Rohit Lamba Reimagines India’s Economic Policy Emphasis

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 guest is Rohit Lamba, an assistant professor of economics at Pennsylvania State University and a visiting assistant professor of economics at New York University Abu Dhabi. We spoke about his recent book Breaking the Mould: Reimagining India’s Economic Future which he has coauthored with Raghuram Rajan. 

We spoke about their argument to shift the focus from industrial and trade policy towards a services and education policy, how India can and should decentralize, if India can scale education and health, India’s growth rate numbers, and much more.

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. 

Hi, Rohit. Welcome to the show. It’s a pleasure to have you here.

ROHIT LAMBA: It’s really an honor, Shruti, to be here. I’ve known Shruti for many years now. I’ve read and admired her work for long. I’m also a fan of the podcast. It’s a real pleasure to be here.

RAJAGOPALAN: Rohit’s book is called “Breaking the Mould.” This is with Raghuram Rajan, your co-author. Basically the book is talking about how conventional wisdom suggests that countries develop by shifting from labor within agriculture to manufacturing. From there on, you see this big benefit of economies of scale, export-led growth. This is how Korea, Taiwan, China, Vietnam, all these countries grew.

You and Raghu argue that this path is becoming increasingly difficult for countries that are a little bit later in the development stage, like India, like many other countries in Africa, though that’s not the focus. Part of this is because of this intense global competition, the shift toward protectionism, changes in technology, wars that are breaking out as we speak, and pandemics and so on.

Your recommendation is that India should actually focus on enhancing human capital and fostering innovation and finding its growth trajectory through the service sector, especially high-end service sector. First of all, is this a good summary of what you guys have tried to do? The reason I ask this is that the headlines are hijacked by, “Rajan and Lamba recommend that India shouldn’t focus on manufacturing and should only focus on services.” That’s not how I read the book when I actually read it. One, did I get this right? Two, can you clarify that point?

LAMBA: I think you’re bang on. I think this is exactly right. The only slight modification I would make is that India should focus on high-end services, where services are both direct services, which is what evokes in people’s minds, but also services which are embedded in manufacturing, like manufactured goods have also modified. What we try to argue in the book is that the quintessential manufactured product, which is the Henry Ford’s car is no longer Henry Ford’s car. It’s Elon Musk’s car now, which looks more like a mobile phone. It has large amounts of services embedded in them.

The other slight modification would be that we’re not saying at all—and you read that exactly right—that India shouldn’t aspire to manufacture either low skill or high skill. We do think that given that India is still a relatively poor country, and that cognitive capacity and budgetary capacity of the government is limited, choices are important. Choices need to be made. We can definitely nudge policy in one direction or the other. As far as this nudge is concerned, we definitely believe that India should be focusing big time actually on improving the quality of its human capital, and letting this services-driven path take its course rather than stymieing it or moving the development trajectory in some other direction.

RAJAGOPALAN: Basically, I think the CliffsNotes version is don’t do industrial policy that other countries followed in 1960s. Focus on human capital, focus on health, focus on education and then let the chips fall where they may, right?

LAMBA: Yes, broadly. Even I was recently at a conference where, someone I really admired, Dani Rodrik, had organized this on industrial policy. Because you talk about industrial policy. There were lots of very smart people in the room from all over the world. Actually, it seems like the intellectual debate has caught on to this, but somehow the policy debate hasn’t. By that I don’t think Dani or anybody else in the room was implying that—they were actually saying industrial policy is very important, and that economists may have got it wrong.

I think we broadly agree with that view, there could be some differences here and there. The point is that India is, even in its industrial policy, India is aspiring to do the industrial policy of the 1970s and ’80s China. That stuff has moved. Even from the framework and the perspective of what the government should be focusing on, what kind of markets can governments enable or even help create, I think there somehow, the policy consensus, if I may use the word, seems to be lagging behind not by a few years, but a few decades to what the emerging intellectual consensus is.

Zooming into Indian States

RAJAGOPALAN: Here, I want to start disaggregating how we think about India. If you look at Bihar, for instance, it has the state GDP per capita of about $800, right? That’s closer to Rwanda and Ethiopia. In fact, Ethiopia and Bihar are also comparable in population. If you look at a state like Kerala, the GDP per capita of that state is about $3,000, which is closer to Ukraine and Morocco. Morocco is of comparable size. I don’t think most economists would tell Rwanda to focus on human capital building and high-end services the same way that that might be the recommendation for Morocco and Ukraine.

Right there, very much, you have economists talking about how the SaaS and fintech startup culture is really picking up, and that’s what they should focus on, especially given the gains of work from home and things like that. Why isn’t the recommendation in the book more at the state level? Because that would bring in the requisite nuance. That’s one. The second is the problem with India is that the states are actually not converging. The richest states are actually growing faster than the poorer states.

What is a good way to think about your arguments there? Because if you talk to someone in Bangalore, they’ll be like, oh yes, Rohit and Raghu are absolutely right. Someone in Bihar is going to say, what? We can’t get into IIT Kanpur and potentially do any of the high-end manufacturing or SaaS capability you’re asking us to do.

LAMBA: See, that’s a deep question, and I think which has no easy answers. Let me try to take a crack at it. You’re exactly right. In using an economist who we both admire, Lant Pritchett’s words, this divergence big time. What Shruti is saying is that the idea that there is a consensus that countries that are poorer grow faster, which is why actually India is growing fastest in the G20. It’s not just because India is getting things right. India is just the poorest country in the G20. Within countries also, these forces are at play.

What is very, arguably, disturbing to some extent, is that states within India are not converging fast enough. By converging, this is just economic jargon for basically their standard of living, if you may, is not getting at parity at any rate. In fact, what you see is that some of the southern states are going faster even, and the Hindi heartland is still somewhat lagging behind. Now, this is obviously worrisome at multiple levels. Actually, the example I like to give is of Bihar and Tamil Nadu. Because in some sense, Kerala hasn’t fulfilled that promise of—if you take the remittances out.

Tamil Nadu, it’s a real interesting what it’s doing now, even with manufacturing. I agree with you. What Bihar has, but Rwanda doesn’t to some extent—if I remember correctly, I think Tom Sargent’s Nobel lecture was on this. Basically he was saying, if you think about United States of America versus united states of Europe, what is interesting is that you have not just a monetary union, but a fiscal and a constitutional union. Rwanda is not the same as Ethiopia. Rwanda and Ethiopia and South Africa are not where Bihar and—

Let me push this puzzle even further before I answer it. What is very interesting about India—and I have this work in progress on this with Abhishek Rai and Shoumitro Chatterjee about spatially how India is growing. We try to just observe that if you look at most countries in the world, especially most large countries like China or the U.S., once economic growth starts happening, you start seeing people moving to regions of economic growth over time.

The Midwest is empty and nobody lives in Nevada, broadly, in the U.S. What is interesting about India is that despite divergence big time, and because of fertility rates being under control in the southern states, what you see is that the largest population still resides in states which are growing the slowest, in some sense. Obviously, there’s some exceptions, which is a puzzle. There could be potentially many resolutions of the puzzle. Abhishek, our former student, he has a nice paper where he basically says that some of it could be explained either statistically or conceptually, by the fact that Indian migration patterns are very specific.

In the sense that people don’t actually move lock, stock and barrel. One of my friends who was accompanying a newly emerging political leader in Bihar who’s walking villages was telling me that the villages are full of women and old men. Which is different than how migration has historically happened in the U.S. and China. It makes the puzzle even more interesting. We are not suggesting that everyone in Bihar is going to become an engineer or a doctor and so on. What we are suggesting—and in that sense this debate that has come up between north and south is a little bit artificial, is because you are seeing some labor flow to where the capital is. Not every place in India needs to become even a services hub or a manufacturing hub.

However, it is true that there needs to be some growth engines in places like UP and Bihar where a lot of people live. This is a long haul. It’s not as if that companies are vying to set up factories despite all kinds of subsidies you give them. It’s not like they’re going to go to Orissa or Bihar or UP. This is the long haul, in the sense that irrespective almost of the path of growth that you’re going to choose, this is going to change slowly as institutional setups in these places grow slowly.

What we can do through agglomeration effects, through externalities, through just pure crowding out of other economic growth centers where people will start looking for other avenues—this is a big problem in India right now in comparison to China, is that tier-two cities are not growing fast enough as economic growth centers. This is going to happen. The impetus, where is the impetus going to come from? We do think that the impetus can come from doing certain kinds of services, certain kinds of services embedded in manufacturing.

You’re right that not everybody is going to be able to take these jobs, and we actually try to argue, at least discuss at length in the book, where these other jobs are going to come from. One simple fact is that a lot of India still is rural. There can be a reasonable debate about trickle-down economics and so on. You can see the United States right now is at full employment, which is a term that economists are used to saying almost everyone who is looking for a job has a job. United States is not manufacturing at the rate that it used to 30, 40, 50 years ago.

I’m not saying India can become the United States, but there is an argument to be made, which I think it’s taking time for to seep into the policy circles, that if you capture rents, if you start creating firms that have large value, lots of other jobs come. In my opinion, Bihar should single handedly have been attracting the Buddhist tourism of the world. Just to give you an example, I’m currently sitting in NYU Abu Dhabi. From what I’m told, more tourists come to the UAE than to India in a year. More tourists go to Singapore in a year than in India.

I’m just saying that tourism is a massive service industry that can have a jump up if wealth is created around other avenues, other sectors in India. Just to summarize, yes, I don’t think that Bihar is going to suddenly start creating high-service jobs, but I don’t see yet Bihar creating industry jobs on a large scale either. We have to somehow rely on agglomeration effects and externalities to pull other parts of the country. Because once cities and the south starts crowding out, the fact that rental rate of capital and labor are cheaper should incentivize industries to move there.

RAJAGOPALAN: I wasn’t suggesting that your argument is ‘all Biharis can become engineers.’ Not at all. Let me back up. There’s one interesting chapter in the book where you talk about the smile curve. You talk about how let’s take a company like Apple. Apple has some very, very high value add at the early stage, which is the design stage, thinking up the idea, creating products, creating an AirPort, creating a watch and designing it, and so on. Then all that stuff gets shipped out to say, Foxconn and Qualcomm and so on, to the assembly line or foundries.

Then toward the end, again, when it comes to branding, when it comes to finance, when it comes to tying, bundling, et cetera, there’s again, very high value in those services. India is poised to capture the top ends of that smile, and the bottom, which is a tiny fraction of the value added overall—I think it’s about 15% or something like that that you argue in the book—is it worth changing your entire industrial policy to target that? That’s where you’re going with this example. My question is, why isn’t the argument that, Karnataka, Tamil Nadu, Andhra Pradesh, maybe to some extent Kerala, Maharashtra, can do the high end of that smile curve. Bihar could do the assembly line work. 

Why aren’t we creating circumstances in India such that very targeted small places that do need that big-push, low-skill manufacturing can get absorbed and we become the people who do chip start to finish? We can do the foundry, we can do the assembly, we can also do the design, which we already do. Why aren’t we the people who are creating Apples or IBMs and laptops, where we do everything start to finish?

Here are a lot of the problems that the developed countries have where there’s protectionism, there’s a walk away from industrial policy because of these global costs of coordination, shipping, war, uncertainty with pandemic and so on. It won’t exist if it’s happening in Bihar and Karnataka. We managed to unite India into a single—it’s already a single trading zone and GST will make it more so if it’s streamlined. I guess my question is why isn’t that the argument? Because when I read your book, I thought that’s what you’re going for. It never quite gets disaggregated at the state level.

LAMBA: We wanted to keep the length of the book in check. That was one argument. Let me just rephrase the question slightly. I completely agree with you. I just think that as a policy goal, especially Atmanirbharta is in the air and stuff, this idea that you can have in today’s world start-to-finish stuff in any product is a dangerous objective, let me say this.

RAJAGOPALAN: I don’t mean it as an objective. I just mean it as we are a large enough country with enough labor and enough differences in capital and human capital that we can aspire to that.

LAMBA: That I completely agree with. One of the, for example, anecdotes we have in the book is that—and Chang-Tai Hsieh, who’s Raghu’s colleague and very famous economist at Chicago, he narrates this thing where if you go to China, let’s say to open an industry, you will land at the local airport, let’s say, of a city of the size of Meerut, let’s say, not Delhi, not Bangalore. You will be met at the airport with the five local mayors. The problem with this in India is that you probably will be met by the commerce minister of India, or at most, let’s say, the chief minister in one of the southern states.

This is the argument we do give in the book, not to the detail that you are saying, but that one of the problems of designing policy, not just of health and education, but even commercial and industrial policy, is that it seriously lacks decentralization. The other question that you asked, the main question that you’re asking, we don’t have a good empirical answer for this, but almost through proof by introspection, as we say in theory, you can argue that a large part of it could potentially have to do purely with both the quality of resources and capital that are potentially available in UP and Bihar, and some of the Hindi heartland, and just the sheer quality of human capital.

It’s not a coincidence that even for assembly, note this, that the place where Apple has gone, if I remember correctly, is the same place where Nokia went 20 years ago. Nokia had a flourishing business for about 10 years before everything wrapped up. In 10 years still, when a company comes—and basically Foxconn knows that it has to hire about 50,000 to 1 lakh people, so it therefore knows that it needs people who are skilled enough in that large a number.

I don’t have proof of this, but for me, this is a strong signal that a large part of is actually driven by the belief of some of these companies that are coming in even today, that they either or both cannot get the physical infrastructure going at a fast enough speed. More importantly, I think we think that it cannot get the quality of human capital that is required, even at the factory-floor level, not like at the global capability-center level, to be able to generate these products. Let me idealize in some sense the supply chain that you constructed.

If you’re able to capture rents, if you’re able to, let’s say, create chip design or create high-quality products in India, let’s say in Bangalore and Hyderabad, and so on, where you are capturing the rents at the two ends of the smile curve, it’s not easy. It’s not an easy job. That’s why we discuss at length in part two of the book how to go about doing it. Which has not been done in the world before, changing the sequence of structural transformation.

Then what is interesting is that you can then decide that because I hold the intellectual property, I want to set up the fab or the factory or the plant in Bihar and UP. Because everything is internal, I will demand so-and-so conditions from the chief minister of Bihar or the chief minister of UP or the local IAS officer there and so on. This stuff, at least I feel like we are finding a lot of purchase in the intellectual community, but in the policy community, it seems like this is not possible.

That India should actually know that the right way or the only way to do this is the way that you do this for the foreign firm first, learn it, then go up the value chain. This, to me, is the intellectual chain of thought that we wanted to shake up. I think what you say is very evocative, that not only can you design and capture rents, but then you can also maybe through that process help take industry to where actually the comparative advantage, at least in terms of labor, is very high.

Why not Decentralization? 

RAJAGOPALAN: There’s always a way to read a book. Sometimes I think academics almost overread a book. The reason I think I went this way is the chapter title, one of the chapter titles, is “where should we place our hopes.” That’s where you lay out some of these arguments of why manufacturing ladder is hard to climb, why the global winds are shifting and so on and so forth. 

My question there is, you’re two people who are strong advocates of decentralization. You have a whole bunch of other policy recommendations in the book. Why isn’t the policy recommendation that we dramatically decentralize to the state or even the local level? More importantly, have a very high degree of fiscal federalism where UP and Bihar, and Punjab can’t rely so much on intergovernmental grants and so on, and they need to start raising their own revenue, at which point you’re going to get the Chinese version of this. At that point, my imagination is that ASML will go to Karnataka, whereas textile manufacturing and Nike shoelaces are going to go to Bihar and Uttar Pradesh. 

That’s not where the book ends up going. The book gives some very specific prescriptions at a highly centralized level. I guess that’s what I’m struggling with in the book. I don’t think there’s a fundamental disagreement in what both of us believe is happening in the world right now, or which way we should go. It’s the choices of policy recommendations, and I guess the difference in where you think we should place our hopes versus where I think we should place our hopes, if that makes sense.

LAMBA: I couldn’t agree with you more. I think what we end up doing in the book, you’re right, is that we emphasize decentralization a lot in the public service delivery aspect, because we basically cite literature from the world and basically say that it’s almost never happened that you—and China is a very good example of that—that you over-centralize, even at the state level. UP, we forget, is the fifth-largest country in the world. What you’re saying, I couldn’t agree with you more, that even at the level of industrial policy—TSMC is directly dealing, even though the CHIPS Act is there, is right now directly dealing with the government of Arizona.

RAJAGOPALAN: Exactly.

LAMBA: I agree with you completely. The problem there is that I think we’re actually, I would almost provocatively say we’re wasting too much time emphasizing or debating the centralization of power in India at the level of the center of the prime minister’s office. That’s a reality, we’re dealing with it, but actually what is really troublesome is an equally or even more problematic cult of personality around which India’s politics and policy is structured at the state level. It’s not like something new that has happened. At the state level, there’s this famous line that everybody wants decentralization, but only up to their level.

I was recently on a panel with professor Arvind Panagariya. I was telling him on the panel that you have the most important job right now, at least as far as the argument of the book is concerned. Even so actually, so what I’m meaning by this is that he’s been appointed as the president [chairman] of the 16th Finance Commission, which is the body that is tasked with the distribution of resources between center and states. The problem is that I think, even though I do believe that this body is very important and has a very important job, but what you’re suggesting, and which is something that I think there’s not much debate on, as we call this, the three F’s in the book: funds, functions and functionaries.

At all of these levels, the level of funds, which is, can you raise your own funds? At the level of functionaries, can you appoint your own people? Functions, what can you do? What are you allowed to do under the legal framework, needs to be much more decentralized. That simply doesn’t exist right now in our fiscal structure, let’s say. Forget about the other structure. A city doesn’t have its own tax regime. 

I often joke with my Indian friends that most people in New York—I’m guessing you’re sitting in New York right now—most people in New York, or everyone in New York knows who the mayor of New York is. A lot of people I meet in New York don’t know who the governor is. Just to tell you how important local government is in a big city like New York: Bloomberg wanted to be the mayor of New York, not the governor of New York State. I think this is a deep structural, to use a much-abused word, problem of how both polity, but also governance is structured. Devesh Kapur has this very nice piece in the Journal of Economic Perspectives, where there is this evocative graph, I would say, which I recommend everybody to look at, where he basically maps the size of the state in India, China and the U.S.

What he finds at A, Indian state is not that large in comparison. It’s not that small, but it’s not as large as it is in popular imagination, but actually it is very fat at the top. The Chinese state is the fattest at the bottom. It’s almost like the reverse pyramid in India. I’m not saying how to solve this problem, just saying the problem is actually quite systemic, that you have to give the authority to people to make these cuts. 

Even today, for example, you see at the level of Tesla wants to come to India, or a chip factory wants to come to India. Even though they can’t technically come to a state government, these decisions are being deflected at the center. The center is moving these things around. You go to Gujarat. Tamil Nadu is already complaining that the center is not letting enough industry to come to Tamil Nadu. 

You can already see that these decisions are too centralized for the claim that you’re making, which I completely agree with, to really have meaning on the ground. I agree with you, and I also agree that the book doesn’t spend as much time as it does on decentralization of public service delivery as it should probably also on decentralization of things like industrial policy.

RAJAGOPALAN: Or economic policy. 

LAMBA: Or economic policy.

Scaling Education

RAJAGOPALAN: Here, let’s talk about what the book does recommend. There’s a very, very big focus on education. This is both primary education and what you call the childhood challenge. This is both health and education, malnutrition, all those things coupled with what eventually gets us high human capital in any society or economy. Then the second part of it is the higher education piece, which India already leads in. The best people in India can compete with the best people anywhere in the world, but the best people that India produces at its top institutions are too few, and there’s too large a rat race for it, so to speak. How do we grow that portion of the pie, is the focus of the book. 

Here, I want to think a little bit more carefully about why, according to you, this policy choice is relatively the easier policy choice, because that’s how you are framing this. It’s too hard to get industrial policy going at a decentralized level. It’s too hard to do serious trade policy, liberalization, manufacturing liberalization, assembly of land, reforming of labor and so on. Let’s focus on human capital. That’s the push of the book. 

When it comes to human capital, especially this high human capital skill development, I’m a little piqued by the argument. If you look at, say, John List and his recent book, “The Voltage Effect,” he talks about how things that work across the world in a small, controlled, successful setting, if you try to scale it up, they may often fail. He calls this the voltage drop. For instance, if you run a small, controlled experiment where you put in all the good inputs and you say, if we create this kind of a situation, then we can get great kindergarten teachers and you can get great outcomes at the zero to 10 age bracket. Then if you try to scale that, it doesn’t quite work because the requisite number of kindergarten teachers at that quality and at that price are no longer available at the society level, to do this across the scale of Bihar or so on.

I think it’s the same problem when it comes to IITs or IISC. These educational institutions are riding off of a 50, 100—in the case of IISC, almost 100-year history. It’s taken a very long time to develop that capital which can actually run that institution, even at the scale that it’s currently running. To get the number of teachers, if you open another 40 IITs, to get that high-end R&D may not quite work. You’ll see a voltage drop, especially at the scale of India. What, according to you, is the reason that that is still the easier thing to do than all these other policies which are typically on the table?

LAMBA: Let’s break it down, First of all, you can frame it at the level of a political economy puzzle, that despite being an early democracy, India or Indians could never rally around health and education as a political device. The more I’ve been thinking about this, the more I find it very interesting, and there are obviously some trivial answers to it. For me, it continues to be an enduring puzzle in some sense. As to why, it’s not as if the citizen doesn’t demand anything of the state. He does, he or she does. 

We are sitting, talking today on an important day, it’s April 19th, on the first day of the voting of the Lok Sabha elections. It’s not as if the citizen doesn’t have some demands from the state. What is remarkable, though, is that the citizen has a certain resignation that this is not something that the state can deliver. In particular, what I’m saying is high-quality, or even medium-quality, basic health and education—superimpose on this very good research by Jim Heckman and many others, which shows that basically the first five to six years of your life are very, very important in terms of your cognitive development, your physical development and so on.

I don’t know, I’m guilty to this, but I don’t know why there is no outrage that 30% of Indian children are still malnutritioned. You can debate, some people say this figure is not correct. I broadly buy this figure, especially because there is enough—I’m suspicious of the genetic argument, because I’ve lived outside India long enough to know that, and there’s now scientific work on this also, is that within a generation or two, Indians actually catch up in height to the locals, wherever they are.

There’s very good research on this. Actually, even this is the worst thing a social scientist can do, but even anecdotally, I have done this, taken a train from north India to east India, and you can see, as you go from Punjab and Haryana toward UP, Bihar, this height of people, of adult men and women, goes down. I think people don’t understand this sometimes when they say, oh, people don’t understand large N arguments. I’m not saying, oh, you are short, or I am tall. It’s just on average—

RAJAGOPALAN: You’re saying we could all be about 2 inches taller on average than we are on average right now.

LAMBA: I’m just trying to give the scientific argument why we think that this is a big problem. Why is there no moral outrage? You could say, it’s diffused, there is concern, but the diffusion can never be concentrated because it cannot find a political voice and so on. I buy all those arguments. When it stretches over decades, it does become a puzzle of a larger proportion in political economy. One document that I highly recommend all your listeners, especially students, to read is the National Education Policy 2020. It’s only 40 pages long. It was tabled by the government in 2020. It is an excellent document. 

They acknowledge almost every block hole there is in the life cycle of a person from age zero to age 18, into giving them a chance to become what I think of increasingly as a learning machine. We are all very privileged in life that we had certain opportunities that helped us become a learning machine. After that, whatever, we made our choices and learned whatever we did and absorbed certain kinds of human capital. That document also categorically recognizes that the big challenge is the early childhood challenge in India.

That is where we get into the discussion in the book on anganwadis and so on. I don’t think it is recognized well enough. Again, in these parameters, India goes from Tamil Nadu and Kerala from OECD levels to the heartland, which is at sub-Saharan African levels in terms of early childhood outcomes. That’s a huge problem. Then you come to primary school, middle school, where—and we must pat ourselves on the back for this—we have in large parts cracked the problem of enrollment. However, learning outcomes on this—I’m sure you’ve talked about this with other guests—continue to be very, very poor.

There’s very good data to suggest—and Jean Drèze told us this also in surveys that were conducted locally in Jharkhand, for example—that after the pandemic, the dropout rates have gone up even more in many states in India. Now, children are not learning something. Again, their journey to becoming age 15, 16, 17 and becoming learning machines is stymied even further. Then you come to, if you get to high school and so on, then you decide where to go for college. Here there is again a problem where—research by Devesh Kapur and many others suggests—that actually India has been making rapid strides in terms of the gross enrollment ratio.

Actually for India, at its level of development—so if you look at U.K., a lot of Western Europe, India actually has higher gross enrollment rates than what these countries had when they were at $2,500 per capita GDP. The question is, what are these people studying? Are they absorbing any reasonable skills? Here I think there is this problem of aversion to working with your hands, which has various multifaceted aspects to it, which we can go into. More and more people are enrolling into certain courses which don’t have a certain usability, so to say, in the job market.

There’s a mismatch between what the job market demands and what they’re learning. Even the students who are enrolling in, let’s say, technical subjects like engineering and so on, the quality of the schools is so poor that—we’re talking about IITs and all. This is a very small fraction of engineering seats, and medicine and so on. The instruction is not of very good quality. The Wheebox survey that we cite in the book says 50% of college graduates in India are not employable. This is the lay of the land, in some sense. Obviously, there’s some green shoots.

Very, very good institutions, like you mentioned, the old five IITs, even the IIT Gandhinagar is doing very well, Indian Institute of Science or Indian Institute of Medical Sciences, even many centralized universities like Delhi University and so on. This is something that I’ve been struggling with conceptually a lot, that if you ensure human capital, does that ensure good jobs and growth, or do good jobs and growth actually pull in higher quality of human capital through it? Is it a demand force or a supply force?

There is no good answer to this. I think both of them are at work. Even here—and I’ll wrap this up—I think this is also something we’re fixing. The problem with Indian labor laws was we were having bimodal outcomes. What do I mean by that? We were either hiring people with tenure immediately, or we were hiring people only on contract labor on a weekly, monthly or bimonthly basis. In neither of those outcomes, research shows, you get very high absorption of learning at work. Even at this final stage where you can say industry will train people, that also failed quite instrumentally because of the structure of our labor laws.

RAJAGOPALAN: I don’t disagree with anything that you’ve said so far. On the problem statement we agree that there is a genuine problem when it comes to primary education. There is an even bigger problem when it comes to skilling, and the job market is not taking care of skilling. There is a very big rat race for the government jobs that do provide tenure, and even bigger rat race for the engineering colleges, the medical colleges which are too few and far between. On the problem statement, I don’t think we fundamentally disagree.

My question is more about your solution, the way I read it in the narrative of the book, is we think it is more important and easier in terms of costs and benefits to focus on fixing education than focusing on fixing industrial policy, or focusing and fixing manufacturing-related questions, or focusing on and fixing decentralizing to the state level and so on so forth. We think this is the place where we will find the fix and this is what we can fix.

That’s the tone of the book. My question is what is it that you are reading into Indian education, which I seem to be missing, that you think that’s the easier thing to fix than all these other things? Because when I read about how hard it is to scale education at any level to the quality we actually need, it seems like an impossible task in the short run, and maybe if we think and focus on it hard enough, it is a 40-, 50-, 70-year project.

LAMBA: Let me give a slight counter to that. I agree with you broadly that obviously this is both the problem with in the mind of the voter and the policymaker. Yes, it takes too long, so let’s do something else.

RAJAGOPALAN: No, that’s not what I’m saying at all. Again, I’m not saying let’s do something else or that this is not worth focusing. The way you’ve placed the argument is not that we have to focus on it standalone because it’s the most important thing for Indians in the long run, though just the narrative in the book suggests that why not manufacturing? Because that’s too hard and it seems like that ship has sailed. Let’s do education.

LAMBA: Again, it’s more nuanced. I don’t think this ship has sailed. Think about it like this. China is literally the manufacturing juggernaut of the world. First of all, India cannot replicate China just in the extent, for variety of reasons, and I think that’s obvious. Yet after doing all of that, it’s at $12,500, $13,000 capita GDP, in current prices at least. Korea is at $33,000.

All I’m trying to say is that if after two, three decades of spectacular growth based on low-skill manufacturing that actually they’ve gone up the value chain in multiple—they’re making EV cars and lots of cool things now. What I’m trying to say is that relying on that path, first of all, requires that scale for you to be able to reach a middle-income country in 20, 30, 40 years. That path in that sense is no longer available. I’m not saying or we’re not saying that—

RAJAGOPALAN: Fair enough. Then you’re also saying that China has much, much higher human capital building, much higher education. They started higher and they developed it further, and they have more institutes of higher education, more R&D and so on. I’m asking what makes you optimistic that India can replicate that path? That’s what I am not sure of.

LAMBA: What India did well, and I think there was an accident of elite history, I would argue. What India did well, for a country of its size, its income especially, it is highly—I don’t like the word “unique” usually—but it’s highly unusual that it was able to produce such high-skilled talent. You can argue, and I would argue actually, that it was in some sense, a mistaken priority in the sense that we should have probably focused much more in primary education than setting up IITs and so on, but we all benefited from it in some sense.

Now that that was done, I actually think that—so, two parts to this—that it was a mistake to actually not push this even further. There is an argument that by now, given what we had in the ’50s, ’60s and ’70s, India should have been training the engineers and doctors not just of India but actually of the entire—what is the term called—Global South like East Asia, Africa. This was actually quite possible. It was already happening to some extent. It was actually quite possible. This is a problem of mindset, and I will come to then what we can do currently.

Is that when I was working in Ministry of Finance, one thing I used to really dislike is that when the budget was prepared or some document was being made, there was this thing called social sector, which was like this stepchild where all the health, education debate would happen in this last column. The idea that actually this itself, in and of itself, other than the externalities and it has by increasing human capital of the population and so on, is a growth-generating sector of the economy. Even still, there is no appreciation of this, that by now, India should have been—

Still this unequal outcome where primary education is suffering. Now I’ll come to the point that you’re asking, is that we are optimistic, I think, because of these initial conditions that we’ve had. Actually, if you liberalize, right, and we can discuss what the word “liberalize” means here in this sector—remember Ashok Gulati always says that Indian agriculture never had the liberalization moment like industry did. And similarly Indian education and health especially never had the liberalizing moment that the other sectors of the economy did.

Actually I would argue that as easy as it may be or it may look for India to develop some green shoots, not China-scale manufacturing, like the way we have done with Apple in Tamil Nadu, it is actually not that hard for India to create centers of excellence if it A, liberalizes and throws money at it. India can throw money at it now, and in much smaller proportions actually than it is throwing money at fabs, for example. We can get into whether this is the right framing of the debate and so on. Taiwan showed this with TSMC. Actually I think because of the diaspora, because of the initial conditions you have with existing institutions, just the IITs—

I’m not saying that you’re going to make an American-style higher education system. What I am saying is that you can have 10, 20, 30 world-class institutions actually in a very rapid time, like in a horizon of 10 years, by liberalizing pay scales, by liberalizing what universities are supposed to do. Maybe this is an academic bias, but I do think that this will have a positive externality that we don’t understand or appreciate as much. 

One of the examples we give in the book of this is of this company, Agnikul, that is trying to make rockets. It is parked in IIT Madras. You need 10, 15, 20 products like this. These products—if you desire to make cutting-edge products—are going to require either direct input from universities, or training from universities that is cutting-edge enough. 

Recently, it’s been in the news, for example, that one of the greatest challenges that TSMC is facing even in the U.S. is having trained engineers who know how to do the fabrication. Even if India is able to bring some of this cutting-edge stuff to the country, it needs to train engineers and scientists in very large numbers.

That’s where I would differ slightly with your framing in this. I actually think, given that India didn’t have the initial conditions in many other—India still has the initial conditions to actually make a huge leap in frontier research which Indians are already doing in the U.S. and in Western Europe. Getting some of this talent back, throwing money at it, actually we think can have a much higher multiplier effect than some of this other stuff.

RAJAGOPALAN: I agree with your core argument that on the margin, rather than spending, I don’t know, $15 billion on a foundry or something else, if you spend $15 billion dollars, the same amount of money across, say, the top 20 institutions of eminence and so on, increase their R&D budget, help them attract the best talent from the world, they would actually give you much greater spillover benefits, and you can ride off of a 7/100-year legacy where you build this up. I don’t think I disagree with that. The question I’m asking is more about the scaling of it.

It’s not that on the margin we can’t do much more liberalized sort of get more bang for your buck in existing places, and especially get more bang for your buck with the people we’ve already trained who are actually leaving the country, right, who are going elsewhere because their talent can’t find opportunities in India. There we agree. My question, however, is, can India actually train 100 times the doctors it currently trains, given this argument of the voltage effect and the voltage drop? Because to create the next 80 centers of excellence, right, it’s not just enough to throw money at the problem. Right? You need to replicate much more than the initial conditions. There have to be now, instead of 70 professors who can teach electrical engineering, there have to be 1,500 professors who can teach electrical engineering. To have 1,500 handy professors who are willing to teach electrical engineering rather than going to private business or private sector or something, you should have started that journey about 10 years ago. I guess that’s what I’m asking, right? 

Because everything in your book seems to suggest that what you’re saying is this stuff can be scaled and scaled at the level that India actually needs it to capture the demographic dividend. That’s the bridge I’m not able to fully comprehend. Between what you just said, where we are in complete agreement to this voltage effect question, I guess that’s where there’s a mismatch. The same with the low-level sort of secondary, primary education, right? There this voltage effect drop is even bigger. You can see it done in a smaller state like Delhi. You can see it done in a sort of tight geographical high-density area. The moment we start going into areas that have much weaker state capacity, that are much larger, much more dispersed, much more agrarian, it seems like it’s going to be very difficult to do this at scale.

LAMBA: I agree with you. I think that I won’t even try or dare to suggest any policies or try to argue for any policies at the primary, secondary education level, which are in any way centralized. I fear we’re going to see more of this. If you look at policies like the midday meal scheme, right, it was started very small in Tamil Nadu, slowly grew, we experimented. Even the NREGA was started in Maharashtra somewhere, we did this, we understood how. I completely agree with you. I feel that’s why we’ve been sort of arguing for decentralization in all these things.

Something in western UP may not work in eastern UP, right? That I completely agree with. And especially when it comes to primary education, we should just let a thousand flowers bloom, let people make their own—it’s not as if we’re doing very well. Some of this perception that these guys are going to get it wrong. You are also getting it wrong sitting in Delhi or Lucknow, right? I completely agree with this, that we should let people make their own mistakes. That’s the only way actually we have of getting primary health and education right.

On higher education, though, I think that the link is—I agree with you that the voltage effect is—you’re already seeing the voltage effect, right. They’ve sort of mindlessly created AIIMS and IITs, and the quality is not the same, right? IIMs also. That’s not actually what I’m arguing. What I’m saying is that you need to create, you need to now go for quality, we did enough quantity. Nandan Nilekani, Narayana Murthy, all these guys went to these four or five institutions, look at the impact just these five or six people have had.

I’m not saying that everybody in their class is a Nandan Nilekani. And you can argue that it takes time, and I completely agree with you. What I’m saying more is that, by focusing on quality—I’m not saying go 100 times, but I’m saying do try to go five times. That already is going to give you such large externalities that we are not appreciating because it already has. 

This famous Gurcharan Das phrase, right, that India grows at night, India grew at night through all these people that we produce domestically. Maybe they went and studied abroad, but they came back. All of these are domestically produced engineers of high quality that wanted to become entrepreneurs. I’m not saying you aspire to—

RAJAGOPALAN: You’re just saying the spillover is going to be so big, it might take care of it in the second- and third-order effects.

LAMBA: I’m not dreaming that it’s going to be massive, but I’m saying that we are underappreciating.

RAJAGOPALAN: No, fair enough. I’m not asking you to quantify it. I’m just trying to understand the argument. You think the spillover is going to be like—

LAMBA: Is going to be—

RAJAGOPALAN: Second-, third-, fourth-order effects. Will be really, really—

LAMBA: Exactly. It is going to produce that the high end—this is the iron triangle, I think it’s called, of higher education, right, that you cannot do pace, quantity and quality at the same time or something, right? India decided that we’re going to drop quality a long time ago. I’m saying let’s redo this thing where we actually ruthlessly focus on quality and do five, 10, 15, 20, really world-class—we haven’t even been able to replicate one more Indian Institute of Science. I do think that the multiplier effect of that is going to be quite large. We’re not even entertaining—look at the situation with higher education in India, right? We’ve sort of given up in some sense.

Educating the Global South

RAJAGOPALAN: How does that help us with the part two of the argument, which is training engineers for the Global South, training doctors for the Global South? Because that does require scale, right? On the R&D, on the entrepreneurship, on having people who are doing 3D production of rocket design and things, I completely agree with you. That can be done, small-scale, top-end research within the IIT Chennai campus. We can take it from there. The second part of the argument then may not give the same returns that you had hoped for and you do argue for.

LAMBA: Right. What I was saying a few minutes ago regarding that is that I said that given the initial conditions we had, by now, we should have—I’m not saying that we’ll start doing it in five years—I’m just saying by now, actually, we should have been. I don’t know where the member of parliament got this data from, but there’s a starred question of the parliament in the answer to which I think it was the education minister who said that just last year, right, seven and a half lakh students left India to go for higher studies, right. I’m going to come to the Global South later. If you make a conservative estimate, a conservative estimate that each of them took $10,000 with them, right, that’s $7.5 billion dollars. Talk about import substitution. I’m just telling you that if you underappreciate this—

RAJAGOPALAN: Yes, you’re basically saying there’s the demand for it, there’s the capital for it, there’s the money people are willing to spend, there is just no will to actually focus and expand on it.

LAMBA: There is elite consensus on this. If you were to do this systematically, if we were to focus our energies the way, and I’ll be slightly provocative here, like the way we focus our energies on building an important statue in Gujarat or, let’s say, the energy with which we went to the G20 meetings, right—which both of it, it’s remarkable actually. I mean it in a positive way that you can go into project mode, right, and deliver things. I think the problem is that there is not enough consensus on this and that’s where we were trying to reorient the debate in the book a little bit.

Picking Winners and Losers

RAJAGOPALAN: I can understand that. Speaking of being provocative, one of the more provocative things that you’ve talked about a little bit in the book, but also more generally, is your criticism of the PLI scheme, which is sort of extremely focused on this sort of high-end manufacturing. It’s a different industrial policy, right? It is trying to replicate the TSMC model, which is, the government will sort of pick winners and losers, in fact, sort of invite winners, roll out the red carpet and hope that becomes the anchor point or has a lighthouse effect, right?

Sorry for picking all the sailing metaphors, but it has this lighthouse effect of inviting other people because if they think TSMC can build and run a foundry in India, if Elon Musk can actually do the gigafactory for Tesla in India, then more of them will come and then that gives this outsized benefit for the initial subsidy. You’ve been quite critical of that, right? Can you tell me, one, what is wrong with this sort of thought process overall? Second, what is wrong with the current version of these schemes?

LAMBA: I think this is, again, the issue of critique being interpreted as dismissal, right? I don’t think that we are, or anybody would be against, good, low-skilled manufacturing jobs coming to India, even if they have to be incentivized in some way. I think there’s two problems, okay? One is at the level of policy discourse, historically, we have seen that industrial policy works well, and there’s a very nice survey paper by Réka, Nathan Lane and Dani Rodrik on this, is that it’s very hard, actually, this policy is like a mystery, right? It’s like, why does it work? Does it ever work? There’s no consensus on it. I wouldn’t go to the extent, I wouldn’t be like a market fundamentalist and say that it is never required or it never works, right? 

I think that a first, almost necessary, condition to know what is working and what is not is to be open about it. By that I mean, what is the policy, how long is it going to be given, how are we picking sectors, how are we picking players within the sectors, what is the objective? Is the objective innovation? Is the objective purely jobs? Is the objective to create value chains, supply chains? One could even say, well, we do not exactly know, but here is some convex combination of objectives and so on.

Enunciating this, we thought when we started writing the first couple of pieces on PLI is very important and we could not find any information like that at all. We are like, okay, you are saying that India has become a manufacturing export powerhouse of mobile phones and so our first op-ed that we wrote on this or note that we wrote on this was it has not, because the import is much larger than the export and so just purely at an arithmetic level, if that is the objective, then it is not succeeding. That is what we did.

We did not even make a value judgment. It is like, is this the objective? If you say, no, I am paying, let us suppose that an Apple phone is one lakh rupees and I am paying 6,000 rupees subsidy on each phone that is being built and I am saying this is the money I am giving because I cannot create jobs in India and 6,000 per phone is the subsidy I am willing to give for you to bring 50,000, one lakh jobs in India or whatever the number is. Then one can have a reasonable debate about this objective.

Now from where we stand, and I still maintain this, even despite some that it was not obvious to us and it is still not obvious to us given all the opening remarks that you made about how geopolitical considerations have changed, supply chains have changed, that if your argument is that we are bringing in this very low-skill assembly with the hope that we will go up the value chain, then the two things that we were saying is that, well, it is not obvious to us that it is going to be very easy going up the value chain. Because of all the geopolitical, it is not impossible, but it is going to be very hard, not in the way that China was able to do because of all the geopolitical reasons that we have discussed in the book and you also said briefly in your opening remarks. And second that when China was doing it, it had almost zero presence in the high ends of the value chain, right? That was the only way for China to go up the value chain.

Now these are competing objectives, right? We think that if it is just about jobs, it is a little bit short-lived policy objective in the sense that your horizon is not long enough. I am not saying that Apple bringing 50,000, one lakh jobs to India is bad, why would anybody say that, right? You have to do the math to understand first of all, whether 6,000 rupees is a good enough subsidy, what is the tradeoff, what math are you doing? You can say, okay, maybe the government has done that math and they think this is reasonable, but I still do not see actually where this is headed in some sense, where is this policy headed in terms of—I am just giving you one example which is the most successful.

By the way, I agree that this has been successful in some sense on the dimension of creating jobs and I think the government should be congratulated and lauded for that. Most other PLIs are not working, and sometimes what happens is—and I think we discussed this at the lovely conference that you organized in Chennai last year—that when you do this without concentration, without debate, you end up with ridiculous policies like let us put import tariffs on laptops, right?

RAJAGOPALAN: Which they thankfully rolled back.

LAMBA: Yes. How far do you go with this—and if you look at a lot of the other policies, right, they are being given to very well-established players. I have a lot of respect for Tata as a group, but you are giving subsidies to Tata, to Ambani’s or Adani’s, very big firms. It is not obvious there that the objective of the policy is innovation. Who knew what NVIDIA was a decade ago, right? Only gaming enthusiasts who were using high-definition chips in their laptops knew. Today it is the third-most profitable firm in the world.

If you buy our argument that India does not necessarily need to go down this route, right, which it is, right, which the policy is saying, no, we will go down this route. We will pick winners. We will pick, in fact, large winners. We will decide. Because it is very hard after five years to tell Adani, “boss, it is not working,” right? One of the things that there is a consensus of the debate on industrial policy that both the naysayers and the enthusiasts agree on is that actually more than picking winners, what is really important is letting go of losers.

RAJAGOPALAN: Letting go of the losers, yes. Just to clarify, is your argument that India is not capable of letting go of losers for various reasons, including political economy history, or is the argument that the amount we are spending per job created seems to be a little bit not in sync? You could have just given that as a UBI subsidy or something else instead of spending that much money to create a new job and then water would have found its own level in various levels of skilling and, households and whether they want to be entrepreneurs or whatever it is that they wish to do. Which is the argument, or is it both?

LAMBA: It is a bit of both. See, again, I am not saying that any and all subsidy is bad. Again, in my head—

RAJAGOPALAN: No, I understand that.

LAMBA: I still haven’t met anybody and if you meet someone, please tell me, who has been able to, in an economic sense, in some historical precedent sense, maybe they try to argue without the math or without the logical flow of argument, but I haven’t been able to convince myself that $15 billion for three fabs, when India already has a comparative advantage in design, is the right way to go. When you are saying subsidy per job, right? Now, you can argue that, well, it’s going to lead to other things and so on, and I’m sympathetic to that.

For a country that is still relatively poor at 2,500 per capita GDP, it’s not obvious to me at all, actually—and this is a subsidy, right, so the government is putting up most of the capital—that this is the right way to create what you call economic spark, or economic green shoots in the country. 

RAJAGOPALAN: Yes, no, I understand. I’ll tell you what my disagreement with it is, and I think it’s a little bit different from yours. I think it’s sort of impossible to pick winners and losers ex ante, right? The reason we know that South Korea picked winners and let go of losers is that ex post we know who the winners were, and who the losers were. 

LAMBA: Remember, Samsung was a vegetable trading company, but sorry, anyways, go on, yes.

RAJAGOPALAN: Yes, right. just like American Express was a messenger company, and so on, right? We have lots of examples like that. The reason we know who is a winner and loser is because the market process will actually tell us who the winner and loser is. A very large part of this PLI scheme comes with a big dose of protectionism, right? Again, my problem with protectionism is more the second-order effect, which is you get sort of shut off from global competition, which means you’re less likely to figure out who the winners and losers are.

One of our most protected sectors, for instance, is the auto industry. That the cars that are being driven in India, at a much higher sticker price are 30-years older models of what’s being sold in the U.S. for the same price, and so on and so forth. Just to hang in there with this example, my core issue with this is much more at the fundamental level of, if we are picking winners and losers, we need to dramatically liberalize our trade policy, and there is no room for protectionism, right?

My issue is, we’ve combined the PLI scheme with the protectionism. We are picking national champions, national champions are promised that protectionism and so on so forth. It’s a little bit different, even from the Korean and the Taiwanese model and so on. That’s one meta-level issue that I have with it. The difference of opinion, I guess, with you is on the spillover benefits, right? On this, honestly, I am agnostic, I just don’t know. I don’t have enough information. The way you frame the argument in the book is the same $15 billion, if we gave it to five or seven top-end universities, we’re going to have big spillover effects.

Just to play devil’s advocate for a policy that I fundamentally don’t agree with, what if the government says, hey, this is also going to have big spillover effects when it comes to manufacturing, when it comes to high-end manufacturing, when it comes to assembly line, when it comes to attracting 10 more national and international champions to now leave China and come set up in India? I guess, this would be my way of asking you to address my main problem with this and also sort of play devil’s advocate on why you think the spillover benefits are asymmetric.

LAMBA: See, it’s very hard to argue this scientifically, to be honest.

RAJAGOPALAN: Yes, there’s no evidence yet.

LAMBA: Even if there is, to make causal claims is going to be impossible, I would argue. Let me take this in two ways, right? Let us take the conceptual argument that you are making, which is the argument about not being exposed to foreign competition and therefore it is not obvious that you should do actually not just subsidies but also protectionist trade policies. There is an argument that people have made and sometimes it may have worked, many times it doesn’t, which is what economists call the infant industry argument.

We have heard some of this, for example, when we spoke to people at Hero Cycles and so on that we may have opened the market for cycles too early and cheap Chinese cycles flooded the market, and so on because India already had a fairly large domestic—cycles is a very interesting example because India was able to produce very good cycles even at the peak of its License Raj. Because India continued to have a very large domestic market for cycles, right? 

RAJAGOPALAN: My only disagreement is when we say very good, according to me, very good is determined globally by people willing to pay money and they decided that the better cycles, better than the very good cycles we made were the Chinese cycles. On that, I also, like you, grew up in a generation riding Hero Cycles but I think Hero family, the Munjal family is being a little too—

LAMBA: No, I agree.

RAJAGOPALAN: They are trying to have their cake and eat it too.

LAMBA: No. Actually, I am agreeing with you. All I am saying is that there is an argument to be made, I am saying. 

RAJAGOPALAN: There is an argument. People have made it over and over again.

LAMBA: People have made this argument that there is an infant industry argument that you need to give protection for some time, you achieve scale and then once you have achieved scale then you should be exposed to competition, okay? Now, there is some merit in the argument. Let us give the opposing argument the best—and you could argue that maybe—I am not too convinced but you could argue that Korea did it to some extent, China did it to a large extent, and so on.

Now there are two problems with cut-pasting this argument to India. One is our own political economy history, we have been there before, okay? Now the counter to that argument would be, yes, we were there in the ’70s and ’80s but our state capacity—and I have heard this argument by serious people—that our state capacity is actually much higher now to be able to do industrial policy better this time around than we did in the License Raj. I am just saying this is an argument that a lot of serious people are making and so fine, that is one argument. And so therefore this combination of protectionism and PLI is this infant industry argument. Let us grow and then once we are able to compete and we can then—

So let me take the most charitable view of this and again, I think reasonable people can have differing views. But take the auto industry, okay, and through that let me try to make the argument we are trying to make in the book. You can have the view that the auto industry in India is a huge success, okay, why? Because it employs around four crore people, it is one of the largest employees actually in the private sector in India. It is, a very well-functioning industry where a lot of big foreign firms from the world make their cars in India. This whole sort of Maruti Suzuki initial thing led to a lot of ancillary industries developed around, somebody is making a steering wheel, somebody is making a tire and so on, right.

Now if you zoom out and if you have the ambition of Viksit Bharat [Developed India] that the prime minister does and which we are hoping to have in the book, then I would argue, and you may think this is a provocative argument, that the auto industry in India is a big failure, okay. Why is that? Because if this infant industry argument, if all of these things were true, we have been doing this for 50 years. When did Maruti come? In the ’70s, ’80s. We have been doing this for 45 years, right? Where is our Hyundai? Where is our Honda? Where is our Toyota, right? Maybe Mahindra is the only one that comes even remotely close to being a global company.

Now, this is what I say is the poverty of imagination, that even after 45 years, the best you are hoping for is to have our big industries be subsidized and fabricate and assemble. This we think is a poverty of imagination and ambition. The reason we are trying to give in the book is that we do not need to go through this route. It is because of our political economy history and because of a sequence of happy accidents, we were able to develop capabilities in the high ends of the value chain.

If you want to be happy with an industry, of the type that the auto industry is in India today, and maybe that is the objective, then maybe you are right. Maybe these externalities that you are saying are worth $15 billion. This is not going, even in the best-case scenario, this is not going to get you to China’s current growth rate in 2047. This is not going to get you to $12,000 something between $12,000 to $15,000 GDP by 2045-50. 

For us, this is a poverty of ambition and imagination. And so I do not think that following this path, given all the externalities, let us say that they may come from some heavily subsidizing, low-skill manufacturing as the current policy imperative is, that I do not see a clear path where India is able to reach a robust middle-income status, which is basically around $15,000 per capita GDP by—we are in the media right now.

RAJAGOPALAN: By using this combination of infant industry and PLI.

LAMBA: Yes. 

India’s Growth Rate

RAJAGOPALAN: I think I understand your argument, correctly, now, soup to nuts. Speaking of growth rates, I have one last question for you, and this is not at all controversial or provocative. This is a very easy peasy last question. What is our current growth rate?

LAMBA: This is the most controversial question of all time.

RAJAGOPALAN: I think I am an educated economist, and I am not able to parse this out. I’m constantly relying on people and it’s just unclear to me how to make sense of what the growth rate is right now. I recently wrote a long essay on how if India is really growing at this sort of, 8% plus number that many people claim in the last year or so, especially the last couple of quarters, it doesn’t seem that way when you look at gross fixed capital formation, when you look at private investment, when you look at consumer sentiment and so on. 

I’m also not someone who just immediately wants to say then that, “oh, no, all the government numbers are rubbish.” I’m a little careful about that. From your point of view, what is a good way of making sense of how to think about India’s growth rate? I’m not asking this so much from the point of view of the book, but because you worked in the chief economic adviser’s office. You’ve looked at this a little bit more carefully than most people I know.

LAMBA: Let me first preface this by saying, I think it was, if I remember correctly, it was a time when I was, it was almost 10 years ago, I think when I was working with Raghu when he was the chief economic adviser. I think he or I don’t remember the Ministry of Statistics and Programme Implementation (MOSPI), which actually calculates these numbers, we went there, he and his team, and there were three of us with him. Basically, we wanted to understand, how is this done? How are you doing this? How is the sausage made, and so on, right? It is remarkable, to be honest, the quality of human capital there, given the incentives. To be honest, these people are very important people in the policymaking.

RAJAGOPALAN: India has excellent statisticians, has historically had them and we just don’t pay attention.

LAMBA: We don’t pay attention.

RAJAGOPALAN: We don’t know their names.

LAMBA: Exactly. Exactly. That’s the argument. These are such faceless warriors, in some sense. For even for a minute, I will not, from whatever I saw, so I would not doubt at all, their work ethic in some sense, right? Having said that, I do think that India needs a systemic overhaul in how it does national income accounting. I think actually, we were going fine for a while. I think, even the stuff with NSS, which has been sort of has suffered big-time, census hasn’t happened.

Just as a data collection machinery—Pramit [Bhattacharya] is someone people should read if they haven’t been reading. He writes excellent pieces on national income accounting and statistics and so on. There is clearly a vacuum in terms of whether we are state of the art in some of these things. Now, I think it’s becoming more and more obvious. I was recently at a conference where there were four people talking about the economy. To be honest, you’re right, the four people said almost not exactly the same thing about how to interpret the GDP data. Someone walked up to me and said, “I’m not an economist, but at some point, a number is a number, right? How can all you four smart people have different views about how to interpret this number?” I think this is a huge problem. Why is this a problem?

If you start believing India is growing at 8% and 8.5% growth rate, you will set very different policies than if you believe India was growing at 5-6%. Right? Compounding works like magic, right? If you’re growing at 8% and 9%, your growth rate in 20 years is going to be very different than if you’re growing at 6%. I want to be careful about this. I don’t think that any serious economist thinks that India is growing at 8.5%.

The way you can frame this is that I don’t think anybody thinks that India’s growth potential today—I don’t agree that India’s growth rate in the last quarter was 8.5%. But even if let’s suppose it happened magically, that India’s growth potential that it’s growth—like if you were to average India’s growth rate—so just to give your listeners an example, if you average India’s growth rate over the last 30 years, it’s around 6%. That is what economists mean by growth potential, right?

Despite all the variances of another war maybe breaking out, oil price shocks and so on, like what could potentially India grow on average? This is very evident because the two arguments that people have given, right? If you believe that India’s nominal GDP, according to MOSPI is 10% and change, if you believe the RBI, which I do, that India’s inflation is around 5%, 4-5%, 5% actually, then automatically a back-of-the-envelope calculation tells you that India’s real GDP growth is 5%. Because of this sort of, jumlas of how the GDP deflator is being calculated and so on, they’re only deflating the GDP by 1.5%. That’s how you’re getting this 8.5% number, okay?

There’s also the whole other debate about whether subsidies have been taken into account correctly and is the gross value added a better estimate than the gross domestic product, right? Which is because India’s gross value added in the last quarter was 6.5%, which is closer to what I think most people believe India’s growth rate is currently. I think any government and, whichever government now comes to power, whether it’s third term for the current government or a new government, I think they should, I don’t know if they’ll do it, but they should really, whoever is in charge at the chief economic adviser’s office, and they should really infuse MOSPI with significant talent, liberalize—again, this is an institution whose salaries should be liberalized.

I was a D-school [Delhi School of Economics] graduate, young students from Delhi School of Economics should be cramming to go to, this should be the prized first job, like it is in the U.S. to go to the Federal Reserve Board or, the National Labor Bureau and so on. This should be a job that young people want to do. I cannot emphasize this enough for your listeners that this can lead to very grave policy mistakes. If you start believing your growth rate is much higher than actually it is, and you start buying that hype, then I think it can lead to deep mistakes.

As a short answer to your question, I don’t think India’s growing rate is at 8.5%. I can’t prove it to you. Because at the end, we all have to rely on government data. Definitely, you can construct various other statistics that will show you that India is closer to a 6% growth rate right now.

RAJAGOPALAN: Yes, the GVA number, even I’ve been tracking that and that divergence, I have a feeling it’ll close—

LAMBA: At some point.

RAJAGOPALAN: —in future quarters, and then we’ll get a much better picture. 

LAMBA: The one thing we didn’t talk about in detail, but I would like the listeners to just educate themselves about is the so-called jobs crisis in India in some sense. That there is a large amount of youth right now that is looking for jobs, is unable to find jobs. I think on this dimension also, we should be careful about how we interpret the data. Because in some sense, India’s problem is unemployment, but this number comes a little bit more from the Western idea of how to measure productivity. India’s big problem is underemployment. When two people are enough to work on a farm, there’s six people working. You go to get a coffee at a Starbucks, when two people are sufficient behind the counter, there’s five people behind the counter. Think about underemployment as seriously as you think about unemployment.

RAJAGOPALAN: Hopefully, you’ll come back and talk to us more about that. Because I think that’s one of the big questions in my mind too. I read some recent numbers from CMIE that youth unemployment rates are sort of 45% that they’re reporting. That’s unemployment, right? That’s not even the underemployment that you’re counting. It just freaked—I thought there was a decimal point off, I really thought I was missing something big. Hopefully, we can chat more about it. Thank you so much for doing this. This is such a pleasure.

LAMBA: Thanks, Shruti.