Former RBI Governor Raghuram Rajan isn't impressed by India's growth story; Here's what he thinks we're getting wrong

Economic Times

27-07-2025

Agencies Former RBI Guv Raghuram Rajan
"There is no room for another China." That's Raghuram Rajan's blunt assessment of India's industrial aspirations. In a recent interview with Frontline, the former RBI Governor made it clear that the world has changed. The conditions that allowed China to rise through mass manufacturing simply no longer exist.Cheap labour is not the advantage it once was. Automation has moved into even the most basic factory roles. "What companies need now is people who can tend the machines, repair the machines—not those who do the manual work machines have replaced," Rajan said. In short, the manufacturing jobs India is chasing might already be extinct.Add to that the rise of protectionism. Countries are building domestic industries, shutting doors that were once open to global supply chains. "Everybody wants their own little manufacturing industry," Rajan said. India cannot expect to export its way to prosperity in this climate.India has been betting heavily on manufacturing as a way to absorb its young workforce. But Rajan cautions that the numbers just don't add up."We cannot expect that number of jobs in manufacturing," he said. Tariffs have gone up, production-linked incentives are scattered, and policies contradict themselves. For example, tariffs are applied not only to final goods but also to the intermediate goods needed to make them. "Then people complain, 'Oh, I can't make this effectively here because the intermediate goods are tariffed.'"
This isn't just a policy hiccup. It signals a lack of strategic clarity. And without that, Rajan believes, manufacturing will remain a political slogan, not a real solution."Get a job wherever, create a job wherever you can." That, Rajan says, should be the guiding principle.India already commands a 4.5 percent share of global service exports. That includes everything from high-end software to back-end support. While these sectors can't employ everyone, they signal a clear competitive edge.More importantly, Rajan sees untapped potential in domestic, mid-skill service jobs—plumbers, drivers, technicians, healthcare workers. These jobs may not make headlines, but they could lift millions. All it takes is better skilling and targeted support.
He also dismissed the idea that you need a strong manufacturing base to build high-end service sectors. "This canard, which is floated sometimes, that you need the manufacturing in order to do the associated services, is not necessarily true," Rajan said. Citing companies like Nvidia and Apple, he pointed out that design and innovation can flourish even when production is outsourced. The days of the free trade consensus are over. Rajan traced America's shift back to Trump and his economic advisers, who viewed trade deficits as signs of weakness. That thinking has stuck around.
"Is he undermining the basis of US prosperity and its dominance of the post-Second World War economic system with this view? I think we are turning the tables on what worked," he said. Today, protectionist tariffs are not a blip. They are part of a permanent, structural shift in global politics. For India, it means the space to plug into global supply chains has shrunk. Trying to follow China's route now is like running for a train that already left the station.India is growing at 6 to 6.5 percent a year. On paper, that sounds solid. But as Rajan points out, this pace is not enough to lift per capita income fast enough to avoid a demographic squeeze."We are the fastest-growing country in the G20," he said. "But also the poorest on a per capita basis. That has to change."Time is running out. India's young population won't stay young forever. If opportunities don't arrive soon, the demographic dividend could turn into a liability.Rajan has long been vocal about the need for decentralisation. Giving more power to local governments, he argues, improves both accountability and outcomes."The village community can see when the funds transmitted from the State government or Central government are misspent or line the pockets of the village elite," he said. "State after state should give more power to the municipalities, to the villages. That will both enhance commitment to democracy but also allow for better governance."He contrasted this with the Centre's tendency to prioritise flashy schemes without follow-through. "We announce a campaign, but never actually determine whether it's working. It becomes an announcement rather than effective rollout."Rajan criticised the growing trend of suppressing inconvenient data or changing methodologies to suit political needs. That, he warned, is a recipe for bad policy."Suppressing data eventually hurts the government itself," he said. "Your critics are sometimes your best friends because they will identify what's going wrong and then you can make the changes and then get credit for it."Honest, reliable data is not just for economists. It is the foundation of public trust.India is spending big on infrastructure. But Rajan warns that not all investment is equal."Every small town wants a metro," he said. "That's overbuilding, and those will be white elephants."What matters more, in his view, is building up capabilities. This means investing in schools, research labs, skilling programmes, and targeted industrial policy. "We have to have a few national labs where you've got state-of-the-art equipment where you can actually be competitive."The message Rajan is sending is clear: Stop chasing China. That moment is gone. India needs a strategy rooted in its own strengths, challenges and people. That means backing services, not slogans. Empowering local governments, not hoarding power at the top. And investing in people, not just projects.It's not glamorous. But it might just work.