India should not follow the Chinese path of manufacturing and export-led growth and should rather strengthen its democratic credentials and chart its own path by focusing on value-added services, said former RBI Governor Raghuram G Rajan.

Value-added growth

Speaking at an event titled ‘Constitutionalism and India’s Economic Future’ organised by the Chennai International Centre, Rajan added that India can move from being the back office of the world to becoming the front office by focussing on exporting value-added services such as management consulting, legal services, telemedicine, edtech and financial services.

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China, Rajan said, managed to achieve an export-led growth by protecting its domestic industries. This allowed it to become competitive over time. The government also used the time to improve infrastructure and skill its people. However, this model of growth may not be possible today as the world has become resistant to the Chinese model of growth.

Demand for protectionism

Rajan added that it is not surprising that the demand for protectionism has been growing in India. He blamed it on the China fetish. He said Atmanirbhar, if it means protectionism, is a time-tested failure and what is needed is Atma Vishwas.

Indian democracy, he said, is its strength and it should be made stronger. Many think it is the weakness but it is a competitive advantage which we can be harnessed for an accelerated phase of growth.

“If democracy contracts, we will end up with a sub-par economic performance. In democracy, criticism forces course correction and when the government shuts criticism, democracy takes a hit,” Rajan said.

He listed out four steps for India to embrace a value-added service-led growth — investment in people, decentralised policy making, strengthening private individual rights, and creating an enabling framework for industries.

Elaborating on these, Rajan said India needed a more skilled workforce and that would not be possible without improved child care, healthcare, education and a social safety net.

Need for decentralisation

“These services can be best given only through decentralised policy making and funding,” Rajan said.

Centre and State governments today spend 15-20 times of what local municipalities and panchayats spend. Most decisions are taken at a level where decision makers have no idea of the local needs, he added. As there is no local control, services are poor. Decentralisation is the only way to improve the quality of the services and China does this effectively.

‘Being a democracy’

To become a leader in value added services, Rajan said that it is important to protect data. Being a democracy helps to give confidence that individual and corporate data — from both within India and outside — are protected. Something China cannot offer. A government should create a framework for new industries with a light touch. Banning something is not a solution.

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“I believe that despite slow growth and divisive politics, India’s brightest days are ahead of us. All we have to do is rejuvenate our democracy,” Rajan said, adding, “It will help us go the India way rather than mimicking China’s authoritarian path.”

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