Make for India better approach than Make in India: Raghuram Rajan

Rajan says an incentive-driven, export-led growth or import-substitution strategy may not work for India in the current global scenario


RBI governor Raghuram Rajan said an export-led growth strategy will not pay for India as it did for Asian economies including China due to the tepid global economic recovery, especially in the industrial countries. Photo: Bloomberg
RBI governor Raghuram Rajan said an export-led growth strategy will not pay for India as it did for Asian economies including China due to the tepid global economic recovery, especially in the industrial countries. Photo: Bloomberg

New Delhi: Providing the strongest critique to the government’s Make in India strategy, Reserve Bank of India (RBI) governor Raghuram Rajan on Friday said India rather needs to make for India, adding that either an incentive-driven, export-led growth or import-substitution strategy may not work for the country in the current global economic scenario.

Speaking at an event organized by industry lobby Federation of Indian Chambers of Commerce and Industry, Rajan said an export-led growth strategy will not pay for India as it did for Asian economies, including China, due to the tepid global economic recovery, especially in the industrial countries. “Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China,” he said.

The Narendra Modi government, after coming to power six months ago, has launched its ambitious programme to make India a manufacturing powerhouse and has advocated for boosting exports and incentivizing import substitution.

Rajan, however, clarified that he is not advocating “export pessimism”.

“Instead, I am counselling against an export-led strategy that involves subsidizing exporters with cheap inputs as well as an undervalued exchange rate simply because it is unlikely to be as effective at this juncture. I am also cautioning against picking a particular sector such as manufacturing for encouragement simply because it has worked well for China,” he said. “India is different, and developing at a different time, and we should be agnostic about what will work.”

Rajan said the government should rather focus on creating an environment where all sorts of enterprise can flourish, and then leaving entrepreneurs to choose what they want to do. “Instead of subsidizing inputs to specific industries because they are deemed important or labour-intensive, a strategy that has not really paid off for us over the years, let us figure out the public goods each sector needs, and strive to provide them,” he added.

Giving instances, Rajan said small and medium enterprises might benefit much more from an agency that can certify product quality, or a platform to help them sell receivables, or a state portal that will create marketing websites for them, than from subsidized credit.

On government’s strategy for import substitution or trying to manufacture items domestically rather than importing them, Rajan said such strategy, by creating tariff barriers, has been tried and it has not worked because it ended up reducing domestic competition, making producers inefficient and increasing costs to consumers. “Instead, Make in India will typically mean more openness, as we create an environment that makes our firms able to compete with the rest of the world, and encourages foreign producers to come and take advantage of our environment to create jobs in India,” he said.

Rajan said with external demand growth likely to be muted for at least the next five years, India has to produce for the internal market. “This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transaction costs of buying and selling throughout the country, improvements in the physical transportation network, more efficient and competitive intermediaries in the supply chain from producer to the consumer. A well-designed GST (goods and services tax) Bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come,” he said.

Speaking at the same event, former prime minister Manmohan Singh said India can achieve a growth rate of 8-9% provided there is a “national consensus” on methods to take advantage of globalized world. “I think that even though many other emerging economies are not doing too well, India has an opportunity to move towards a growth rate of 6-7% and thereafter to 8%,” Singh said.

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