public, then it became communist, then there were strikes, then people stopped showing up to work, then it became impossible to get capital from that bank. Then it became another useless appendage in the middle of that street in Lucknow. It was not the only problem that unfolded in Lucknow. The man who ran that sari store had other issues as well. As you know, crime was rife in Uttar Pradesh. There were gangs all over the place, and all the serials or all sorts of murders that went on in Uttar Pradesh.

He said that 20 gangsters would come into a sari store with a woman, and then they try to negotiate a price. It was a very difficult negotiation and he really didn’t make very much in his sari store. We use a statistic that actually another major industrialist pointed out to me. There’s a new book, “Age of Vice,” or something that’s just been optioned for a Netflix movie. It’s a thriller about a mafioso kind of guy in Uttar Pradesh who controls the liquor trade.

It’s interesting that that book came out because what this tycoon said to me was, “You have to look at liquor taxation in places like Uttar Pradesh. When it was totally controlled by the mob, the state was not able to collect any liquor taxes. Now that legal controls have gone into Uttar Pradesh, liquor taxation revenues are going way up.” Which is actually true. This guy I speak to, all of a sudden he doesn’t have gangsters coming into his store, liquor taxation revenues are going up for society. 

The central bank has been restructured 25 times. Now actually its loan losses have gone way down. It’s still not a dynamic bank. HDFC Bank opened 100 branches in Uttar Pradesh last year, and it plans on opening 100 branches in Uttar Pradesh this year. They’re not opening 100 branches because they are a sympathetic place. In fact, bank branches in other parts of the world are contracting. In America, bank branches are going down. As Arjun has mentioned, India is growing with digital banking at a ferocious rate. You don’t have to open digital banks just because there isn’t access to finance. They’re opening branches because Uttar Pradesh is becoming a dynamic place.

The business person that I spoke to from a leading family is opening a housewares factory in Uttar Pradesh to make stuff. I spoke to another man in Uttar Pradesh who makes the compressors on car wipers that go to all the car industry. It used to take three or four days to ship his car compressor component to other parts of India where they were used in production. Now it takes less than a day because the highway system has been built up in Uttar Pradesh. You were saying, “Will there be jobs? Will there be education?” I’m looking at it from this other perspective, which I said, there are now highways.

This guy who’s making compressors can now make them more efficiently. He can now [hire] more people. There’s now a legal system where you can run your store. There’s now a financial system where a bank is opening branches up where you can get credit. All those things mean that those people you see on the road between Delhi and Lucknow are much more likely to find employment in the years to come because people are much more likely to create enterprises to engage in the values that they have to offer. I see that happening on the ground all over the place in Uttar Pradesh. It’s not true in every state, but how important is Uttar Pradesh? We start the special report in Uttar Pradesh because it has 240 million people. Even though Modi is from Gujarat, he has his district down in Varanasi. Traditionally, that is where the Gandhi families—they’re now in Kerala because they’re coming—I don’t know if they’re coming, but they’re now in a different district.

They traditionally had their political jurisdiction down in Uttar Pradesh too. Everybody wants it for political reasons. If you turn around Uttar Pradesh, it would be what? We’d calculate the fifth or sixth country in the world. That is huge, huge. You said you’re optimistic about Indians, but not necessarily about India. If you could turn around Uttar Pradesh, which seems to be in the process of turning around, that is a remarkable reason to be optimistic about India itself. Now, as far as being optimistic about Indians, I am hoping that they save my country because I don’t know if my country is capable of saving it for itself. I actually encourage Indian immigration to come to my country and save America. I am actually looking at Indians in India.

India and Education

Now, Arjun also said education isn’t sufficient in India. I don’t know about that fact. I really don’t. I’ll tell you why I disagree with that too. Now, you can tell me for many, many reasons why coaching academies are terrible places. Kids commit suicide. They work all the time. They don’t have good athletic stuff. They don’t get polished. They don’t get taught all these other things. But you know what? They learn math, they learn chemistry, they learn science, they learn all the most difficult subjects of the world and they learn incredible self-discipline. There are a lot of these people now coming out of the school system.

Every time someone can open a factory in a place like Uttar Pradesh, they’re going to start looking for students who have all those capacities to provide some engineering talent inside the ecosystem, which can then apply people who are underemployed. I think there’s just tremendous underutilization of loads of talent that have gone on in India because of the disconnect, all the problems that were there, and the socialist tendencies and all the other issues that the place had. As you clear those out, you will see that many, many of those things will be put back together.

Now, there are mysteries in India for me, and I’ll tell you what a mystery for India is to me. I think the most important thing about education is how does a family feel about education. Indian families are really, really serious about education. That matters more than anything else. But I have to tell you, I am mystified by the fact that, in America, New York pays a ridiculous amount of money per student for all their schools and many of their schools are in terrible shape. If you go around America and you see a district where the schools are in superb shape, you’re often likely to find an Indian community. The Indian communities in America maintain their schools.

You go to New Jersey, to the tiniest town that has no record for a particular achievement, and you go to an Indian district, those schools look terrific. By the way, I think the kids coming out of those schools will be terrific, and are terrific already. You know what? If they don’t get into Ivy League schools, it won’t matter. They’ll build the institutions wherever they go. I am surprised that I go through so many schools in India that are in such terrible condition. I just don’t understand why they’re in terrible conditions because I know that the families care so much about the schools. I also have been a correspondent in other places in the world including China and Japan.

When I was a correspondent in Japan, I saw parents teaching kids through torn textbooks. It wasn’t like the China that I saw was a rich China. It was a China where the families similarly were devoted and were actually parenting themselves. In Japan, which was a fairly rich country that I worked in, I don’t know if you know this, but every school that I went to, the children, the first thing they did in the morning when they came to school is cleaned up the school. The last thing they did before they left at home was they cleaned up the school. It was incredible to see how much effort the students in a Japanese school put to maintaining that school to put it into absolutely perfect condition.

Given how much the Indians care about their schools, I don’t understand why the schools aren’t in the same condition, notwithstanding the poverty and the financial constraints. In fact, even in Mumbai, which is one of the richest districts in India, there’s school after school that’s just in dreadful condition. I don’t understand why it’s in dreadful condition given the families care so much about the school itself. I hear because the government’s run the school, or there’s this or there’s that. I don’t understand that disconnect. That said, I’ve been to coaching academies, and I hope to go to more for a story, but I’ve been to coaching academies that are in terrible condition, and I’ve seen students studying with the diligence that almost makes me cry.

Just because the walls aren’t in good shape and the lights aren’t in good shape and the fans aren’t in good shape and the air conditioning—doesn’t mean they’re not doing remarkable things. I don’t get that disconnect. Indian schools in America are temples of learning. Indian schools, to some extent in India, are temples of learning too. I don’t understand why they don’t resemble that. 

State Capacity Problems

RAMANI: Yes. We try to get to this in part of the report, and I think it comes down to governance. The great book that I also reviewed recently called—

RAJAGOPALAN: Karthik’s.

RAMANI: —“Accelerating India’s Development.” Exactly. Karthik Muralidharan’s book. He’s a professor at UCSD and he also runs a think tank here in India. It really focuses on this question of governance and state capacity, and state capacity being—you can just roughly define it as the ability of the government to achieve its objectives. How much muscle does it have? School quality would be one of those things. Can you actually get school quality to go up? A very, very interesting thing about Indian government is vacancy rates are actually very high, especially when you go down from the highest level of government to the lowest.

India is a federal structure. You have the union government, which is the central government. You have the states, and then you have local governments which are running cities, municipal corporation is the term, or villages, Panchayats. If you look at the percent of total governmental employees at each level of government, and we have this stat in the report, it’s about 15%. That’s 15 at the local level. If you look at the United States or even China, which are other large federalized countries, it’s more like 60%. Another way of capturing the same lopsided nature of Indian governance is if you look at the share of spending governmental resources that are spent at the local level, it’s about 3% for India, and it’s 50% for China, I think it’s 27% for the United States.

India is basically much more centralized. I think what that means is these feedback loops of local governance where you would complain to your mayor or you would complain to your city council, whatever it is, if your schools are bad and they would fix it, that’s broken down. Actually, in Mumbai or in a lot of Indian cities, if you ask people who their mayor is, they don’t know. It really doesn’t matter because they don’t actually do so much. Lots of government employees, people in the administrative service have this joke that if you want to run the city of Mumbai or Bombay, you should become the chief minister of the state of Maharashtra because they have so much control over the cities.

It’s a strange thing because India was set up back in 1947 after it gained independence to explicitly not have a strong set of local governments because the founding father is, in fact it was actually B.R. Ambedkar, who was from a lower caste background, who thought that India didn’t have the capacity or human capital necessary to have a very decentralized political structure. It ended up having a very centralized administrative service. In the early 1990s, and this was Narasimha Rao if my memory’s correct, who under him, the 73rd and 74th amendments to the constitution were passed.

That created this third tier of government, which the cities and Panchayats were supposed to devolve lots of money and resources and personnel, but that hasn’t happened as you can tell from the stats I mentioned before. I think you need some democratic cultural consciousness shift. One place to start that we suggest in the report is you need to fill all these vacancies, like the people who are supposed to be monitoring schools for quality. I think in Karthik’s book he mentions they have vacancy rates of like 20%, 30%, 40%. Then you wonder why maybe absentee rates for teachers are so high and these buildings don’t get refurbished. I think that lack of capacity and that lack of democratic culture at the local level, which is closest to the people, is perhaps one reason why, but it’s a very complex issue.

EASTON: If you look actually interestingly at some of these coaching academies, they’re quite libertarian. I don’t think that anyone in America can name who the best professors are in high school. In Kota and in Mumbai, and all these places, everybody knows that someone can teach you physics. In fact, there are huge bidding wars to get these high school teachers who are really good at teaching. There’s no vacancies whatsoever in these environments. India has created this incredibly libertarian secondary school education process right out of the blue. Actually, I’ve just heard some very interesting things about how this developed. I don’t know if this correlates with what you—I’ve been working on a story on this subject. Somebody told me that Kota, for instance, was one of the most industrial areas of India until 1991 when the opening happened, and when the opening happened, many, many companies in Kota went out of business, and that unleashed many, many physics and engineering professors who no longer had jobs, who created coaching academies. 

This was quite an inadvertent consequence of economic upheaval that created an entirely new educational structure. I’m very much a believer in the fortuitous roads that economic development takes. Nobody planned this. Nehru never imagined it. When the economy opened, nobody thought that they would create an educational hub in Kota for all these other things, nor did they create some weird model that would be replicated in other parts of the country. But I actually see a libertarian educational structure emerging in India. Look at all the other surprises that India has had. Did we ever imagine that India would be a software country?

RAMANI: I think there is a connection here, which is, how do you enable parents and local communities to effectively govern their schools? You mentioned the coaching academies and so forth. It is still a very small share of the population that accesses this and has disposable income. Even if you want to scale that system up, which maybe you should give everyone educational vouchers, and they should be able to just go to a coaching academy full time, which is one alternative, but you do need to have some governance mechanism. I think one of the failures of local government in India is they don’t even have the capacity to raise their own revenues. So property tax collections are extremely low.

Actually, one idea that was given to me by some former people in the finance commission was GST, the goods and services tax. A third of the revenues from it should just be allowed to be kept in the local jurisdiction in which that activity happens. You would actually create a lot of revenue for local governments in that way, and it would be incentive-compatible, which means you would keep the revenue based on the activity that happens in your city, which gives you an incentive to improve the governance outcomes of your city. I think, in a way, it’s really about how do you build these feedback loops, these accountability mechanisms, and they can happen in multiple ways.

EASTON: I sometimes think the idea is how can you avoid the government as much as possible. I was interviewing kids at some of the IITs, and they actually talked to me about dummy schools. Do you know about these? Have you heard about these?

RAJAGOPALAN: Yes.

EASTON: You have to get a state education, and you have to get an education in an accredited institution, so there are now schools that if you go to a coaching academy, will allow you to never show up for class, which is breaking all of the government rules, and just take the test at the end of the day. Here, you create structures totally outside of the—Arjun’s idea is you build a better structure, and there’s much to be said for that. My idea, maybe because I’m from a different era, or a different world or something like that, is how can you avoid the government so you can be productive and have a better life for your family and your country?

In the Indian way, Jugaad way, they are just circumventing all of the government structures that have impeded their ability to have a high education. I look at those circumventions of government structures as the most promising aspect of the Indian economy.

RAJAGOPALAN: Arjun, you’ve touched on something really big, and I think it’s not just about education. I think it is all governance. In India, we have always stifled local government. If you go back 250 years, it’s because East India Company officers didn’t understand how to do it and they just delegated it to zamindars, entered into a permanent settlement, took the revenue and went home. Even today, you see this enormous difference between the northeast and the south and the southwest where the British actually set up their own revenue collection and some kind of governance state capacity at the local level versus in the northeast where you still don’t have that capacity.

Of course, then the Ambedkar and Nehru moment comes, and Nehru believes in a high degree of centralization, and Ambedkar wants to avoid what he calls the den of parochialism and localism because it’s so casteist, the village government or the local government. I think the bigger issue is both the East India Company and the Indian framers, the reason they never quite attempted local governance is this attachment to uniformity. The moment you have local governments, you are going to get what you have in New Jersey. You’re going to have Edison, and Woodbridge, and Princeton and Orange where you’re going to charge $25,000 a year in property taxes, but it’s also going to be people vote with their feet, and the people who really want to live there, live there. Then there are parts of New Jersey, maybe 40 minutes from there, which actually have quite terrible schools.

The visible version of that is, oh, the Indians and the South Koreans and the Chinese live in Princeton, and Woodbridge and Edison. You have someone else living on the Jersey Shore. The other aspect of it is New Jersey is comfortable with the lack of uniformity. The United States, even as a union from the time of its formation, has been comfortable with this lack of uniformity. In India, the top-down structure always, somehow the attitude is, “We’re going to give whatever we give to everyone equally badly, and so be it. If some places start doing really well, and some places start doing badly, then that’s a really big problem.” That’s where the paternalism kicks in, and that’s where this attachment to face-level uniformity kicks in.

What changed that was liberalization. The southern states started growing much faster, the places that embraced capitalism, as Tom said, the places that had better state capacity, and so on. I can’t believe I’m saying I’m not optimistic about the libertarian side of India, that’s really a little bit crazy, but the reason I’m less optimistic than Tom is it doesn’t scale. Everywhere in India, one of the hardest-working people we ever see are the guys who iron your clothes. I’m sure you have one, Tom, down the street in Mumbai. Everyone has a guy who irons their clothes.

EASTON: Actually, let me be clear, I iron my clothes.

RAJAGOPALAN: Okay, you iron your clothes.

Concrete Ceilings for Indian Businesses

EASTON: I have to say that has drawn a tremendous response from Indian friends. I’m amazed you mentioned that. When I started as a reporter, I had two shirts, and I washed one every day, and I ironed one every day. I didn’t have any money to do that. It didn’t seem like that was that big a deal. When I iron my shirts here, people are incredulous so maybe I should stop. It shows I have not adopted Indian standards. Anyway, I’m sorry to interrupt, but it has become a source of consternation among some people who have seen me have an iron.

RAJAGOPALAN: No, I iron my own clothes, too, but I didn’t, growing up in India. It’s because there was this guy down the street who worked from 8:00 a.m. in the morning till 8:00 p.m. at night, and all he had was a wooden bench or a stone bench. In the summer, it’s like 45 Celsius in New Delhi, and he would have his charcoal steam press going on. In the United States, I can imagine someone who works 12 hours a day ironing will very soon have a small shop in the strip mall—

EASTON: It’s true.

RAJAGOPALAN: —and then he can become a dry cleaning shop, and then he can have a chain of dry cleaning. Before you know it, he will be like the dry cleaning king of United States with the most garish symbol or sign. He’ll be the guy sponsoring all the local golf tournaments and the football tournaments and so on. In India, that guy is going to spend his entire life ironing. Most likely, his kids will do the same and now maybe we can hope that his grandkids won’t. The reason is that no matter how hard you work in the Jugaadu part of India, until you can exit that aspect of India and actually come out of the shadows into the formal economy, you can’t scale.

You talk about this in your report, that most small firms in the informal sector, they’re not able to scale either because the Factories Act kicks in at 10 people or the Industrial Disputes Act kicks in at 100 people, but it’s the same thing with schools. We do have a libertarian system where people vote with their feet and so on, but you don’t take ownership of the schools because the schools aren’t collecting anything close to user fees or local tax fees. This is where I see the marriage between what both of you are saying. The libertarian exit has happened exactly because of what Arjun is saying. The system doesn’t work. It’s too top-down. You don’t have voting with your feet. You don’t have actual ownership of local government.

I think the meta-issue is, the reason we don’t have all of that is that the union of India has long held that either we will have it for everyone or we will have it for no one. We’re not comfortable with just devolving directly to different local governments. God forbid, districts of Kochi grow better than districts of Bihar.

EASTON: I think that every reporter thinks all the time about all the stories that they try to do that fail. I thought about a big story on pushcart capitalism, and that would be the evolution of the pushcart guy to the bigger business, to the store. I didn’t see that happening. I abandon that idea of a story. I don’t think the ironing guy is going to ever become whatever. There are many of those ironing guys whose children will take their place, but there aren’t as many ironing guys now as there used to be. Are there?

RAJAGOPALAN: Yes.

EASTON: I walk in old lanes and I see someone with the charcoal iron. People tell me there used to be many more of them, and there would be people who would be—

RAJAGOPALAN: Yes.

EASTON: Even in my time in Mumbai, I’ve seen some of the shoe repair places close, those little stalls where people sit on the ground and they repair shoes and they make shoes. I’m not sure that’s a good thing or a bad thing, but I have seen those very inefficient components of the society start to—sometimes there are things in between. For instance, I used to buy my books from a bookseller outside where my co-working space is and I thought he was invulnerable. The street would be plowed up, he would go down, the street would be rebuilt, he would come up, there’d be rain, he would have umbrella’s, and then he finally died. No one replaced him. You know Mumbai, near the courts, there are these outdoor bookstores.

RAJAGOPALAN: Yes. I love them.

EASTON: One of the things that I’ve been so amazed by those outdoor bookstores is I ask them for different books, and you think it’s just piles of books, but it’s not just piles of books. They’re really organized. They disappear in all those files, and then they come back and they have one, and they know how to get it for you. I see those similar things that you saw elsewhere of those piles becoming a store. Now, why can’t they move their books into a retail store? What is the impediment that stops them from doing that? Because if they could, they would. Why can’t the hawkers that I see on Colaba Causeway, occupy the stores on Colaba? What is the disconnect between those things that allows India to migrate upwards in that way?

That is a very, very serious disconnect, and it’s a very serious impediment, and it would bring more people into the formal economy in a very, very productive way. Obviously, it’s not happening for a reason. 

RAJAGOPALAN: The reason is the Shops and Establishments Act, which I believe kicks in at 10 workers. If you’re asking about the ironing guys, because you need a fire code arrangement to be figured out. In Mumbai, there are jewelers with millions of dollars-worth of diamonds who are not following the fire code because it’s absolutely impossible to have egress and ingress, which are six feet wide and all the crazy regulations. A lot of it is the regulatory system. The nice thing about the India Stack, which has come in with the unified payments interface and things like that, is that the ironing guy doesn’t have to be down the street anymore. You can reduce the transaction cost. You can come and pick it up once a week and do it in a better place. In an easy—

EASTON: He can get credit.

RAJAGOPALAN: —and more comfortable place. He can get credit, exactly, if he shows revenue. 

EASTON: Because you can see his transaction.

RAJAGOPALAN: Those things make me happy. Still the scaling problem always hurts me.

The Binding Constraint

EASTON: Shruti, we just said that through the digital stack, a guy in a slum can now get credit. Do you think it’s possible that when you and I look at things, we don’t see scaling? It’s me looking at the metro being built. It just never seems to get built. They don’t have people working on the machinery. Nothing is happening. It’s unbelievably irritating and yet one day, maybe years after it was supposed to happen, all of a sudden the metro is working. They’ve finished it. Somehow this transition is happening in a million tiny ways that we’re not seeing. We’re seeing all the impediments. We’re seeing the 10-person employment and this employment and yet we come back and we visit in 10 years and we go, “How did that happen? There are just so many impediments. How did they get around that?” It still might be unfolding right in front of us, but to watch it is to see it not happening, which is an odd thing.

RAJAGOPALAN: Yes and no. I’ll tell you why I say yes. I don’t live in India anymore, but I study it all the time. When I do come to India two, three times a year, I can see the difference every few months, every couple of years when I visit Bombay or when I visit Kerala. I don’t go to Kerala every year, but when I do go, I see the difference and so on. I do agree with you that there’s a certain aspect of being so close to something that you don’t quite see it, and you need to step away and come back in a few years. 

There are lots and lots of constraints for any productive economic activity in India, but depending on when you look at it, the question is whether that is the binding constraint or not the binding constraint. For a very long time in India, for all the small shopkeepers and the individual entrepreneurs and the guys who were on the carts, the binding constraint was access to capital. Now we’ve relaxed that constraint. Now they have access to capital. Now I think the binding constraint is the Shops and Establishments Act. Earlier, it was really not a binding constraint because they didn’t even have the capital to start their own shop. Now that they have their capital, that’s the binding constraint.

Now, the day they figure out the Shops and Establishments Act, and they either increase the thresholds and you figure out, then maybe, as stupid as it sounds, the binding constraint is going to be the fire code or the land use code, which is what it is in New York City. The changing of land use or allowing taller buildings, that seems to be the binding constraint in most urban parts of the United States, which is all about detached big single-family homes where actually you need something completely different. I think one of the reasons you and I swing between the optimism and pessimism and scratch our heads on why is this going on is because things are changing so quickly in India that what used to be the binding constraint two years ago is now no longer the binding constraint because of the UPI, but now something else—

EASTON: But there is another one.

RAJAGOPALAN: —is the binding constraint. Exactly. It is really this thicket of regulation that needs to be removed. When I was growing up, the binding constraint was the industrial planning system, which didn’t allow you to make more than 500 bicycles a year, or produce more than X tons of cement or something like that. That just disappeared. You had Rakesh Mohan and Narasimha Rao and Manmohan Singh just dismantle it. In a matter of eight months even as a young eight, nine-year-old kid, I was like, “Wow, I didn’t know there were more than two kinds of chocolate. I didn’t know there’s more than two kinds of cola. Now, there’s like 20 kinds of chocolate. That seems unreal to me.” I think that’s the thing.

Now we have 20 kinds of chocolate, but can each of those chocolates become the Royce or the Japanese chocolates. We have incredible Ayurvedic cosmetics. Can they become Korean cosmetics? Now the binding constraint, I think, is something else. That would be my response to this sort of, “Why are we always puzzled by what’s happening?” By the way, I completely get your pessimism about United States because I lived in New York City when they were building the Second Avenue Line, and apparently everyone has lived in New York City when they were building the Second Avenue Line because they were building the Second Avenue Line for I don’t even know how many decades at this point. It just went on and on and on.

I understand that Mumbai building it in a matter of five or six years still is extraordinary for a country of its state capacity. It’s GDP per capita is one-thirtieth of the United States. New York City is one of the most productive places in the world, and they can’t get their act together when it comes to pulling together a metro, and it takes decades to make it. I completely understand your pessimism for the rest of the developed world and the optimism for India. But all Indians who are hustling so hard, they keep hitting a concrete ceiling the moment they start getting their wings, and then there’s another concrete ceiling and then that needs—that’s how I feel about India. I don’t know if that makes me optimistic or pessimistic.

EASTON: The truth is what you said about hitting all those concrete ceilings, I think the greatest privilege of being in India is respecting the people who have managed to hit that ceiling so many times and continue.

Industrial Policy

RAMANI: I was just going to add on this idea of binding constraints, switching over time, this is actually a theme that came up quite a bit in the report that literally the binding constraint has shifted from supply to demand in the sense of lack of access to financing to where do you access a pool of demand. As you were saying, you hit these brick ceilings, there’s some kind of reallocation component sitting in the middle where how do you ensure that all the resources go to the productive firms? I think the reason why I bring up demand is because I think there’s a misconception that India is a really vast market. 

RAJAGOPALAN: Oh no, it’s not.

RAMANI: You can see this even when we talk about tech where I’ve been very optimistic about Indian startups and tech for a long time, and I still am. Actually, the reason why there’s been a big venture capital pullback, partly is due to the business cycle and partly is because there’s been a realization that the market is actually much smaller. You see Sequoia Capital literally leaving India along with some other funds. Where can you access demand? You have to export if you’re in a country at India’s stage of development. I actually think that’s the big hurdle is how can you tap into export markets, how can you get Indian-owned companies with IP in this country that are able to compete globally?

We’re talking about where are you optimistic, where are you pessimistic? This is one area where I think it could go both ways, and I see some reasons for concern. We brought up Apple earlier where now 14% of iPhones this year are reportedly being assembled in India, and it’s going to jump to 20-plus next year. That’s pretty good. Us, as a paper, we’ve long been skeptical of industrial policy, but there is possibly a causal connection between the government’s production-linked incentive scheme, which is their flagship industrial policy, and this happening. Not so much because of the money because they’ve actually given out very, very little, less than a billion dollars of total money, but rather because of the signal.

When we talked to the Foxconn guys, they’re, “They created this program and it gave us a very strong signal that these hurdles that we’ve been talking about all throughout this conversation were going to be removed. And they’re going to work with state governments and make sure that land can be acquired, and make sure that you can build a massive dormitory to have a bunch of labor in a single place, which previously would not have been possible.” This is like the Shenzhen dormitory-style living for factory workers. I think that signal or commitment was quite important. Now they are exporting, but then if you look beyond this anecdote, you don’t actually see the manufacture and export figures moving much.

I think part of the reason why is because this government still hasn’t made it easy enough for foreign companies to come into India to compete, which is where you get technology transfer, which is where you learn how to export products globally. If you want to increase exports, you correspondingly have to increase imports. You can’t do one without the other. 

One debate that Tom and I have been having is whether this government’s approach to tariff policy has been wise, where what they’re trying to do is they’re trying to boost exports with these subsidies, but at the same time, they’re using these tariffs on components to encourage companies like Apple and Foxconn to buy from local suppliers, but the local supply chain isn’t really built out. What’s actually happening is the subsidy payment is being used to pay off the tariff.

RAJAGOPALAN: It just cancels each other out. Then there’s so much dead weight loss and none of the Indian firms can capitalize on the deal. There’s just so many second- and third-order effects of that.

RAMANI: Exactly. Exactly. What you’d like to see happen is the country learn. Successful industrial policies, if they are going to work, are going to happen through iteration. This week we’ve been meeting—I’m in Delhi right now—meeting with various folks in government, and I do actually see evidence of this learning process, which is somewhat encouraging. In the last budget, they cut component tariffs from 15% to 10%. I think there’s a recognition that more probably needs to be done. There’s a sense in which let’s take the realization and the learnings we’ve had from the electronics PLI, and let’s apply it to the other domains. Again, the jury is still out, but that’s one reason to be both pessimistic that they have some protectionist tendencies that haven’t really gone away. Also, there’s this kind of learning process. I think that’s going to be really interesting to watch in the first 100 days of the new government if Modi comes back for a third term, is, do they really revamp these policies with the learnings from the last five years?

RAJAGOPALAN: I’ll tell you where I am on the learnings and reiteration. I think it causes a lot of regime uncertainty. The second thing it leads to is, the attitude among businessmen that if you have an inroad for that particular sector or business association or the individual business house with the government, then you can iterate and get things done and solve problems one at a time. If you don’t, that area is entirely out for you. I think this is one of the reasons we don’t see a huge inflow in FDI. We don’t see the big inflow.

Forget FDI, even domestically, I think this is the reason we don’t have high investment rate and fixed capital formation because this learning by iteration is a little bit nuts when you think about it from that point of view. Adam Smith got this pretty right, and Ricardo got this pretty right. You can’t have a protectionist economy that exports if you have high—you know this. You have lots of books behind you, Arjun. People who write a lot and produce a lot of books also read a lot and consume a lot of books. They’re just different books, right?

RAMANI: Yes.

RAJAGOPALAN: This idea that you can become this electronic manufacturer of the world without importing electronics or parts of electronics is just bananas.

EASTON: Wait a second. You’re going a little too far. They don’t believe you can get there without importing, and they make concessional deals with even the Chinese who they don’t want to make concessional deals with because they think there are critical components that have to come in. Managing an infant industries argument is a very difficult thing to do. They may not be capable of doing it. You do see some very strange things happening in India like, for instance, though you haven’t seen it in the statistics, they’ve threatened, as you know, to put a permanent system in for personal computer imports. They withdrew that.

RAJAGOPALAN: Thankfully undid it, yes.

EASTON: Sort of undid it. It was with immediate effect. Then it was postponed, and then it was put off, but with a threat that it could be reimposed. Very quickly you saw 34 people sign up to produce personal computers in India. Not that you’ve seen all those computers because the most recent statistics show that personal computers are still coming overwhelmingly from China. It is possible that you are about to see the creation of a new personal computer industry in India. You can’t totally discount their heavy-handed approach, and yet it is fantastically difficult to manage.

It does lead to corruption. It does lead to inefficiency. You look at that component shift from 15% to 10%, you could almost argue why not go down to zero, but it wasn’t just a distinction between 15% and 10%. I believe some of the litigation against the Chinese telecom operators were because part of a cellphone screen had a tariff of 15% and part had a tariff of 10%. They were litigating on tax evasion based on the spread between those two, which may have actually been a way just for them to torture the Chinese importers of components.

They used all that stuff as leverage to put friction into the gears of the Chinese and enable other producers of other parts. Now, just pulling off such a sophisticated game of restricting imports from one group and aiding them in another at a time when no government may be sophisticated enough to pull something like that off. I have to say the Biden administration, in its own way, is trying to do much the same thing, and again, may be totally unable to do that sort of thing. My argument, or to the extent we had an argument about it, is that I think that India is very serious about trying to pull this off effectively.

You can’t just dismiss it, and you have to look at all these different things that they’re trying to do like the PC imports and stuff like that, and seeing if they had an impact. I think another great area of sensitivity is APIs for pharma because the Indian generic drug industry has done very, very well in global markets. They’ve done very well in part because they’re extremely low-cost production methodologies. Part of that low-cost methodology has been importing APIs from China. That has led to the thought that the API industry in India was wiped out and that the Chinese could integrate from the API industry that they have now taken away from India to build their own generic pharma.

That is a real and legitimate concern with India. Then the question is, do you put some tariff on the APIs from China? I like to think of this as both positive incentives and negative incentives. The positive incentives are production-linked incentives. You actually pay for production. The negative incentives are tariffs and so forth. They are worried that the Chinese would wipe out the drug industry if there weren’t these sort of impediments put in, and if they couldn’t rebuild their native industry. Now, to the extent the government is trying to temper the problems that go on with infant industry approaches, they’re not very explicit about how they do these things.

They don’t explain themselves very well, but one of the stipulations they have put in for many of the things they’re doing is time frames. They’ll say, “We will have a tariff, but it will be for a limited time frame. We will have a PLI, but it will be for a limited time frame.” That is to protect against the endless tariffs that went in, in the nonliberalized India economy before 1991. I don’t know if they’re sincere about that. Once you put in tariffs, there’s always reasons to extend them. They may never call up, but this is a very, very dynamic area.

They’re competing with countries like China that have been very adept at imposing things and not imposing things. Giving breaks for intellectual property and breaking agreements, and so forth. I just think it has to be thought about in a very deep and rich way, even though there’s a temptation to just say, “This is all a bad process. You’re just going to be introducing friction into the system, and you’re just going to make it harder to build the export-oriented businesses that you want. That all the assemblers that you want to have happen will just not set up here because it’s just too costly.”

The other component to it, just one last point on that, that Arjun has touched on and that’s come up elsewhere, is the building of roads and logistics, which is at the same time as they’re doing various other forces. They’re doing tremendous subsidies to create an efficient system because it is very, very costly to get to an Indian factory to a port, and it takes a long time. That is closer to what I guess maybe we would all consider to be a public good if we could define what a public good is. They’re moving on many, many cylinders at once.

We can fault or not fault others, but I guess the pushback I was giving is you can be totally unsympathetic to what they’re doing, but there is some reason to what they’re doing. When 32 PC manufacturers announced after that, we all recoiled when they put in a permission thing for computers. We all thought that was a stupid idea, and yet when 32 companies announced subsequently that they were going to produce computers in India, I was like, “Maybe there’s something more to this than I’m willing to acknowledge, given my own libertarian leanings.”

RAJAGOPALAN: I’ll answer the immediate aspect of why we disagree and also the meta-aspect. The immediate reason why I disagree is I’ve seen this story play out before.

You get the semiconductor guys to come in, you get them to set up in India. India was actually the first country before Taiwan, before China, to have a tie-up with Philips, which eventually led to ASML in Netherlands. None of those things really happened in India. I have seen this song and heard this song before. It’s not that I think this government is less competent or more competent than the Indira Gandhi government or the Nehru government. It’s that I think this can’t be done, and it’s because they simply don’t have the knowledge required.

EASTON: Yes.

RAJAGOPALAN: I hate to suddenly reveal my Hayekian, George Mason, bloodedness, but that’s really it. It just can’t be done. I think you’re right in that it’s not an utter disaster. There are some immediate green shoots that come out of it, and if you iterate better, and you actually manage and you go to the South Korean and Taiwanese way where you’re willing to let go of losers, even after the subsidy and everything, you’re willing to kill your bad babies and just continue pumping in money, and you’re good at picking winners, it can be done.

I’ll tell you the meta reason why I still think this is a bad idea, even if they pull it off. It is a little bit of the seen and the unseen. What we see is, yes, they put out this crazy notification that they’re going to have permits for laptops, and then they undo it and then 34 people sign on. I think it’s unclear how many hundreds of laptop manufacturers and assemblers in India never took off because the government engages in so much regime uncertainty. Just, it’s always one step forward and two steps back. I think that’s the reason for my pessimism.

I know that’s theoretical more than empirical because it’s hard to find the dog that didn’t bark or the 100 laptop assemblers who never took off in India. I do think that is something to be cognizant of. The other difference, I think, also between China, Korea and India is, one aspect is the tariffs and the external sector, which India liberalized to a large extent, then did a little bit of a U-turn and now it’s doing this dance of we increase it a little bit and give some special exemptions and so on. That is never, I think, the real reason India has been held back because India is a huge domestic market.

I think India was held back because its regulatory system—tariffs are a tax on the domestic consumer and the foreign producer, and it’s a benefit to the domestic producer. The regulation is a tax on the domestic producer and the domestic consumer and the global consumer because you’re just not producing that stuff. I think in India, the game is less about tariffs and tweaking that around the edges. It’s more about some of the stuff that Arjun was talking about earlier, which is the broad-based factor market, institutional reforms, getting your courts in order, getting your roads in order, getting your land, labor, getting your electricity connections in order, and power generation, Discoms in order.

I think that has always been the tax in India because even if India were a closed economy, but it opened all of that up, it’s domestically an enormous market. I’m not saying we should undo liberalization, but I’m saying in these two aspects, India is a little bit different from Korea and China because Korea never taxed its domestic economy quite that way. They did infant industries, and then they liberalized, and it was great.

EASTON: No, they did. For instance, their car imports were restricted, and many other areas, things were restricted in all sorts of ways. I’m not saying that they should be a model for India, but I’m just saying South Korea did do many of those things. You say that you can’t see a lot of the unseen things, but you could say that emigration from India was actually a lot of the unseen things, all the brilliant Indian people—

RAJAGOPALAN: Unseen, absolutely.

EASTON: —who took their great ideas and were unable to create a business in India.

RAJAGOPALAN: And left.

EASTON: Yes, and then left and were able to create their business. All that stuff is very, very true. Getting the courts right is obviously an incredibly important thing and getting the property system right, all that is obviously essential. It’s obviously very, very difficult to do any of that in India and getting the revenue service right. If you look at all the other things, you might say, The allocation of GST, as Arjun mentioned, is really important getting that right. It may actually be even more important just to have one rate of GST.

RAJAGOPALAN: Exactly.

EASTON: Even if it’s the wrong rate of GST, right? You just choose any number and that becomes the GST rate, and you allow the economy to conform itself around that. That matters more than the allocation and everything else too.

RAJAGOPALAN: I agree.

EASTON: I’m very sympathetic to both of you guys when you say these things.

RAMANI: If I could just add one thing to maybe square some positions here, I think the thing that has sort of worked with the electronics PLI, and the reason why I brought the actual monetary allocation has been low, but the signaling effect has been more important, is it’s within that limited sector for those firms, they’ve cleared hurdles. I totally agree with you, this is like picking winners, both sectorally, and to be honest, in terms of the firm itself, because they really wanted Apple. I think the question is whether that learning, then they realize, “Oh, there should really not be no rules for only one company, but really, it should be clear red tape for everyone.”

RAJAGOPALAN: Exactly.

RAMANI: That’s what it would take to get true creative destruction. This is better than not clearing red tape for anyone, I guess, in that sense.

RAJAGOPALAN: Yes, this is better than autarky and License Permit Raj, which I have lived in. I agree.

RAMANI: It’s like third best, fourth best policy in that sense. I agree with you. Obviously, an ideal is you wouldn’t have to do this.

Future of Economic Journalism

RAJAGOPALAN: I have a question on a very different India from your point of view. Both of you work with The Economist. The Economist, again, I’ve been reading this paper for decades at this point, and there used to be maybe two India stories a year and maybe some small snippets covered in news, and where the world is and stuff like that. Now you see much deeper India coverage, but it’s still not as deep as China. It’s still not as deep as Europe. I do compare India to the entire European Union in terms of its size. For foreign newspapers looking at India, and India is not for beginners as you know better than anyone else, what do you see happening in the future? How many India reporters and editors do you expect The Economist will have 10 years from now living in India and reporting on India? How many pages of an issue will it be?

EASTON: Wait a second. Were you referring to the, what is it, YouTube site, “India is Not For Beginners,” which is the singularly best thing that has ever run on YouTube?

RAJAGOPALAN: No, I haven’t seen that. No, I’m not referring to that. I just meant India is not for beginners just as a standalone statement.

EASTON: One of the most recent YouTube, there’s a guy—

RAJAGOPALAN: I have no idea what you’re talking about.

EASTON: Oh, there was a guy on a Zoom meeting while driving a scooter. The computer is on his lap, and he’s on a Zoom meeting and he’s driving a scooter. I think he has a phone under his head, and the line is “India is not for beginners.” Every day—

RAJAGOPALAN: I love it.

EASTON: —there’s a new Zoom on how India is not for—actually, I would encourage all your listeners that this is far more entertaining than The Economist will ever be, and probably far more revealing, and obviously, has millions of reporters in India. Arjun, you’ve seen these things that I’m referring to. Have you not?

RAMANI: Yes.

RAJAGOPALAN: I see these things, but to me, they’re so obvious that they don’t always—

RAMANI: They don’t really register, yes.

RAJAGOPALAN: They don’t appear as the meme, or they don’t register as much, but I will check out this particular one. 

EASTON: There’ll be a rickshaw guy changing his spare tire while the rickshaw is going down the street. They bend it up on their corner, and then they change. These are all things, you’re right that we see in India, but it is not for beginners.

RAJAGOPALAN: Yes, you see them all the time.

EASTON: Yes, I don’t know. Arjun, what do you think? How many people will we have in India in 10 years?

RAMANI: I actually should point out, I think we’ve already made pretty big investments here. I’m sitting in our Delhi bureau right now. We have two full-time correspondents here. We have two full-timers in Mumbai. I’ve been here for a year-long stint. We have a full-time researcher here. That’s more than a lot of international publications, but that’s grown slightly I think over the last several years. I think basically, if you look at the history of The Economist—I don’t actually remember Tom, you may know this, what year we created the China section.

Basically, as countries grow in importance and the size of the economy and so forth, generally that just leads to more interest from our core readership, which tends to be business people, and investors, and politicians, and the professional class, and so on and so forth and in lots of other groups. They become more interested in the country, then we devote more attention to it. We don’t actually have that many readers in India yet. We’re still predominantly, I think, read by people in Europe and U.K. and U.S., but we do have a growing readership in Asia. Yes, maybe 10 years from now we’ll have one or two more people. We’re a pretty small newsroom, so there’s a finite number of people who can be here. We have a lot more people in Singapore now as well. I do think there’s an Asian general pivot for The Economist as it becomes more important to the world.

EASTON: There are two things. One is just, the thing that disturbs me the most about The Economist’s coverage and how it’s read in India is that people often read our stories and they say, “This is how The Economist feels about India,” as opposed to, “This is what happened in India.” It’s a very different way of looking at things. They’ll look at it, and they’ll say, “Oh, yes, there was this covered. This means The Economist is positive about India, or negative about India or something about India.” Rather than they’ll say, “This is how India is,” which is a transition point in coverage, which is very, very important.

It means the publication is no longer the issue, it’s the content of the stories that has become the issue. I don’t know if you have experienced similar things, Arjun, but I hear that all the time. Another thing is that The Economist coverage, or The Economist engagement in India is particularly problematic. Now, I guess maybe you know this Arjun, or maybe we’ve talked about it. If you go to Calcutta, there’s an old graveyard with all those destroyed graves because Hindus don’t have many but the British do. There’s one tombstone that’s in sensational shape, just perfect.

If you look at that tombstone, there’s a little sign on the corner of it, and it says, “Maintained by the Revenue Service of India, the Tax Authority.” That is the founder of The Economist [James Wilson] because he created the personal tax code, the thing that has probably destroyed more businesses and more lives, and more of the economy than any other thing.

The thing that was introduced into India, that was the single most carcinogenic factor into this economy was actually created by the founder of The Economist. The tombstone says, “Was killed by labor and climate anxiety.” Now, this was before the green movement. I think he was basically pickled by the Calcutta heat and died of dysentery. It says he arrives in a particularly fraught economic period or something like that, as if every period isn’t a particularly fraught economic period. I guess the revenue authority is very, very loyal to the person who created all their jobs, right?

Therefore, I don’t know if the expansion of The Economist’s role in this country, we will never reach our former peak, which was created by our founder when he was here, but I don’t know for Indians’ sake if it would be a good thing if that actually happened. Yes, that’s my take on this.

RAJAGOPALAN: As long as you’re not controlling the revenue service, I think we have cause for optimism. One last question before I let you go. Arjun, you’ve written a fair bit about AI and how AI is going to change this publications business. Also, in one of your pieces, you talked about how employers and businesses are a little bit slow when it comes to understanding what to do with this technology and adapting to this technology, and so on. How do you see The Economist adapting to it? Are we going to see more bylines? Are we going to see basically more stories with bylines to start with? Do you expect to see more star writers, opinion writers? What’s the way forward for a publication like The Economist?

RAMANI: Yes, it’s a very good question. The future is uncertain. I’ll say a few things. I’ll be curious Tom’s thoughts on this too, but the first thing is, at least as far as I’m aware, we will never publish anything written that’s an output from a generative model.

RAJAGOPALAN: I didn’t mean to suggest you will.

RAMANI: No, just to clarify for people who are listening. This is AI internally. We have an enterprise license to these tools. I with some other people have built a tool that can tell you where you violated The Economist style guide, that can tell you how to condense your writing. I think just like there’ve been writing assistants for a while, we’re in the process of getting a level up in terms of our writing help. I think it’s also useful as a research tool. I’ll use the generative tools with search engines to quickly pull lots of sources for me.

Obviously, you don’t trust them, and you have to go and click on all the links, but it can save you time. I think the research assistant function of AI is useful for journalism. That said, I don’t think the productivity boost is actually that big for journalism. I think it’s, for me personally, maybe like, I don’t know less than 5% or something, maybe 5% to 10%. I think the reason why is because the role of the journalist is to try to get new information from the outside world and then record it. By definition, if you can get that information through using search-connected generative model, then you’re not doing your job.

I think of it if you ask a model to write something, and then that’s the baseline. You got to beat that, and you got to beat that by a lot. I think there’s some kind of efficient markets thing going on with AI and journalism, where the news business is like, you have all these firms, traders competing against each other. They’re trying to incorporate new information into the market. You do have to go out into the world and get some kind of edge that other people don’t see. I guess to get to your point of how does AI affect The Economist and journalism, it’s going to be used as a tool.

It already is, and that’ll increase, but I don’t see the fundamental writing process changing that much. Now, the one caveat to this is, and we are thinking about this, is what happens if you get to a world where the way people consume information, shifts from reading articles, like news articles, as the unit of consumption and the unit of consumption shifts to, “Hey, I’m going to ask Gemini, or Claude or ChatGPT, the next generation of it, to go and search the web, and create a personalized summarized digest that’s particularly my interests and in the writing style that I like the most.”

What happens then? I think you could get some pretty interesting media market structures then. Maybe The Economist, I don’t know if this is dystopian or not, but maybe it becomes an API, an application programming interface, and we’re still out in the world collecting information and writing it down or recording it in some shape or form. Maybe we’re doing a lot more podcasts, maybe we’re doing a lot more note collection, but we’re actually writing articles less. Now, the reason why I’m not totally sold on that though is because writing is thinking.

I only get my thesis or what I believe when I’m actually writing an article. In a sense, I guess you could see these things existing in parallel, just like podcasting exists in parallel to writing articles. Maybe this kind of, hey, we’ll call The Economist API, will exist in parallel to the traditional article and podcasting and so forth. Yes. Did that answer your question?

RAJAGOPALAN: Yes. It does. I actually think I might go even a step further because they’re like weird substitutes, right? The Economist becomes the training model for lots of other publications, which are now trying to come up in the future, or The Economist can actually serve up personalized stories to its own subscribers as it starts collecting more information per subscriber. But I do think the byline will be the way to go because, at some point, the curation will matter. No, because at some point, just The Economist will not be a sufficient signal because there are going to be lots of things that sound like it through large language models, and people will start looking for the name of the individual and their very particular point of view and so on. I do see that happening, and not just at The Economist. I think I see that happening pretty much everywhere. Right?

RAMANI: Yes. Sorry, I didn’t answer your bylines question. I think that’s possible, and to an extent, you already see more writers coming behind the name of The Economist through social media and podcasting. We have newsletters, right, that are byline that goes straight to your inbox? I do think there’s space in the market for one paper without a byline, though. 

RAJAGOPALAN: Yes.

I think it does create a consistency of vision, a clarity of thought and also an internal culture that potentially improves the quality of—actually, I’m confident it does because you experience those benefits. I think those benefits might offset that point that you made. That is very valid. I don’t know, though, the world could move in that direction. 

RAJAGOPALAN: The reason I think I’m less optimistic about that is not because I think there isn’t room for at least one paper to exist like that. It’s because now you’re not competing with other papers, you’re competing with Perplexity or something, which does assimilate all that information and throw it up in a nice 700 words without a byline, right? The Economist as of today is far better than that, than whatever that output is without a byline. Eventually, as those get better, are the readers just going to, as a heuristic, look for a byline to separate what they think comes from a particular source versus what they think comes from a particular model? I guess that was the broader question.

RAMANI: Yes, no, it’s a good point.

RAJAGOPALAN: Yes, you’re right. The future is always uncertain. Thank you so much for doing this. You’ve been so generous with your time. We’ve gone way past our usual length, but I’ve enjoyed this thoroughly. And I hope to see both of you next time I’m in India or you’re on the East Coast. Such a pleasure and I really enjoyed reading the report and look forward to having you back.

RAMANI: Thanks so much, Shruti.

EASTON: Thank you very much.