In an interview with Karan Thapar, former RBI governor general Raghuram Rajan points out flaws in the Union government’s claim that India has become a mobile phone exporter after the Production Linked Incentive (PLI) scheme was introduced. Apart from questioning the numbers about net exports, Rajan also asks if the government’s assumption that low-skill manufacturing will give way to high-skill, value added manufacturing in time. He says that India should not look to replicate China’s success in manufacturing, but should rather focus on its strengths – which he says are in the services industry.
The following is a transcript of the video interview that was published by The Wire on August 12. It has been edited lightly for syntax and clarity.
Hello and welcome to a special interview for The Wire. The Union government claims India has become a major manufacturer of mobile phones. Is that correct? Or is it misleading? And if the boast is unwarranted, does that raise serious questions about the Production Linked Incentive (PLI) scheme? Is it a success? Or could it be responsible for funnelling wasteful expenditure or at least money that could be better spent? Joining me to answer those questions live from Chicago is the former governor of the Reserve Bank of India and now professor of finance at the University of Chicago, Raghuram Rajan.
Dr Rajan, the Modi government claims that in the last five years, India has become a major manufacturer of mobile phones. As proof, they claim that between 2017-18 and 2022-2023, net exports have grown from -3.3 billion to 9.8 billion, which is a turnaround of 13.1 billion. However, you’ve raised serious questions about this claim, and I want to go through them one by one.
First, you say it turns out that very little apart from assembly is done in India. In fact, industry experts have told you that mobile companies have imported completely knocked-down kits and then assembled phones in India. Now this is critical. Are you certain of this?
Well, thanks Karen for having me. And let me set the context a little bit. This is about more than just a scheme of the government. The reality is, jobs matter hugely in India. And if you look at the job situation, manufacturing jobs have stayed relatively flat as a fraction of overall jobs for the last three decades or so. And so most developing countries develop by creating many more manufacturing jobs – that’s how China developed. And so, there is this feeling that if we don’t create manufacturing jobs, we’re sort of falling behind. And the truth is, there are areas where we have very strong manufacturing – two-wheelers for example, auto ancillaries, pharmaceuticals.
But by and large, we seem to have missed the manufacturing bus. And therefore the government is saying, “Oh well, we need to increase manufacturing, how do we do that?” We have these disabilities – our infrastructure is not great, our workers are not as qualified as workers elsewhere, we don’t do R&D [research and development], etc. It’s a government-acknowledged disability, and they say we have to compensate for that. And then manufacturing will come to India. And that’s the context for the PLI scheme.
There are two parts. One, we raise tariffs on what we want to manufacture in India so people can’t actually sort of bring them into the domestic market without paying those tariffs. That gives protection for production in India. But in addition, there is a production incentive. For example, for mobile phones it’s about 6% in the first year of the invoice price. The government will give that to you as a subsidy to compensate for all the disabilities of manufacturing in India. So that’s the scheme. The intent is – let’s bring production to India. And whenever the government talks about this, it says manufacturing is up, exports are up. Now, if you are a manufacturer and you’re producing in East Asia and you say, “Oh, the government has just erected tariffs, so I need to produce in India.” But what does production mean? The government cannot say you have to make this and that – there’s some loose definition of production.
It turns out that if they assemble the stuff in India, that’s enough to qualify. And in fact, that’s what they’re doing – they’re basically bringing all the components to India and then with the old screwdriver technology, putting it together in large factories and saying we’re manufacturing in India. And of course, if the government is giving you 6% of the price to export, that’s a huge export subsidy – I might as well export from India also. And so overnight, because of the tariffs we’ve increased what is “produced in India”. And over time, we’ve also increased the export significantly and we’re now saying this is wonderful.
The truth is a lot of it is just assembly. Where we’re going further sub-assemblies, but we’ll come to this. What fraction of value is that? You know somebody from the industry basically said, the entire [plan] is to shape aluminium sheets into iPhone SE cases, drill the holes, and then export the semi-finished shells to China for final assembly. That’s the kind of stuff – where we are calling manufacturing, that’s what we’re doing. We’re not doing sophisticated stuff here.
So, in a nutshell, the government ought to rephrase its boast. We are not a major manufacturer of mobile phones, but we could claim to be a major assembler of manufacturing phone parts which are then exported to another country where the actual phone is put together.
Well, I would say more than that. Yes. We are assembling final phones in India also, but we are starting to become part of value chains, that’s to the government’s credit. But the reality is, for every Rs 100 of the invoice price of the phone, you’re paying Rs 6 to the “manufacturer”, right. (I want to keep saying quote unquote because it’s assembly, let’s call them assemblers.) Now, think about it. If you look at the typical phone, say an iPhone, for which we have detailed data. But 30% of the final price is manufacturing. That’s because the rest of it is services like the intellectual property that Apple charges for and I’ll tell you something more about that in a second.
So, when I look at that iPhone, about 4% of the value is for assembly. That’s the entire assembly value. And so if the government is paying Rs 6 for it and the cost is only Rs 4, why wouldn’t anybody bring assembly into India? They’re making money on it, and of course, they would. Why would they do it if they weren’t making money?
The problem, however, is when you look at the value added in a phone, or any electronics or any sophisticated manufacturing. Manufacturing over time has become less and less of the value added. As I said, in the iPhone it’s about Rs 30-40 out of 100. The remaining is in the initial part – the intellectual property, and the design that goes into it – and the final part – the marketing, the finance, etc. That’s Rs 60 to 65, and that’s where all the profits are. So take Apple. Apple, the company, is worth US $3 trillion. Apple doesn’t manufacture anything, Foxconn manufactures for Apple. Foxconn’s market value is $50 billion. 3 trillion, 50 billion. So, 60 times the value. What we are trying for is what Foxconn is doing – the lowest part of the value-added chain. Of course, we say this is going to produce low-skilled jobs and that’s true. The question is, is it going to do any more? And we’re paying for those low-skill jobs.
Let’s focus a little on that 4%, as you put it, that India is doing by its assembly. Because your second point takes your first point about assembling a good critical step further. You write, and I’m quoting you, “India still Imports much of what goes into the mobile phone, and when we correct for that, it’s very hard to maintain that net exports have gone up.” And then very importantly you add, “Indeed we cannot even tell from the data whether India is paying out more in subsidies and tax waivers to mobile manufacturers who bring the assembly to India than the value they add in India.” That last thought is particularly disturbing because it suggests that, if you’re right, we’re not gaining very much, if anything at all.
Yeah, we’re paying manufacturers to bring work to India. Effectively, we’re paying the wages of those workers. Now the key point is whether this grows into something much bigger. And the problem of course is with these global supply chains, especially for relatively small items where transportation costs are really low. You know, bringing it into India doesn’t mean you do the rest in India. You can take it out back and forth – like we talked about the cell phone shell. And that’s really the problem, that this may remain where it is – that you pay for this work, they do this work in India so long as you’re paying them, and then when the subsidies stop they say, “Well, thank you. It was nice being in India, but you haven’t fixed the disabilities that force you to pay the subsidies.” In other words, bribing people to come to India is not useful if when you stop paying them they leave. So there has to be something which really keeps them in India and that’s something to think about because that’s the cornerstone of the government strategy – bring them in a big way and everything else will happen.
It happened in China but we’re 30 years or 40 years on from when China did this. And the question is, can this happen again? But the broader point the government actually doesn’t dispute our numbers – I will come later to this – but I think it sort of says, “Hey, we’re not importing 32 billion precisely for PLI, we’re importing 22 billion, we’re exporting 11. So the net imports is 11 billion.” So the government is not disputing the fact that we’re importing a lot of the content here.
I’ll come to the point about whether this can lead to something more and something bigger when I come to the way you’ve been criticised by Rajiv Chandrasekhar, because that is the basis of his claim – that this is only a starting point.
Let’s drill a little further into the figures that you were about to recite because I think they really substantiate the point you’ve made. They’re a little complicated for lay audiences, so I’ll take them slowly. You write, “When mobile phone exports really took off from the last quarter of 2021, there was a commensurate rise in net inputs of imports. And when you add the combined imports of semiconductors, PCBAs, displays, cameras and batteries amounted to $32.4 billion in 2023.” And this means, and this is the critical thing, that the “net exports of final phones, and semiconductors, PCBAs, and other mobile parts fell from minus 12.7 billion in 2017 to minus 21.3 billion in 2023”. That’s almost, but not quite, a 100% fall. And your conclusion is telling, you say it’s entirely possible that we have become more dependent on imports during the PLI scheme. It’s not that our exports have gone up – they have a little, But our imports have gone up much, much more.
Yeah, so exports have gone up quite a bit and that’s where the government boasts from the rooftops that we’ve become a mobile phone exporter. But again, we have to understand what that means. It means that we’re putting together the final mobile phone in India, importing all the parts, and then exporting a certain fragment. Yes, it’s positive in the sense that we’re exporting. But it does raise the question, are we paying for the exports? As I said, through these subsidies, how much are we paying per job that we are creating? And there’s a lot more obscurity because it’s not clear how many additional jobs have been created, and what the cost per job is. But I think the point is, you know, we may have become more dependent over time. Some of that may also be that our demand for smartphones has increased over time and therefore we’re importing more. So I don’t want to lay all that on the back of the government. But the broader point is – again and again – where are we going to go from here?
Now, there’s this point about the PLI scheme, also this has become the single government scheme in manufacturing to increase jobs. Uou see PLI schemes here, PLI schemes there. And what I’m asking – what my co-authors and I are asking – is do we know it works? Can we establish with the first area where we did it, which is mobile phones, that it actually creates many more jobs and it creates more jobs than we are paying for? And that those jobs have persisted, they will not disappear over time. And also, as you think about this, ask which areas are being picked for PLI? What is the government thinking that goes into picking say windmills or batteries for PLI? Is it just this is the latest shiny area? Do we have a comparative advantage so that jobs actually stick there? And will manufacturers make investment even if you don’t pay them? If you do pay them, when they were willing to make investment you’re actually paying more than you should.
What we have right now is this wonderful circumstance where a lot of manufacturers across the world are worried about China. And they are looking for China+1 strategies. Maybe they come to India. Apple has said that, because it wants an alternative to China. Do you have to pay Apple, the richest company in the world, to come to India? Or will it just come anyway? So there are all these questions. Do you need to pay? How much are you getting per job? We’re not a rich country. There’s so much more we can do with that money.
And finally – and this is where the scheme is so obscure – how did the data on how you pay get determined? You remember the time when we paid companies based on investment and they made gold-plated investments, you know, enhance the data on how much they were investing in order to get the benefits? Here, it’s on the invoice price. What goes into the invoice price? And can I put the kitchen sink into the invoice price to increase it, so as to get the subsidy? Of course, the government will say we have our inspectors etc., but this is going to become a lot like the license permit raj. A lot of stuff which the government has to do to get it right. And none of this we can really tell about because the data are simply not available.
Absolutely. Let me at this point out that in your articles you’re very honest and in your honesty, by the way, you’ve also ended up effectively tackling one of the criticisms that Rajiv Chandrasekhar, the Minister of State for Electronics, has made about your critique. You admit in your article that your first assumption that net exports are falling from minus 12.7 billion to minus 21.3 billion assumes that 100 of all imports of semiconductors, PCBAs, displays, batteries, battery chargers, cameras, goes into mobile manufacturing.
But then you say this is critical, and this is where you’re addressing the critique from Chandrasekhar, even if the figure is only 80%, even if it’s only 60%, net exports would still be negative. The figure would actually have to be as low as 40% for net exports to become positive and as you say, the real number is likely to be much higher than 40%. So when Mr Chandrasekhar, half reading or perhaps half understanding your article, criticises you for assuming that all imports of semiconductors, PCBAs etc., are going into mobile manufacturing, you’ve already answered it. Even if only 60% is going in, net exports are still negative. It has to be as low as 40, which is very unlikely, for them to become positive.
Well, to the credit of the minister, he actually responded, which is good. We can talk about the tone of the response, which is not so good. But I think the point here is that without the data you have to make assumptions. And to call assumptions lies, I think is overstating the case. It’s basically saying it could be this or it could be that – we don’t know. So we assume that it could be anywhere between 40% to 80% of the imports were used in the mobile phone sector.
And the minister basically said it was 65% – that was almost in the middle of our range, but slightly higher, which makes the imports even higher than we thought it would. And essentially, yes, we are importing a lot of what goes into our exports. What you hear the government speaking about, including the prime minister, is that we have become a mobile phone exporter. But they never talk about the imports we are doing and that matters because the difference is in a sense the value we are adding in India. And so far, it has been very little. So a lot depends on what happens in the future.
Let me for the audience underline two things you’ve established before I go further. One, we’re not mobile phone manufacturers, we’re better described as mobile phone assemblers. And secondly, when the government boasts that you’re exporting mobile phones, what they’re overlooking is the vast quantity of imports that go in to the creation of the phone that we export, and it’s quite possible that net exports are negative. This leads you to two conclusions…
Karan, it is not just “quite possible” that net exports are negative – it is. The number has been confirmed by the minister. We are importing in the PLI scheme, 11 billion more than we export
Quite right, as he said 65% of the imports of the items I mentioned go into the mobile phone industry, which is way above the threshold of 40% at which net exports will become positive. This leads you in your articles to two conclusions, let me put them to you one by one: first, you say we certainly cannot claim the rise in exports of finished cell phones is evidence of India’s prowess in manufacturing. In other words, we were assembling phones before the PLI scheme was started and before tariffs were introduced, and essentially, even after those schemes were introduced we’re still assembling phones. Effectively, as far as assembly is concerned, nothing much has changed.
Yeah, I mean again, to give the government credit, maybe we’ve moved a little more into sub-assembly but it’s still assembling. The reality really is that you know, you have to ask yourself, how long are we going to do this? How long will it take to move from this level to the next level, and is it going to really happen, and that’s really where the entire scheme is based on. We pay these guys for a little while, they come to India, they build scale and then over time magic happens. Yhey start doing a whole lot of other stuff, and yeah maybe but that’s hope. And I do have a hope that we become a manufacturing giant on that basis. But the reality is the world has changed. They will manufacture wherever it’s cheapest to do so.
And China hasn’t gone away. China still has enormous numbers of workers in the Western provinces it wants to bring into formal manufacturing. Vietnam has got a lot of skilled workers. If we want to compete with these countries, it’s not through temporary bribes that we’re going to compete with them. We’re going to compete with them by improving the underlying [situation], remedying the disabilities. In a sense, and that’s the real question: how fast are we moving there? The single biggest disability we have is the quality of our workers. When you talk to manufacturers, industrialists, again and again they say we can’t find skilled work, those that we need.
This leads directly to your second conclusion and that is the questioning of the PLI scheme. You’ve done a lot of it already but let me put to the audience what you wrote in that article. You said, “A key question is whether the 6% subsidy India pays on the finished mobile phone, coupled with state subsidies, actually outweighs the value added in India.” And you then went on to ask, “Is the scheme a failure in the making?” Am I right in saying that your clear hunch is it is?
Well, I wouldn’t be so categorical at this point. What I would say is we have to give the benefit of doubt. This is an idea, but so far there is no evidence that it is a scheme that works, and I think therefore the government has to do a lot more to look at the details of the scheme and to convince itself that this is worth spreading to every other sector. But what you see is without doing that evaluation, without being confident of its success – just on the basis of statements like we’ve become a mobile phone exporter – we’re seeing it extended to sector after sector. And there is absolutely no discussion in the public as to how these sectors are chosen.
Why should I subsidise this rather than that? And remember, these subsidies don’t go to every manufacturer in the sector – they go to a chosen few. How are those few chosen? Does it make sense to privilege the bigger manufacturers in that sector? Some of them are foreign manufacturers – I’m not against that. All I’m saying is, how do we know how the government is doing all this? There’s a huge contingent liability we’re building up. On what basis? And the government is not transparent at all.
You know you began that answer, Dr Rajan, by saying I’m prepared for now to give the benefit of the doubt to the government, and that to me sort of fingers crossed situation. We don’t have the data but let’s hope it works out right. But this then raises the critical question: is the money that we’re spending on the PLI scheme – and it’s not a small penny it’s a lot of money – could it be better spent otherwise? You write, “Spending on PLI means not spending on something else.” You say “government can instead spend money on creating high quality schools and universities,” and you critically add, “developing and expanding the education sector would be a large industry in itself with large externalities which would generate for the economy and for society”. So clearly there’s a hint there, if not something stronger, that the money spent on PLI – if your hope doesn’t materialise – is money that’s wasted or at least money that could have been and should have been better spent.
Well, let’s start asking whether, the fact we haven’t grown in manufacturing is something we should take for granted and not keep saying we’re going to become the world’s biggest manufacturer. But look at the area where we’re creating jobs. So manufacturing, the ILO says, from 2012 to 2021, we’ve moved from 97 million jobs to 100 million jobs – [that’s] 3 million jobs [created, which] is peanuts.
On the other hand, if you look at the service sector, that’s moved by about 20 million jobs. Now, these are formal jobs. The point is there is, there is an area we are more successful – much more successful, and that is in creating service jobs. We are so fixated on getting chip manufacturing to India. Chip manufacturing again, is the final production stage. What we are really good at is chip design. We have, through the back offices of some of these big firms – 20% by one estimation – of chip design in the world. So are you going to hanker about bringing chip manufacturing to India, or are you going to expand the chip design?
Now how do you get chip design? Not by building foundries – which are the most expensive part of chips, the foundry that Intel is building costs $20 billion. It is by creating minds, by creating engineers, who are going to do that chip design. And that means upgrading the quality of our engineering output. I work with a university, it’s looking for a spectrometer so that the kids can do research in chemistry, the faculty can do research in chemistry. It costs Rs 18 crore – a secondhand spectrometer costs Rs 18 crore. And they’re not being able to do it for want of that input.
We need to train minds. We don’t need to build gold-plated capital in this country. If we train those minds, we’re going to see a huge expansion in service exports. In fact, over the last three years since the pandemic, as we’ve got services at a distance, the area that is succeeding is not in manufacturing. In fact, manufacturing exports are sort of dead in the water. What’s really taking off is services exports. Even that is slowing down now because of a slow down in the West. But what has really helped us is service exports. So, instead of hankering to be like China, why don’t we be like India? Focus on the service sector.
Now, they say our service sector doesn’t produce low-quality jobs which we need for the large level of moderately skilled people who are coming out of agriculture. But it does! The biggest job in India is security guard. Then we have jobs like retail. Then we have jobs like tourism. All of them employ in services. People of moderate skills. So, on the one hand if we’re focusing on exports let’s capture the biggest part of the value chain. Richard Baldwin calls this a smile. The intellectual property in the early part, the marketing and finance in the later part. That’s where the value added is. That’s where we have the capability, a highly trained human capital to capture that. Why are we looking for the lowest part of the value chain? Why do we want to be slaves to the rest of the world by picking up low-skilled manufacturing, even if it contributed to higher-skill manufacturing, which I said is not at all clear nowadays, because companies just produce wherever it’s most efficient.
So, last point. TSMC, the world’s [largest] manufacturer of chips, is worth $450 billion. Nvidia, which doesn’t manufacture a single chip, just designs it, is worth $1 trillion. And add to that Qualcomm, Broadcomm. We don’t need to go into chip manufacturing – we already have a large presence there. Focus on your strengths, don’t focus on the weaknesses because you have no imagination.
Everything that you said raises critical questions about the agreement that we reached in June when Prime Minister Narendra Modi visited the United States with Micron to manufacture ships in India. And you address that directly in your article. You say if after five years of tariffs plus PLI in mobile phones, India makes few of even the simplest parts, should we really be investing in the Micron plant? And before you answer that, remember 70% of the $2.75 billion investment is coming not from Micron but from the Gujarat government and the Union government. Micron is only putting in 30%, is putting in roughly $750 million in India. Its investments in America run into billions of dollars. Literally two or three hundred billions of dollars, so what’s the answer to your question? Is this a wise move or a mistake?
I simply don’t understand it and maybe the minister or others in government understand what we’re doing here. Micron says what we’re doing is we’re going to bring assembly and testing of chips to India. So it’s not as if we’ll become independent. We’ll still be importing the wafers, the etching all that will be done elsewhere and maybe we cut it up. But what are we getting? We’re getting 5,000 jobs. We are paying $2 billion for 5,000 jobs. That’s Rs 3.2 crore per job.
Now you know [people ask], why not do it? Well, we have limited resources. So $2 billion is something like Rs 16,500 crore. The entire higher education budget, which produces all those IIT engineers who are creating such a wave in services, the entire higher education budget of the government is Rs 44,000 crore. You’re spending more than one-third of the budget, the higher education budget, on subsidising a rich semiconductor firm to bring some of its production to India.
We’re not going to become independent; we will still import chips, we will still import the parts for the chips from elsewhere. Why? What is the logic behind this other than we’ve got a shiny factory in India and we can claim we’re doing chip manufacturing? I mean why do we need chip manufacturing at this point, especially when the entire… and by the way these are not logic chips, these are memory chips. Logic chips which is where the heart of chip manufacturing is requires a much bigger investment. That’s where we were talking about the $10 billion [joint venture by] Foxconn and Vedanta. I don’t understand what those guys have what, you know, abilities they have in manufacturing chips which leads to the question again, how are we choosing these guys? That was the big sort of chip venture till those guys decided they weren’t going to do it. So, there’s a lot of non-transparency in this whole process.
I want to come at this point to the criticism’s made of your analysis by Rajiv Chandrasekhar, the Minister of State for Electronics, but I will underline for the audience one critical thing you say: the Micron project, if it happens will be creating 5000 jobs at a cost of Rs 3.2 crore a job. It’s almost an unimaginable figure, and yet it’s the truth.
Okay. Against that background, let’s come to Rajiv Chandrasekhar’s criticisms. And again, I’ll go through several of them one by one. First, he says, your conclusion is not rocket science. He says without question all electronics manufacturing begins with assembly, which is light on value addition. In fact, he says all complex manufacturing across all sectors usually begins with assembly. But, he adds, as the component and sub-assembly ecosystem builds up, driven by scale and supported by exports, new jobs are created, value addition increases and domestic companies join the global supply chain.
In other words, what he’s saying is this is how electronics manufacturing has to begin, and you are either ignorant of that or you don’t understand it.
Well, he has his opinion. The reality is global supply chains used to be when transportation costs were high, sort of get aggregated around where you are doing most of the production. What used to happen was in Asia was what was called the Flying Geese, that you start with low skill manufacturing, and then others ahead of you in the value chain give up because their workers have become more expensive and you move up the scale. The problem is we’re starting after China. We’re starting when there are a lot of competitors like Vietnam. And so they’re not vacating those parts in the higher skill part of the supply chain, and they have these skilled workers to do that kind of stuff.
So, this notion that somehow you start with low-skilled assembly – in fact, you’re buying low-skilled assembly it’s not even that you’re more competent at it – but somehow we’ll migrate up, you have to tell me what you’re doing to make sure that will happen. If you’re investing tremendously in creating higher-skilled workers, I’m entirely with you. The opportunity for moving up is there. If all you’re doing is paying people to come here and assemble, you’re not investing in the next step, which is creating the conditions to move up the value chain. And that is not what they’re going to do. It’s what the government has to do and I don’t see anything here which says we’re doing that.
I mean in some sense, the problem is we’ve been assembling for a long time. We were assembling computers since the 1980s. Remember when there was liberalisation, and we started being able to buy HCL Busybee computers and so on? We’ve been assembling cell phones. There was a Nokia plant which got closed down in 2012-13. We were assembling mobile phones there.
This has been done for a long time. Where are we moving up the next step? So, if you think about where we’re good at manufacturing, it’s not in the commodity manufacturing. It’s where there’s a lot of jugaad, a lot of value added based on small improvements in technology, small improvements in reliability, whether it is your two-wheeler manufacturing or whether it’s pharmaceuticals, where we’re you know the jugaad is in trying to get other processes by which we can make generics.
We’re not great at fundamental research, we’re not great at commodity manufacturing. And that’s why I keep asking, how are we picking these sectors? Do we know we have any advantage there? Or are we just saying China does it, let’s do it? And that’s the worst reason to do it because China’s there, it’s not going to move. And you know people will do China+1 but they’re not going to move a lot to India unless you fix the problems.
For the sake of the audience, I’ll point out that Mr Chandrasekhar simply asserts in his response to you that we will move to the next step. He assumes it, in other words, but he has no evidence for it and no reason to either believe that this will happen now. He then goes on to actually criticise you for things you haven’t said. I’ll leave that aside deliberately, I’m simply pointing out [this fact] to the audience – that is a reflection of the fact that the minister actually either misread or misunderstood parts of your article. But he does make us another fairly substantive point – from his point of view at any rate – about the time frame, you’ve chosen. He says if you had compared 2013-14 with 2022-23, rather than 2017-18 with 22-23, you would have found a 1,400% increase in mobile production and a 4,200% increase in mobile experts. So he’s claiming that you’ve deliberately chosen the wrong years to minimise what the Modi government has achieved.
Well, first the reason we picked 2017-18 was that was when the tariffs were increased to 20% on mobile phones, and of course, 2020-21 was when the PLI scheme came in. So, we wanted a nice before and after. We weren’t making a point about this government and what it’s done over its tenure. However, he should know that this point actually hurts him. If we have been in the process of assembling for you know close to nine years, why haven’t we moved forward, after so many years? So if you’re saying it’s going to come, why hasn’t it come already? You could say “Oh, give it time!” But we’ve given it nine years. Nothing really has happened on the manufacturing side, so why should we believe the minister when he says it’s coming? The reason he feels strongly about his claim it’s coming is he looks at China. This is how China improved, this is how Thailand, Malaysia improved. But as I said the world has changed. It is not the world that they were starting in, and so we have to be a little careful about taking that.
Well in fact, he does tackle, in his own way, the point you made about – he’s looking at China and assuming that we will move down the same road and follow the same trajectory as China. Because he says and I’m quoting him, “I can assure that we are doing far better than what China was able to do in it’s first, four, six years of mobile manufacturing.” Again, Chandrasekhar provides no facts to back this up, but he asserts it and so I’ll ask you: Has he even got any evidence for this?
It depends on what starting point he’s talking about. But if you’re talking about the recent starting point, India is a much bigger economy than China was when it started this kind of manufacturing. So yes, we may be bigger in terms of assembly, but as I said – the proof of the pudding is whether you start serious manufacturing. And there I think he’s on much, much weaker ground. There we really haven’t done much so you know. Do we move up the manufacturing ladder? That’s really the key and I don’t think there is any evidence yet that we’re doing that.
Now Mr Chandrasekhar also responds to your criticisms of the PLI scheme. He says it addresses a massive cost disability across several factors, and you talk about those cost disabilities in earlier answers yourself. He’s talking about the cost disabilities that India faces if you compare India with China and Vietnam, and he says if these had not been addressed, India would not attract the global supply chains it is. Has the PLI scheme addressed them effectively, and are we attracting global supply chains as a result, which is what he’s claiming?
You don’t address disabilities by paying for it because at some point, you can’t keep paying for it. You have to stop paying. And that’s the point I keep making again and again: what are you doing to directly address the disabilities, to upskill our workers, to increase the R&D that’s being done in industry, to do all the other good stuff that you claim are disabilities? If you’re not doing anything about that or doing very little about that, the moment you stop paying manufacturers are going to say, “Well it’s really cheaper to produce in China, Vietnam, let’s go back there.” Because how much are they bringing across in terms of investment? They’re building a big shed, and they’re assembling within that shed. I mean I’m obviously sort of being a little facetious, but there’s not a whole lot of investment they’re doing. The PLI scheme requires some investment, I think that can be managed. But the reality is it’s not huge. And they can move it, and so the question is how are you keeping them? You have to improve everything else, and therefore you have to tell me how you’re improving the quality of our workers and doing all the other good stuff that is needed. And again, it goes back to: is this what we really want to do, or do we want to focus on our strengths?
In a nutshell, what the minister is doing when he says we are addressing the disabilities is actually bribing people to come in. That is clearly the wrong way of doing it because, as you point out, how long will you keep bribing them? If you have not addressed the real problems which are to do with the educated quality of our skilled workers, on that he’s doing nothing, but he makes one further point which I’ll put to you: he says in your criticism of the PLI scheme, you’ve overlooked, and these are his words now, “the overall positive sentiment created by the success of the smartphone PLI scheme” and you also overlooked the “upside of electronic supply chain shifting to India in other sectors”.
Well, I think that he has a point here when he says that there is overall positive sentiment about India. Some of it is because of the government’s great ability at public relations and that’s working well for India. But some of it also is because, as I said, is the China+1 strategy. People are looking for alternatives to China. We aren’t capturing a lot of that business. Vietnam is capturing more. But that’s another reason people are looking at us. But a manufacturer like Apple or anybody serious doesn’t go based on headlines. It looks at ground realities. How easy is it to do business here? Should I come in?
And the reality is it still is quite hard to do business in India. I’ve talked to sort of potential FDI people here, they really are still worried about all those impediments. And if you look at FDI into India, look at World Bank numbers, it’s stuck at 1.5% of GDP for the last so many years. So really, I mean it’s you know if you look at the data closely – all this ‘India Shining’ and everything is coming in and wonderful and so – the bare data says we have to do a little more. I’m hopeful. I think India is capable of a lot. But I think the first thing to do is get rid of the sort of perception management and look at the details. Let’s not fool ourselves because that’s the worst way to go. Eventually, people find out the truth and that’s a problem. So unless we’re fixing those disabilities, we’re not going to have a big role in manufacturing, but we’re going to spend a lot of money on it, a lot of people are going to say that’s where the jobs are, and when the jobs don’t come you can see the frustration spilling out in places like Manipur. Where you know it all it started with as you remember reservations. Because everybody’s looking for reservations given they can’t find good private sector jobs. Let’s get reservation in government jobs, for example, because that is our ticket to a middle-class life. Those forces are going to increase tremendously unless we do something about it, and that means real jobs and not, you know well..
Not Rs 3.2 crore jobs…
If those were worth Rs 3.2 crore, even that may be okay. But Rs 3.2 crore per moderately skilled job is too much.
Now finally, above and beyond his criticisms of your analysis, Mr Chandrasekhar has also attacked you in personal terms. He’s accused you of lacking pride, self-respect, and even dignity, of bankruptcy of morals, and believe it or not of an over-simplistic mind. Do you really want to respond to that or do you think it’s better off just ignored?
Well, he used to be very polite when he came to the RBI and met me on some issue or the other. Let me not get into the language of the street, it’s not dignified. But I mean when people couch it with that, it makes debate much harder. Hopefully, we’re both on the same side – we want jobs for India. What we’re disputing is whether the jobs will come through the scheme the government is suggesting. I really hope it will, but I would want the government to continuously evaluate, in an independent way, whether it’s doing that and given that the data are so hard to get, and given even then it can be massaged and manipulated, you really need an independent evaluation agency to look at this to get the data to us. And why I say this is because we’re expanding the scheme left right and centre, and we have to ask is this really the way to go, is the government actually better off? Because the country needs jobs, there are no two questions about it. How we produce those jobs, that to my mind is a central question, and I don’t hear that addressed so far.
Let me put you what someone said about the personal attack on you made by Mr Chandrasekhar. This person said, “Politicians only resort to vituperative language when actually they realise they haven’t got a good case to make. They buttress the bankruptcy of their arguments” – using his language against him – “by using the vituperative personal language instead.” So does his personal critique of you suggest that actually, he hasn’t got good arguments to make which is why he’s speaking in these terms?
Well, I would say after a six-page note – which again I think is commendable that he took the time to write it – he basically agrees with the argument: it’s just assembly. And where he says ‘lies, lies, lies,’ we said 40% to 80%, he says 65%. Well if that’s lies, I’m happy to live with those lies – that’s part of the academic process.
The reality is he agrees with everything we say. The difference is he thinks good stuff is going to come in the future. I’m saying let’s be quite skeptical about that, it hasn’t come. And if as he says we’ve been at this since 2014, it hasn’t come for nine years. You remember [Albert] Einstein’s definition of insanity: doing the same thing and expecting a different result. [Editor’s note: This quote is often attributed to Einstein, but there is no evidence he said it.]
Again, I would hope this works because we are spending a lot of effort in this scheme. But evaluate it. Put it out in the public domain. Tell the people of India this scheme is working, not through headlines that we’re exporting. What are we creating in terms of jobs? How much are we getting for that? I’m willing to believe a lot of women are getting employed. That’s a huge vulnerability in India, female labour force participation is very low. That’s a good thing. So come out with all these numbers. Show that they’re incremental, not that this is stuff they were doing anyway but they did it because of the scheme. And tell us, how much does the scheme cost per job that we are creating. And will they stay once we stop paying? Now, already those manufacturers saying, “Oh, you need to extend the scheme because we haven’t had enough time.” Extend, extend, extend. That becomes what we used to call the license permit raj. Restrict the number of people, give them subsidies, protect them with large tariffs, and hope something good happens. It doesn’t.
My last question Dr Rajan, and I’m deliberately now going beyond the subject we are discussing. I’m going to raise something that’s been at the top of the news and I’d like to get your view before I say bye-bye to you. The government proposes to put restrictions on the import of laptops, tablets, and personal computers, and I believe the date is going to be the first of November. The Economic Times on August 11 says the government may well add to this list cameras, printers, hard disks, telephonic devices. In other words, a whole range of things are certainly going to be put on restrictive import. Mr Chandrasekhar has suggested that he is doing this to ensure what he calls “trusted and verifiable systems”, which sounds as if he’s hinting at issues to do with national security. How do you view this decision?
Well, Mr Chandrasekhar is an engineer. He should know that it’s not necessarily just the hardware, it’s the software that’s layered on top which is where the security issues are. I mean the government, you know, got into a row about Pegasus. That wasn’t about the hardware that was about the software which allows for spying. And so security issues aren’t just about the hardware, and if you have a problem with a particular country’s hardware, by all means, ban that. But you know given global supply chain’s all over the place, I think you have to ban all imports. I mean the reality is we have been assembling some of the stuff, as I said, personal computers since the 1980s, we haven’t moved forward beyond that. If this is about manufacturing in India, how do you think this is going to expand? And this again neglects the fact that at this point we should not be considering the lowest part of the manufacturing chain assembly. We should be thinking about AI, which is going to affect our services exports hugely. You know, AI is based on using the top quality computers which now China cannot get access to because it’s being denied some of those chips. We can still get access to, let us steal a march over them, but focus on the big picture, focus on the big things, not the tiny little things.
Stop putting the old license permit raj back into action. You know, this is really a failure of economic thinking. And this I think is the bigger problem from these kinds of schemes. You don’t know how that you’ve succeeded, you think you have, let’s extend it everywhere else, and then you realize you’ve brought back the license permit raj. In fact, they use the term licensing. I was shocked that they would use the term licensing, given what a bad reputation it has in India.
I don’t think this is the way to go, you’re missing out on our biggest advantage which is our high-quality services. If you put taxes, restrictions on computers and iPads etc., you’re restricting that industry, you’re forcing them to go begging to the government every few months, “I need more of this, I need more of that.” I don’t understand the logic behind this, let me leave it at that.
You said something very evocative which I will repeat, “a failure of economic thinking”. And I take it that’s as true as the government’s intention to put a range of restrictions on a whole lot of imports that I’ve just mentioned, and it’s also true of the PLI scheme. You haven’t thought this through; you haven’t asked yourself the question does it work; you haven’t asked yourself the question could the money be spent better on other things; and finally, you haven’t asked the question should India be getting into different areas rather than manufacturing?
In other words that rigorous thinking that you expect ministers to do because it’s their duty and responsibility, they are clearly not doing – or at least not adequately.
Well, I will leave that summary from you as the final word, other than saying. I think we need a bigger debate about the direction we’re going because I am very worried. This is not a direction, given the many pressures in the world today, the onshoring, nearshoring that is happening, the automation that’s happening, the fact that China, Vietnam are desperately competing for these kinds of businesses, do we have a vision on what we need to do going forward? And unfortunately, I don’t see it in the government utterances.
All I can say is I hope Mr Chandrasekhar, I hope Mrs Sitharaman, and if we’re lucky I hope Mr Modi’s, taking the evening off and is watching you and hearing you and asks themselves the questions that you’ve raised so forcefully today. It’s time those questions weren’t just asked but someone made a critical effort to answer them. Thank you very much indeed, Dr Rajan.