Former RBI governor Raghuram Rajan has cautioned the central and state governments in India against using populist measures that stand in the way of providing good quality public services. Rajan termed the practice of political parties promising something free for everyone in the run-up to elections as “sheer populism”.
In an exclusive interaction with Outlook Business, he said, “Populism constrains government resources for what it really needs to do, which is to provide quality public services.” He clarified that targeted transfer of cash and goods has its share of benefits but highlighted its dangers too.
“I think targeted benefits at the relatively poor, helping them invest in themselves, is not a bad thing. But using that to substitute providing public goods in terms of better schools, better healthcare, and more access to finance is a mistake. We shouldn't let the freebies and the revdis be the alternative to actual access to public services,” said Rajan, who headed the country’s central bank from 2013 to 2016.
When it comes to industrial policies, Rajan criticised the Centre’s import substitution strategy. “Import substitution is a terrible, terrible idea. If we want to be part of global supply chains and are serious about manufacturing, we have to seriously consider our policy uncertainties,” said Rajan on Thursday, after the launch of his new book Breaking The Mould: Reimagining India’s Economic Future, co-authored with Rohit Lamba.
To boost its domestic manufacturing capability in sectors like electronics, India has been imposing high tariffs on the import of products. At the same time, the government has also been incentivising manufacturers to produce domestically through subsidy programmes like the production-linked incentives (PLI) scheme.
The PLI scheme for smartphone production is considered to be a success by the Centre, with 98 per cent of India’s overall mobile shipments in 2022 being ‘Made in India’. This was less than 20 per cent a decade ago, according to data from Counterpoint Research. Union Minister Ashwini Vaishnaw recently said that India’s local value addition in certain smartphone production is over 15 per cent.
In the PLI 2.0 programme for IT hardware manufacturing, Vaishnaw claimed that the scope for value addition is 30 and 48 per cent. But Rajan is not convinced of these figures, citing lack of transparent data.
“Sometimes, what happens is that you add the producer's margin and this and that, and it gets shown in India as value added. We need to know what exactly is coming under value added. These things need detailed calculations. Unless these numbers are made public and somebody scrutinises them, I don't know what is being talked about [by the government] at this point,” added Rajan.
(A detailed interview with Raghuram Rajan will be published in the January issue of Outlook Business magazine.)