Book Review | India almost middle-income, yet needs to become ‘thinking nation’

India might have become the fifth largest economy in the world and is perhaps on its way to becoming the third largest. It is also growing faster than most major economies in the world. But is it truly on track to becoming a developed country where poverty has been marginalised and people enjoy a high standard of living? According to authors Raghuram Rajan and Rohit Lamba, the present rate of growth of the Indian economy is not enough to propel the nation into the league of developed nations.

“With a per capita income of around $2,400, India is now on the verge of entering the ranks of middle-income countries. At even a very respectable per capita income growth rate of four per cent, per capita income will reach $10,000 only by 2060, which is lower than China’s level today. We must do better... If we want the journey to be short, we need to know where we are going. For that, we must cut through the hype and examine our weaknesses and strengths with a clear eye.” That is the core idea behind this marvellous book the authors have put together.

One of the reasons for India’s relatively slow growth, the authors argue, is the problem with manufacturing. They believe that it would be extremely difficult for India to follow the low skill manufacturing path which other successful economies of Asia have taken in the past.

“Today, most goods are produced by global supply chains, criss-crossing through many countries. The supply chains have exploited labour arbitrage so that little is produced by expensive workers in industrial countries, unless they are aided by significant automation. Instead, Indian labour will be competing with labour from Vietnam or from China, which has still not fully exhausted its supply of cheap labour, especially in its less developed western provinces. Unlike the situation for early developers decades ago, Indian workers, adjusted for quality, will not be much cheaper than their competitors. Therefore, the gains from labour arbitrage will not pay for other deficiencies.”

The authors explain why countries like Vietnam have a distinct advantage over India. Vietnam, for instance “is a signatory to many more regional trade agreements, and can import or export its products virtually duty free. No wonder global supply chains go through Vietnam and much less so through India. In fact, the share of global value chain-related manufacturing output for India rose only slightly from 14 per cent to 16 per cent between 2007 and 2021, whereas for Vietnam this same share grew from 35 per cent to over 56 per cent in the same time period.”

The authors are convinced that India’s attempt to boost its manufacturing with the use of low-cost labour will not succeed. They feel that India’s strength lies in its intellectual services capabilities. This is why India has succeeded in developing a world class information technology sector and is exporting a plethora of services to the rest of the world. They argue that “instead of bringing mobile phone assembly to India, we need to design the phones and chips of the future, and the associated software and app platforms, thereby profiting from the truly value-added parts of the global supply chain. Phone assembly coming to India would also be nice, the additional cherry on our value-added cake, but not if you have to pay enormous subsidies for it.”

The authors are completely against the idea of the government giving subsidies to companies for setting up industries especially in manufacturing of electronics and semiconductors. “Are we better off dominating chip design with the thousands of additional engineers and scientists we will produce, and starting firms like Nvidia, Qualcomm or Broadcom, none of which fabricate their chips, or do we want to imitate China especially when we have much better relations with the chip manufacturing world?”

They write that “it does not seem wise at this moment to enter this ruinous subsidies game - we are better off investing in India’s human capital to produce ideas and creativity”.

One of the central, and somewhat controversial, notions that the authors propound is the relationship between political freedom and creativity. The authors feel that the authoritarian climate presently prevailing in the country is not good for the development of intellectual capabilities. They feel that this is holding back development in the country. “The development path we suggest will depend far more on our people having innovative ideas and being creative, pushing the intellectual frontier out. Growth at the frontier requires debate and argumentation, which an authoritarian government rarely tolerates.”

They also point out: “Governments with authoritarian tendencies dislike data that might suggest weaknesses, or feedback that looks like criticism, for it suggests they are fallible. Such governments stop collecting any kind of data that might be unfavourable. As a perverse consequence, they are left to navigate in the dark, which makes it hard for them to correct course.”

India is at a crossroads, they argue, and it should take choices which can make the nation truly great and pull it out of its present economic backwardness. Unfortunately, they feel that with the kind of authoritarian society India is becoming this cannot happen. They feel India needs to become “a thinking, innovative and creative nation”.

No surprises then that this book has provoked extreme reactions from many in the government and its supporters. However, even if one disagrees with a lot that is in the book, it is a work that should not be ignored. It is a volume of ideas and good intentions, and meant to be read with an open mind.

Breaking the Mould: Reimagining India's Economic Future
By Raghuram G. Rajan and Rohit Lamba
Published by Penguin Business
pp. 336; Rs 799