Raghuram Rajan’s Vision Of An Indian Path To Development

Episode Summary

After discussing the trajectory of China's economy earlier this year, Luigi and Bethany turn their attention to the future of another global economic behemoth: India. Joining them is renowned Indian economist Raghuram Rajan, who has a brand-new book out this week, "Breaking the Mould: Reimagining India's Economic Future" (co-authored with Rohit Lamba). In "Breaking the Mould," Rajan and Lamba make the controversial and counterintuitive argument that India should follow an economic development path that is based not on manufacturing, as China has done, but rather on services. In this conversation, we discuss why India's strengths play to services-based development, how India can deal with the economic and educational inequality created by its past, how Western business should engage with India, and why democracy is critical to India's future economic success. We think his perspectives are important for Indian citizens and policymakers, but also for global citizens and policymakers given the critical role India will play in shaping the world of the future.

Episode Notes

After discussing the trajectory of China's economy earlier this year, Luigi and Bethany turn their attention to the future of another global economic behemoth: India. Joining them is renowned Indian economist Raghuram Rajan, who has a brand-new book out this week, "Breaking the Mould: Reimagining India's Economic Future" (co-authored with Rohit Lamba).

In "Breaking the Mould," Rajan and Lamba make the controversial and counterintuitive argument that India should follow an economic development path that is based not on manufacturing, as China has done, but rather on services. In this conversation, we discuss why India's strengths play to services-based development, how India can deal with the economic and educational inequality created by its past, how Western business should engage with India, and why democracy is critical to India's future economic success.

We think his perspectives are important for Indian citizens and policymakers, but also for global citizens and policymakers given the critical role India will play in shaping the world of the future. 

Episode Transcription

Raghuram Rajan (RR): I really think India needs to rethink its development path. And I think if it does all this, here is a coherent path, which is different. I want to emphasize different from the path we're currently on.

Luigi Zingales (LZ): The last couple of years with Bethany, we have focused on the interaction between capitalism and democracy. At the end of the 20th century, this combination looked triumphant. As the Berlin Wall was crumbling down, capitalist democracy was spreading the world over. Now, that we're approaching the end of the first quarter of the 21st century, you know, we're coming down to that, this relationship looks much more problematic. Democracy is in retreat and basic democratic principles are questioned even in the ultimate cradle of democracy, the United States of America. If this was not enough, the enormous economic success of China makes people wonder whether democracy is an obstacle to development. I regard democracy as a value regardless of its economic effect, and I think that you, Bethany feel the same, don't you? 

Bethany McLean (BM): I do, although it's sometimes hard for me to know if I feel so strongly about it because that's what I grew up with and I don't know anything else and I'm naturally a defender of it. Then I also wonder, as you and I have explored a lot on this podcast, the ways in which supposed democracies, including ours, are not really very democratic in the ways in which they become corrupted. And so I also worry about the gaps between the values that both democracy and capitalism espouse, both of which I am big believers in, and then the reality is their practice. 

LZ: Yes, but actually, I regard democracy, i.e., the ability of people to express their opinion and to influence the direction of the government, as a value per se. Even if you were to tell me that you lose a little bit of GDP by being democratic, I prefer to be democratic over non-democratic. Now, the question is whether you're starving - that's a different story. I think that even people, well, if other people start to question whether maybe there is a trade-off between being free and being wealthy, the success of China really makes people wonder. And the natural comparison is in India. India, that is now rising very quickly and is currently the fifth largest economy in the world. They recently surpassed the United Kingdom. And as you can imagine for Indian people, that's a very important sort of step to overcome. But according to the FT’s economic chief editor Martin Wolf, by 2050, the Indian economy will be 30% larger than the US economy, at least in purchasing power parity. 

BM: I think that's why you see so many large corporations from Netflix to McDonald's localizing their content for the Indian market. India just recently overtook China to be the world's most populous country and it's still extraordinarily young. And so I think the question remains, if India has achieved its growth because of its democracy – and India has been a democracy since independence – or despite it. 

LZ: And of course a lot of people are asking the question: is it the fault of democracy that India fell behind or not? One interesting statistic is that in 1960, India, China and Korea had the same GDP per capita. Today, China is five times as wealthy as India. This is really remarkable, and makes people question, should India give up democracy for prosperity? 

There is no better person to address this question than Raghu Rajan, who is not only my colleague at the University of Chicago, but more importantly was the former governor of the Reserve Bank of India, which is the Indian Central Bank, and a very informed and acute observer of the Indian economy. He just released a new book with a younger colleague, Rohit Lamba, and the book is called “Breaking the Mold.” Now, the subtitle of the book reveals a very ambitious goal, which is reimagining India's economic future. And the main thesis of the book is that India is now trying to emulate the path to success that China followed, and so many other Asian, so-called Asian Tigers followed. But the book says it's too late to follow that path. 

The persistence of China and many other sort of China-like developing countries in the low-skill manufacturing sector, and the competition coming from automated manufacturing, make the traditional path of specializing in low-skill manufacturing and then working your way up, not feasible. 

And one of the things that the book points out is that if we plot the value added per employee against the various stage of value creation, we get a smile-shaped curve. So value added is very high in the design phase, low in manufacturing, and very high, again, in distribution. Just one statistic that the book reports that is very interesting in this dimension: Apple, which does not produce anything, but only designs and distributes, today capitalizes roughly $3 trillion. Foxconn, which produces the iPhone and specializes in manufacturing, capitalizes below $50 billion. 

BM: So part of the core argument in Raghu’s book is that pursuing the manufacturing way to development by subsidizing new plants is hopeless for India. It's unable to provide a young generation with enough jobs and those jobs will not be that well paid. So his argument is that the future is in service. In India, which has demonstrated excellence in a number of sectors like software and consulting, should aggressively pursue the service route. And this gets to his defense of democracy because he argues that this requires freeing the creative spirit of Indian entrepreneurs. And so it can only be pursued by making India more not less democratic. But Luigi, we could keep talking forever. Let's discuss these ideas with Raghu himself. 

BM: Raghu, just to set the stage as we get started, how would you describe India's economy today? Would you say it's successful? Would you say it's in a good place? 

RR: Well, it stands out as one of the few fast-growing economies in the world today, and that generates a lot of attention. But that's a headline number, and we have to look beyond that. One of the big concerns for Indians is jobs. Even at this pace of economic growth, around 6%, 6.5%, if you look at an annualized basis, India is not generating enough jobs. What seems to be going on is really the higher-end firms, the more capital-intensive firms are doing very well. What is not going so well is the more small and medium sector, which is often the job-creating sector in the economy. 

LZ: One of the many things I find interesting in your book is the intersection between economics and politics. So when you discuss the India you imagine, the Indian path to development, democracy plays a critical role. So to what extent the institutional features and the economic features are interconnected? 

RR: I think hugely so. We are making the argument that without emphasizing human capital, without increasing the investment in education, in health care, in nutrition, it's going to be very hard for India to elevate the quality of jobs in its workforce. Already with automation taking place, even in large firms in India, it's harder to find good quality jobs for the average worker. As we see automation take place in more of the world, as robotics comes in in a bigger way, you will have to upgrade the skills of the workforce to manage the robots rather than to do the work instead of the robots. 

And similarly, when we're thinking about artificial intelligence and services, you have to be at a higher plane in terms of creativity, in terms of innovation, in terms of ideas. The last aspect of development we emphasize over and above human capital is that today the highest value aspects of the global value chain is in creating the intellectual property, in creating the ideas, creating the products, designing the products. And for that, again, you need to elevate the quality of human capital in India. 

How does all that happen? That happens typically in an environment which is more open, more democratic, more open to free exchange. But we argue democracy is critical from at least two other angles. One, bottom up. If you are a parent who is sending a kid to school and you want to protest against the quality of the school, you should have the strength of conviction as well as the protection that comes from a democracy to be able to protest. It shouldn't be easy for the village authorities to slap you down. The second aspect is for governments which are trying a new path. Democracy allows for transparency, allows for data to inform people, allows for criticism to happen, and allows governments to change course. 

BM: So would you argue, even though it may look on the outside based on China's growth rate over the last bunch of decades, that their approach, a more authoritarian approach, has been more successful? Would you argue that's not all it's cracked up to be? Or that those numbers are misleading? Or that perhaps with the advent of AI that that's all about to change and democracy is going to become even more important?

RR: Well, I think China is a real thing. It has done fantastically well over the last four decades. But I don't think it's an example to emulate for a couple of reasons.

One, we don't have the strengths that China had, including the strength in terms of education, mass education, which China had when it started, but also its ability to impose certain costs as well as certain outcomes on its people. For example, land acquisition is tremendously easy in China. Just take it because it all belongs to the state. Try doing that in India. Impossible, okay? So if you want to build out infrastructure, it takes a much longer time. China built a huge high-speed railway network in the span of, you know, close to a decade. We've spent about that much time trying to get one railway line from Mumbai to Ahmedabad, simply because we can't do the acquisition of land in appropriate time.

So we're very different countries. The China path is closing rapidly, export-led manufacturing growth. How much is the West open to another 1 .4 billion economy trying that? We also have a whole bunch of China “me, too’s”. Vietnam is falling pretty much the part China did. And China is still there on that part. China has not moved on, you know, taking much of its population out of the low value-added manufacturing to high value-added. There's still assemblies going on in China. So you cannot at this point take that path as easily as China could 30 or 40 years ago.

You have to find a new path. And this has to build on India's strengths, which are, you know, we've already talked about democracy. We need to strengthen it rather than weaken it as we sometimes do now. But we also can you know build on the culture of debate as also the willingness to take a different path. India has focused on services. You can see some enormous success stories and services today including providing direct services to the West. So I think these are parts we can build on very effectively 

LZ: Now in the United States when we think about Indian people we think about extremely successful people like you, Satya Nadella and lots of very successful leaders. However what is striking looking at the statistics is how behind India is on education. As you said, was behind in 1960, but is still behind today. So tell me if I'm -- statistics are wrong, but what I read is that if you look at the people above 25, basically almost a quarter is still illiterate. Another half is, does not have a high school degree, and then the rest is the India we know to some extent. 

My concern is that even if you were God and overnight you could transform the educational system, which not even God probably can do it, but transform the educational system and train the best possible way in the new generations, you have a stock of people, three quarter of a population that are really, really behind and is hard to educate them. So what do you do with them? 

RR: You're right and some of the numbers are worse than you think because you said 25% is sort of college educated, but of that 25% that is college educated, the quality of colleges varies considerably. And we cite a survey in our book, which says 50% of college graduates are unemployable. 

Now, for those who have already received some education, remedial education or reskilling or upskilling is quite possible. That we need to do. I think for those whose whose brains are stunted because they had malnutrition as children, it's going to be harder. Today India has a malnutrition rate of 35%. That's horrendous and above a number of countries in sub-Saharan Africa. Of course, this varies across India. In Kerala, it's 6% at OECD levels. In some states, on the east, its 55%, which is you know, amongst the worst in the world. But what we're saying in this book is, let's wake up and recognize that so many Indians will not have a chance going forward unless we make a change today.

Of  course,  what  the  elite  Indian  would  like  to  hear  is  much  more  about  how  we  reach  the  moon – and  we  have. But  those  stories  don't  actually  compensate  for  the  fact  that  the  average  Indian is  actually not  doing  that  well. And that's what we need to also focus on, even as we create more Satya Nadella's and Sundar Pichai's. 

BM: No matter how good your plans for future education are, you're still only likely to affect the younger generations. So  what  do  you  do  with  the  adults  who  are  probably  going  to  remain  uneducated  until  the  end  of  the  year until you die,  and  especially  with  the  advent  of  AI,  what  kind  of  jobs  are  available  to  them  now  and  in  the  future?

RR: Well,  that's  sort  of  a  little  bit  of  the  tragedy,  right?  The  fastest  growing  job  in  India  was  that  of  security  guard.  There are  jobs  like  that, so  it  is  possible,  and  this  is  where  I  think  automation  sometimes  helps,  where  machines are  simple  to  use,  and  so  men  or  women  with  machine  can  actually, even  with  very  moderate  skills,  do  a  lot  of  work.  One  example  is,  you  know,  these  sweeper  trucks,  historically  used  to  sweep  with  your  hand,  but  if  you  have  these  vacuum  trucks  and  you  know  basically  how  to  drive, much  else  has  taken  care  of  and  it  still  is  a  very  valuable  thing  to  have  a  human  behind  the  wheel.  We  still  haven't  gotten  to  the  point  where  we  can  fully  automate  those.  

So  I  think  over  time  some  of  these  jobs  will  have  to  be  what  occupy  people  as  they  come  out  of  agriculture. Now  any  of  these  jobs  actually  generate  more  productivity  and  value  added  than  staying  in  agriculture  and  being  the  sixth  person  on  a  small  field  when  the  field  can  really  employ  one  or  two. But  I  think  over  time  you  know  we  have  to  invest  tremendously  in  upscaling,  adult  education  and  remedial  education,  retraining  those  who've  gone  through  college  but  haven't  really  learned  anything. There's  a  huge  industry  that  is  emerging.  This  itself  is  a  source  of  employment.  Huge  industry  emerging  in  India  on  these  kinds  of  things, re-skilling.  So,  as  soon  as  machine  learning  becomes  a  big  thing  in  the  U .S., there  are  ton  of  small  shops  setting  up  in  India  offering  machine  learning  courses.  They're of  variable  quality.  I  think  the  government  can  help  if  it  can  cleanly  and  transparently  certify  quality. But  the  private  sector  is  willing  to  step  up  and  ramp  up  in  these  kinds  of  situations.  And  that  can  also  help  with  the  adult  education  piece.  

LZ: Actually,  if  I  may,  I  would  love  reading  your  book, I  would  love  answered  your  questions in  slightly  different  way.  So  let  me  try  and  feel  free  to  trash  what  I  say.  It  seems  that  there's  no  doubt  that  formal  education  is  not  super  pervasive  in  India. However,  I  think  people  have  other  skills  and  I  always  found  people  in  India  fantastic  in  many  dimensions.  So,  the  question  is,  how  do  you  exploit  or  take  as  an  opportunity  those  skills  that  that  they  have?

There's  an  example  in  the  book  that  I  really  like  is  the  fact  that  why  India  cannot  launch  its  sophisticated  fashion  industry  or  sophisticated  craftsmanship  because  in  some  level  the  skills  that  build  the Taj  Mahal  are  still  there  in  some  form  or  another. This  is  not  formal  education.  This  is  maybe  transmitted  from  father  to  child  or  mother  to  daughter.  But  they're  still  there  and  can  be  exploited  as  can  tourism. 

In essence,  I  think  India  is  a  fantastic  country  to  visit.  At  the  moment  is  mostly  focused  on  very  high  level  tourists  and  most  of  these  high  level  tourists  is  actually  dominated  by  large  multinationals. But  I  think  that  with  a  better  system,  you  could  have  accessible  Indian  food.  And  it  says,  if  you  have,  I  love  Indian  food  and  my  temptation  will  be  to  eat  off  the  street.  Unfortunately, if  you  do  that  most  of  the  time,  you  get  sick,  but  not  because  it's  poisonous,  it's  because  our  bugs,  our  stomachs  are  not  ready  to  the  Indian  bugs.  So  trying  to  take  advantage  of  these  skills  in  the  21st  century, I  think  that  should  be  a  part  of  your  plan,  and  I  think  it  is,  but  I  would  like  you  to  elaborate  on  this.  

RR: No,  no,  you're  exactly  right,  that  our  plans  are  not  just  about  exporting  service or  services  into  manufacturing.  It's also about  services  within  India.  You  know,  we  have  a  whole  bunch  just  along  those  lines.  So one you mentioned was  handicrafts. Now,  handicrafts  are  dying  out  in  some  parts,  but  there's  superb  handicrafts  available  across  the  country.  Kashmir has  a  fantastic  history  of  handicrafts. If you  can  popularize  those,  create  brands,  assure quality.  One  example  we  talk  about  in  the  book  which  you  mentioned  is  this  firm  which  looks  at  weavers  of  Banarasi  saris. What  is  interesting  is  why  don't  they  actually  take  risks?  Why  do  they  have  the  sameness  in  quality  which  is  easily  then  replicated  and  you  have  fake  products  coming?

The  reason  they  don't  is  because  they  have  to  take  the  entire  risk  of  the  saree  themselves.  For  a  saree, they  work  three  months  on  and  then  it  turns  out  that  it  doesn't  sell  or  there's  a  small  defect  or  something. It's  a  huge  risk.  So  they're  very,  very  conservative.  But  once  you  say,  I'll  take  the  risk,  you  just  produce  the  sari.  You  suddenly  see  a  whole  variety  of  new  designs  coming  out  and  this  brand, Tilfi,  is  trying  to  do  that.  So  that's  an  example  of  how  you  can  market  skills  which  didn't  exist  before,  create  a  worldwide  market for  it,  and  then  expand  while  maintaining  quality  control  and  offering  new  designs.

Healthcare.  There  are  these  sort  of  barefoot  doctors  in  India,  basically  used  to  work  in  a  pharmacy  and  know  the  various  diseases  and  know  what  is  prescribed, and  they  start  a  business  as  your  local  doctor.  They have  no  certificate,  no  nothing,  but  people  trust  them.  Well, why  not  upgrade  their  skills?  Give them a  menu  of  18  common  diseases. Let  them  identify  them,  test  them,  give  them  a  certificate.  Let  them  be  able  to  prescribe.  And  then  let  them  know  what  they  don't  know.  If  they  don't  know  what  it  is, let  them  push  people  up  to  the  next  layer.  You  immediately  create  much  more  health  care  for  people  than  there  is  now  of  better  quality.  But  that  requires  the  medical  association  to  accept that  in  fact  these  guys  can  prescribe.  We  need  to  make  some  advances  there  but  that's  a  huge  source  of  employment.  There's  a  lot  more  that  can  be  done.  

LZ: What  I  got  from  your  book  is  one  of  the  important  things  is  initial  priorities  because  of  course  it  would  be  nice  to  do  everything  and  this  is  the  United  States  when  they  send  a  man  on  the  moon  they  also  started  a  war  on  poverty  and  all  these  things  at  the same  time  they  were  much  richer.  What  I  did  not  fully  appreciate  until  I  read  your  book  is  how  much  these  priorities  do  matter  because  I  got  from  you  and  correct me if  I'm  wrong  that  the  amount  of  subsidy  that  just  one  chip  manufacturer  got  for  four  or  five  thousand  jobs, has  the  same  cost  as a  third  of  all  the  budget  for  the  IIT  which  is  the  most  prestigious  school.

RR: It's worse than that. It's the whole central budget for higher education. It's one third, I mean, this is $2 billion. We don't spend a huge amount on higher education. We should probably spend much more. But the subsidy to Micron to build a factory in India, which is coming from both the Gujarat government and the central government is $2 billion out of the 2.8 billion investment.

I mean, this is a prestige project. It's one of those, which you think will bring aura to the country because we're manufacturing chips. But of course, these aren't state-of-the-art H100 NVidia chips. These are just ordinary, often not the logic chips that everybody cares about. These could be memory chips and so on. But the bottom line is that you're spending so much on that. Why not spend that on schools? On colleges? On universities? India doesn't have one university in the top hundred right, and you know if you're trying to move up the creativity ladder, if you are trying to build, you know drug patents, new drugs as opposed to generate “me too” drugs which you know, it's high time we moved up the ladder If you're trying to do AI, you need top quality universities. Spend money on chip design rather than on trying to bring chip manufacturing to India, which anyway, and this is the thing that I find hardest to explain to people, you'll never be independent in terms of chip manufacturing, no matter what you do.

For machines, you need ASML in Netherlands. For any kind of chip input, you require the rest of the world because India doesn't have a lot of silicon and this and that that it can use in chips.

For most of the intermediate products that go into chips, you're going to rely on the rest of the world. So this is a strategic choice. You become independent of the world simply because you have a micron factory. You're still going to be dependent for every chip that is more complicated on the outside. A better way to ensure national security is be friends with everyone rather than try and build your own supply chains.

BM:  Is there, and this is a bit of a tangent from your book, but is there a broader lesson in that, as we're all talking now, well, at least in the US, about bringing semiconductor manufacturing back here in order to ensure national security. Is there a lesson in the “be friends” approach, and is  it  actually  maybe  a  good  thing  for  the  world  that  everyone  needs  each  other?  Is  there  a  way  to  make  that  argument  in a  utopian  kind  of  way?  

RR: It is naive to  make  that  argument  saying,  okay, it's all going to be concentrated in Taiwan, and the rest of the world will be dependent on Taiwan, and then we hope and pray that Taiwan never gets invaded, right? I do think that it is important to center that chip manufacturing elsewhere also so that in case something bad happens you have alternatives.

So I don't quarrel with the fact that the West wants to build independent factories in the United States, getting TSMC from Taiwan to build in the US, getting Samsung and even Intel.

What I do worry about is India trying to do it when it's so far at this point behind but also because of the cost. Any factory worth its name and size is going to cost you know 20, 30 billion dollars. That's how much is being spent on the Intel factory, on TSMC. And at the end of it you know what you'll do is replicate something that's already elsewhere.

For India, it makes sense to free ride on the West, maintain good relations with the West, and buy your chips from the West. Spend more money on chip designers. By one metric 20% of chip designers are India. Why not make it 30 or 40%? Be the Nvidia's of the world. It's going to take some time there also. But be that rather than the TSMC's of the world. You actually increase value by doing that.

LZ: Speaking of successes one of the big successes of India that maybe I will listen as our last familiar with is the uniform payment interface and the so-called Stack system that I learned from the book that you had some part in sort of launching, but has become, in my view, the best standard around. In fact, when I was in Italy and there were people who were collecting information for Mario Draghi whose new task to give suggestions, to the Vandalay and to the European Commissioner about what is the technology strategy for Europe. I said, you should ally with India because they have the best framework. So can you explain what this is and why this is so fantastic? 

RR: Well, UPI, the Universal Payment Interface works on what is called the India Stack. And it's the brainchild in many ways of Nandan Nilekani, it's a public interface, you know, owned largely by a whole conglomerate of banks. So, if I have an account in a bank. I can transfer money to you who has an account in another bank using a third bank's app or a third party's app. And it's basically interoperable to the nth degree, okay? Information can be collected on payments, et cetera. That can also be transferred based on whom information is collected. It's... it's actually a very vibrant and versatile structure. 

As I write in the book, the one decision I had to make was really should we allow the banks to monopolize this, which they were very eager to, or should we bring in the non-banks? And Nandan was very, very emphatic that the non-banks were important because banks would kill the innovation. And we managed to persuade the RBI staff that that made sense. And I looked at the numbers a few days ago.

It turns out we're about 10 billion transactions a month. That is billion with a B. You know, in India you see beggars, street vendors, all of them have the QR code. So you can make transfers to them directly at short notice. But what is interesting is 95% of these transactions are done by the non-banks.

Clearly, the banks haven't moved fast enough. In fact, now they're using the regulatory route to say, hey, you non-banks, you're occupying too much of the territory, we need to cut you down to size.

But the bottom line here is competition works, and it worked effectively here. Last point I'll make is, what is interesting is India is rightly saying, here we have a nice sort of set of structures we can teach other countries how to use. Countries in Africa can do this very effectively. 

What is important is India has created a separate sort of outfit to do this, and I keep saying that it will be especially beneficial if India can assure other countries that it's not going to use this technology transfer as a backdoor way of spying on them or, you know, generating data on their citizens that can be misused, having privacy laws, having protection will make us a much more confident and reliable ally to those countries than, you know, superpowers who don't have those constraints on themselves. Democracy will help. 

LZ: If I may say, this is where I think the alliance with Europe is a match made in heaven because Europe does not have a platform like this, has a very strong privacy rule, and a desperate need to adopt a platform like this. Europe and India are a natural allies in a world that is divided between China and the United States. 

RR: I couldn't disagree with that. I think it's important to explore. I mean, this is why an open India, an open democratic India, I think, could be a big player, an important player. But we need to work all these elements. 

LZ: Now, one of the side-effects of the stock system, and in particular of the other, the enterprise, is  that  it's  not  just  about  the  global  economy,  measures  of  identity  that  is  based,  is  that  it  made  it  easier  for  the  government  to  do  direct  transfers.  So  during  COVID  in  the  United  States, we  experienced  this  difficulty  is  that  the  government  had  some  physical  inability  to  transfer  money  fast  to  individuals.  I  think  that  the  beauty  of  the  other  system  is  that  you  can. The  problem  is  that...  that  you  can.  And  so  it  seems  that  the  government  tends  to  abuse  of  that  by  doing  direct  transfer  everywhere. Because if  you're  running  an  electoral  campaign, there  is  nothing  as  big  as  having  a  few  extra  dollars  or  rupees  in  your  bank  account.  And  if  you  think  it's  just  the  Indian  government,  I  can  tell  you  that  the  Italian  Prime  Minister  at  the  time, Renzhi,  did  the  same  before  the  European  elections.  Put  60  euros  in  the  pocket  of  every  Italian  and  won  that  election  by  a  landslide.  

So  on  one  hand,  this  seems  to  the  nightmare  of  conservatives  that  once  you  make  enable  the  transfer, you  make  it  more  diffused.  But  there  is  a  huge  cost  of  transfer  in  a  country  like  India.  And  this  is  good  transfers  to  people  who  are  really  in need  are  fantastic,  but  they  have  a  budgetary  cost  and  replace  other  government expenditures. And so to what extent the combination of a system that is based on this welfare transfer in a very democratic country, induce an economic policy that is not sustainable in the long term?

RR: Well,  it  is  a  very  real  concern  because  what  we're  seeing  in  the  most  recent  state  elections  is  parties  are  competing  with  each  other  to  give  these  transfers.  And  at  some  point,  you  bankrupt  the  state  through  transfers.  What  is  --  I'm  not  denying  the  need  for  targeted  transfers  at  the  poorest,  because  if  they  have  cash  in  their  hand,  they  become  a  different  person.  They  can  actually  change  their  consumption  basket  in  ways  that  are  better. They  can  send  their  kid  maybe  to  a  private  school.  At  least  they  should  have  the  choice  relative  to  the  public  school.  The  problem,  of  course,  is  when  you  --  it  becomes  the  only  thing.  And  what  is  important  is  --  public  services  in  India  have  been  the  orphan  child. You haven't  got  good  government  schools.  You  haven't  got  good  government  health  clinics.  

And  part  of  the  reason  is  India  is  very  much  centralized.  These  services  don't  decentralize  to  the  local  level, to  the  municipality  level,  to  the  village  level.  They're  all  commanded  at  the  state  government  level.  The  state  of  Uttar  Pradesh  is  240  million  people.  That's  one  state  and  everything  is  run  from  the  capital  Lucknow, which  means  that  at  the  local  level,  who  do  you  complain  to  when  your  teacher  doesn't  show  up?  So we  need  far  more  decentralization.  So  one  of  the  big  sort  of  points  in  the  book, as  you  mentioned,  is  how  the  politics  and  the  economics  come  together.  With  decentralization,  you  can  get  better  public  services,  which  then  can  lead  to  better  improved  human  capital.

The  one  state  which  is  decentralized is  Delhi  because  it's  really  a  city  and  it's  about  as  big  physically  as  say  a  district  in  India.  And  Delhi  has  focused  on  improving  schools, on  improving,  you  know,  healthcare  clinics  and  it's  done  a  very  reasonable  job  there.  But  that's  an  example  how  decentralization  can  actually  improve  social  services. 

BM: Let's  see  I  would  ask  that  as  the  last  question  about  how  you  think  Western  business  should  engage  with  India  moving  forward  and  keeping  in  mind  that  there  are  a  lot  of  US-based  businesses who  are  expanding  in India. I  was  just  actually  talking  to  David  Solomon  at  Goldman  Sachs  about  how  much  bigger  Goldman's  office  in  India  now  is  a  decade  later  than  it  was,  I  think,  when  it  was  first  opened  in  2007.  So, what do you think  the  lesson  is  for  U.S. businesses? 

RR: Well, at this point, many are going in looking for exactly what Goldman is looking for, smart engineers, MBAs to do some of the stuff they would find it more costly to do in the U.S., build  programs,  build  risk  management  structures,  build  trading  structures,  all  of  which  Goldman's  8,000-person  office is  doing  in  India.  I  would  say  that's  the  easiest  thing  to  exploit  right  now.

But  manpower  is  going  to  be  an  issue  because  there's  a  huge  competition  for  the  available  talent  there  is.  So  this  is  where  we  keep  saying  India  has  to  create  more  of  that  talent  by  improving  the  quality  of  its  schools  and  colleges  and  service  that  global  market.

I think as far as manufacturing goes, infrastructure  is  improving  in  India,  you  know,  it  will  become  easier  to  manufacture  in  India.  But  I  would  say  that  yet  again  there,  the  quality  of  the  workforce  is  going  to  be  very  important  over  and  above  the  infrastructure. And  of  course,  India  has  to  do  a  better  job  in  clearing  away  some  of  the  rules  and  regulations  that  hamper  business.  They  have  done  a  lot, but  there's  still  some  way  to  go  to  welcome  foreign  businesses. 

LZ: So the very last question. This book is half a superb summary of economic development theories and half a political manifesto. So are you providing these ideas for somebody else to carry forward or are you planning to actually push this idea yourself in India? 

RR: No, look, as with any academic, I'm trying to put the ideas on the table hoping somebody will take them forward because I really think India needs to rethink its development path. And I think if it does all this, here is a coherent path, which is different. I want to emphasize different from the path we're currently on. And I think we need to change that path because I worry about the direction we're going in both economically and politically. And I think changing the path will be good for India, will be good for the world, and I hope somebody takes it up, even if, you know, even somebody in the current government.

BM: Luigi,  you're  very  familiar  with  Raghu’s work,  obviously, he's  a  colleague  of  yours.  Did  anything  in  this  book  or  in  our  conversation  with  him  surprise  you?  Did  it  seem  like  a  continuation  of  his  way  of  thinking  to  you? Did anything in this book or in our conversation with him surprise you, did it seem like a continuation of his way of thinking to you, or was there a moment when you thought, "Wow, he thinks differently than I thought he did for all these years?" 

LZ: That's a very good question. This idea of a different path, of an Indian path to development, I think is a new idea. I'm still struggling to put together the pieces. As all the big ideas, there is a lot of work to be done to cross the T's and dot the I's. I think that this book is more a kind of a manifesto book rather than implementation book. I think that it's a very new and intriguing idea. 

BM: I  hear  you,  I  couldn't  help  thinking as  I  read  the  book  and  as  we  talked  to  him  that  there  are  aspects  of  it  that  are  manifesto-like  to  me  too.  And  that  if  India  can  solve  the  education  question  then,  oh  my, maybe  they  can  tell  us  how  to  solve  it  here  in  the  United  States, right? I mean, it's very easy to say that education is the way forward and of course it is but actually making that work particularly in societies as India does as we do that have Legacies of racism and huge disparity disparities as a result of that. Wow, it's  difficult.  But  I  did  think,  as  I  listened  to  him,  that  there  are  so  many  things  that  both  countries  can  learn  from  each  other,  so  many  things  that  we  can  learn  from  India,  because  certainly  if  they  can  figure  out  the  educational  piece, then  there  are  lessons  that  we  might  be  able  to  use  here  in  the  United  States.  

LZ: But  I  think  that  the  educational  piece  might  be  easier  paradoxically  in  India  than  in  the  United  States.  First  of  all, in  India,  there  is  an  enormous  prestige  associated  with  education.  So  the  average  person  dreams  of  sending  the  kids  to  the  most  prestigious  school,  which  might  not  be  true  throughout  America. And number two, from what I gather from him, so far as being so much starved of funds that just reallocating a bit the funds might go a long way. Aren't you shocked that one factory absorbed the entire budget of all the university system? And by the way, that factory is employing 5,000 people, so it's not like employing an army that you say is worth it. So in a sense, his job and I don't want to sort of make it too simplistic, but his job is easier than the job here, because just the reallocation of priorities might make an enormous difference.

BM: I have an even more basic question, and maybe we should bring our Capitalisn’t team member in to discuss this, but  I  was  wondering,  realistically,  how  far  is  India  from  the  vision  that  Raghu  espouses,  and  what  direction  is  it  realistically  going  in?  In  other  words, is  it  close  to  what  he's  talking  about  and  is  it  moving  in  that  direction?  Or  is  there  a  risk  that  it's  going  in  the,  how  real  is  the  risk  that  it's  going  in  the  opposite  direction  and  that  this  really  needs  to  be  a  manifesto  and  an  urgent  one? I  don't  know,  Luigi,  if  you  know  the  answer  to  that  or  if  we  should  bring  Utsav  in  to  answer  it.  

Utsav Gandhi: Hi,  I  should...  probably  caveat  first  that  I've  been  living  in  the  United  States  for  almost  12,  13  years  now,  but  I  grew  up  in  India  myself. And  every  time  I  return  to  India  in  these  last  few  years,  I've  seen  growth  in  like  leaps  and  bounds,  whether  I  go  to  the  big  cities  or  even  if  I  go  to  like  mid-center,  mid-tier  cities  as  well. What  I  agree  with  Raghu  for  sure  is  when  he  said  that  India is  at  a  crossroads  firstly,  and  it needs to rethink its approach  moving  forward.  And  specifically  where  I  think  his  ideas  are  interesting  are  in  the  notions  of  telemedicine, for  the  consulting  industry  to  move  from  the back  office  to  the front office,  and  then maybe  even  exporting  educational  services.  And  I  certainly  think  the  points  he  makes  about  democracy  more  broadly, are  something  we  all  need  to  keep  in  mind,  especially  as  we  talk  about  in  this  podcast  a  lot,  how  that  intersects  with  economic  growth  in  general.  

UG: I was wondering if either of you would want to talk what your personal experience has been. I don't know if you either of you have traveled to India before but maybe our listeners would like to know what your perspective is as having visited India etc.

LZ: I traveled to India twice, it’s a very large distance, so my first time was in 2000, and then I went back in 2018. I did see an enormous change in the country. There  is  a  phase  of  economic  development  where  you  see  the  change  in  the  street.  So  going  from  $600  per  capita  income  per  person  to  $2,500  means  from  not  having a  private bathroom  in  the  house  to most  people having  a  private  bathroom  in  the  house.  That  is  a  dramatic  change  in  the  quality  of  the  street,  in  the  quality  of  everything.  So  I  think  that  that  is  really  the  step  that  they  made  and  they're  rightly  proud  of  that.

Now  what  is  interesting  when  I  was  listening  to  Raghu,  I  could  not  not think  about  the  experience  of  Italy,  because  Italy  at  the  end  of  the  world  War  II  was  a  really  underdeveloped  country. It was an agrarian country.  Industry was very peripheral.  In  the  first  20  years  after,  30  years  after  the  war,  there  was  a  major  transformation  that  used  to  be  called  the  Italian  miracle. Huge  success  based,  like  China,  on  manufacturing,  but  actually  we  did  it  as  a  democratic  country.  

So that was to our merit.  The problem  is  that  we  missed completely  the  transition when  we  became  a  developed  country.  We  needed  to  invest  in  the  stuff  that  Raghu  was  saying  we  should  invest,  in  massive  education, in  top  education,  and  we  didn't  do  enough.  And  so  the  tragedy  of  Italy  is  the  opposite,  is  that  we  have  not  grown  in  per  capita  income  for  the  last  25  years. This is something that I keep repeating people.  The  surprising  thing  about  Italy  is  there's  not  a  revolt  yet,  because  if  you  don't  see  your  standard  of  living  increase,  if  the  majority  of  the  population  don't  see  any  increase  in  standard  of  living  for  more  than  25  years, that’s a very long time. 

BM: I  couldn't  help  thinking  as  you  were  talking,  Luigi,  that  maybe  the  ultimate  lesson  of  this  is  don't  take  anything  for  granted  just  because  you  get  your  country  or  your  company  on  the  right  trajectory  for  a  certain  period  of  time. Doesn't  mean  anything  whether  it  will  stay  on  the  right  trajectory.  I  guess  that's  obvious  but  you  can't  remind  yourself  of  it  too  often.  And  then  the  other  thing  I  thought  harkening  back  to  our  Chile  episode  is  both  as  Raghu  was  talking  and  as  you're  now  talking  about  Italy  is  that  inequality  really  does  matter  in  a  way  that  is  in  a  way  that  is  so  much  beyond  the  headlines.

And  I  think  sometimes  the  way  in  which  we  talk  about  inequality  does  it  a disservice  to  it  because  we  talk  about  it  in  a  headlining  kind  of  way  without  getting  at  the  very  real  instabilities  and  resentments  that  it  that  it  creates.  

LZ: But  not  only  the  instability  and  the  resentment,  it’s  the  wrong  political  choices  I think Raghu in his book is very clear that one of the reasons why India is so behind in education is because there was so much inequality and the rich people didn't think that the poor people needed education.

With all the negative we can say about communists, there is one good thing is they educated everybody. Paradoxically, communist China set the perfect stage for a capitalist boom. Because it created education for everybody, making it possible to have the boom that we have served since the 1980. 

BM: So  maybe  that  goes  back  to  my,  maybe  I  should  add  another  leg  to  that,  all  of  this. Democracy  and  capitalism, the  relationship  that  democracy  and  capitalism  have  to  education  is  really  interesting  in  that  you  need  education  for  either  democracy  or  capitalism  to  succeed.  But  if  you  really  push  capitalist  logic, then  some  people  don't  deserve  to  be  educated  and  thereby  you  undermine  the  very  thing  that  gives  capitalism  its  mojo,  its  ability  to  survive.  

LZ: That's an excellent point, Bethany. Okay.

BM: Back  to  your  point, Luigi,  about  democracy  being  a  value  in  and  of  itself,  I  think  there's  a  teeny  bit  of  arrogance  in  that  view,  and  that  it  sounds  like,  to  us, would  give  up  a  little  bit  of  extra  wealth  to  preserve  freedom.  But  for  a  lot  of  people,  the  increase  in  wealth,  that  dramatic  disparity  between  India  and  China.  It's  not  the  difference  having  one  car  versus  five  cars  or  having  a  5,000  square  foot  house  versus  a  1 ,000  square  foot  house.  It's  the  difference  between  having  one  bad  meal  and  or  three  nice  ones  a  day.  The  difference  between  being  unable  to  give  your  kids  a  formal  education  or  seeing  your  kids  graduate  from  college,  the difference  between  having  just  one  bike  and  having  a  car  and  confronted  with  the  extreme  nature  of  those  choices, many  people  might  prefer  an  autocratic  regime  that  delivers  rather  than  a  democratic  one  that  does  not.  

So  I  think  Raghu’s  new  book  is  really  important  because  it  makes  the  argument  that  I  think  we  want  to  hear  that  democracy  is  key  not  only  to  what  has  been  achieved  but  to  what  can  be  achieved  in  the  future. And  I  think  while  the  book  is  clearly  targeted  to  India,  it's  of  great  interest  to  all  of  us  because  it  really  does  provide  an  interesting  lens through  which  to  think  about  this  very,  very  relevant  debate  everywhere, which  is  how  a  country's  government  can  promote  economic  development.  From  a  very  parochial  perspective,  namely  that  of  the  US,  that  it  seems  that  we  should  care  a  lot  about  India  and  perhaps  more  so  than  we  all  do, especially  or  at  least  it  should  be  more,  more  in  the  forefront  of  all  of  our  minds,  given  the  ongoing  tensions  with  China  and  the  importance  of  India  to  the  global  economy going  forward.  

LZ: Oh, absolutely.  Imagine  a  world  in  which  India  sides  with  China,  would  be  a  very  difficult  world  to  deal  for  both  the  United  States  and  Europe.

BM: But  I  wondered  about  his  view  of  democracy  and  regulation.  Does  a  democratic  regime  need  more  regulation  than  an  authoritarian  regime  or  does  it  need  less? Because  he  mentioned  at  the  end  of  our  conversation  the  need  to  roll  back  regulations  in  India.  And  so  I  started  to  think  about  that  as  sort  of,  maybe  it's  not  really  a  third  leg  of  this,  maybe  it's  just  another  tangent. But  if  we  think  about  this,  ongoing  dance  between  democracy  and  regulation,  I  mean,  democracy  and  capitalism,  what  role  in  that  does  regulation  play?  And  if  democracy  and  capitalism  are  on  axes  and  you  want to  be  in  the  upper  right  of  a  very democratic  and  a  very  capitalistic  regime,  where  does  regulation  sit  on  that?  Does that make sense?  

LZ: It's  interesting  that  in  one  of  the  chapters  there  is,  he  quotes  a  proverb  from  Ram  Rajya, which  is  from  an  Indian  religious  text,  in  which  you  say  that  the  aim  of  government  should  be  to  govern  well  and  in  the  best  interest  of  the  people  over  the  long  term.  This should be the goal  of  any  democratic  system. Now,  having  regular  elections  doesn't  guarantee  that  that's  the  outcome.  And  so  I  think  that  the  question  is  when  we  say  democratic,  are  we  saying  that  they  have  periodic  elections? Or  are  we  saying  that  the  government  is  really  aiming  to  act  in  the  best  interest  of  the  people  over  the  long  term?  

BM: That's a really interesting  question.