Raghuram Rajan: India's growth path lies in liberal democracy

Taking a leadership role in the services sector is within India's capacity, and strengthening its liberal democratic values is essential to earning the trust of the world.

Raghuram Rajan, former governor of the Reserve Bank of India, says India's growth path lies in building on its historical culture of tolerance and respect for all to become crucial to global supply chains.

Strengthening India's liberal democratic values is an economic necessity to gain the world's trust in this endeavor, he said, since India has the potential to take the lead in the services industry.

The leading economist said India would be better off if it focused more directly on the service component of manufacturing as a global supplier rather than competing with a cheap manufacturing neighbor like China.

"Our independent judiciary, our liberal democracy, these are critical advantages if we are to go down this manufacturing service-led growth path because this will enable us to earn the world's trust; it's intrinsically necessary," said Rajan in his keynote address at the 'Ideas for India' conference.

In an article on 5G technology, a well-known academic from the University of Chicago argued that such critical infrastructure would not be trusted if it were sold by an "authoritarian neighbour or authoritarian country" because there might be built-in backdoors.

"When you provide consulting services, you need to convince the other place that you're not sort of getting backdoor entries to their firms, finding out what they're doing, and then use that to either get an advantage or blackmail them.

"For that you have to convince them that you are bound by the rule of law for that we need to strengthen our democracy, our checks and balances, our data protection law. It's in our economic interest and competitive advantage relative to Chinese and Vietnamese and Russian firms," said Rajan.

He stressed that the country's focus should be on its human capital and look beyond manufacturing more products already available in abundance, such as chips, and focus on value-added chip design.

"If we produce 10,000 engineers a year of high quality, we can be a global presence in chip design. So why not do that, rather than pour money into a bucket which is very deep as a resource-strapped country, we need to spend much more cleverly," he said.

Rajan highlighted the importance of capitalizing on services sector exchanges beyond just agriculture and manufacturing in the ongoing free trade agreement (FTA) between India and the UK.