Why is rock star Raghuram Rajan against Modi, BJP government?

Raghuram Govind Rajan, a popular Indian economist and former governor of Reserve Bank of India, hit the headlines once again recently for commenting against the Narendra Modi-led BJP government at the Centre. This time, he chose the much-touted Production Linked Incentive (PLI) scheme for mobile phone manufacturing.

For the uninitiated, the central government rolled out a PLI scheme for large-scale electronics manufacturing in April 2020, under which it offered an incentive of four to six per cent on incremental sales of mobile handsets made in India. A year later, it launched a second round of the scheme with reduced incentives. Mobile handset exports from India zoomed by nearly eight-fold from Rs 11,200 crore in 2018-19 to Rs 80,000 crore (around $10 billion) in 2022-23. This remarkable upswing in mobile phone exports has largely been attributed to the PLI scheme.

Rajan, a known critic of the Modi government's economic policies, contended in his article, co-authored with others, that no actual manufacturing of components for mobile handsets was happening in India as companies which availed these incentives were just assembling products from imported parts, and exporting the finished devices.

Going by the numbers, he may be right. But it's too early to gauge the positive impact of this scheme. Moreover, all great entrepreneurial journeys begin with a first step. The Modi government took the right first step with the PLI scheme.

India established its credentials globally as a top player in the technology sector. But it lags behind by miles in the manufacturing sector in which our communist neighbour China is the undisputed leader. India needs its manufacturing to grow by leaps and bounds to catch up with China in this space. Further, as its population is increasing by the day, it needs millions and millions of new jobs. Only the manufacturing sector has the potential to create that many jobs. Besides, India needs to reduce its dependence on imports and at the same time, expand its export base. That can only happen with a robust manufacturing base.

India obviously needs to offer incentives if it wants to fuel the growth of manufacturing. Further, for the components industry to take roots, there should be a sufficient ecosystem to achieve economies of scale. Once manufacturing capacity crosses a critical limit, component makers will also start setting up their units in India. This happens with every manufacturing sub-sector.

China's success in manufacturing lies in the fact that manufacturers there take advantage of economies of scale as they cater to global markets. It takes time for India to reach that level. However, India can replace China as a global hub in some manufacturing sub-sectors if it pursues its goal vigorously and it is backed by a workable strategy.

It's not that Rajan, who earned the nickname of rock star during his tenure as the RBI chief, is not aware of all these factors. But he may be looking to settle scores with the Modi government. Rajan, who is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business, was appointed as the RBI Governor in September 2013 by the then Congress-led UPA government. He returned to the teaching job after his three-year tenure ended in September 2016. As he made it clear later, he was willing to serve a second term, but the Modi government didn't extend any such offer. Perhaps, this might be the reason why he turned into a vocal critic of the saffron government.

However, he is risking his global reputation as an outstanding economist by making frequent adverse comments on the Indian economy. Rajan gained global prominence as an economist after he predicted the 2008 global economic meltdown in advance. So, his words on economy and money matters carry a lot of weight. He will lose this prominence if he continues to make such hollow statements on the Indian economy.

For instance, he participated in the Congress leader Rahul Gandhi's Bharat Jodo Yatra. Frankly speaking, he has every right to support Rahul Gandhi. And he has every right to have political aspirations too. For that matter, he also discussed the Indian economy with the Gandhi scion during the Covid pandemic. Nobody should have any objection to all these. But in a conversation with Rahul during the yatra, he commented that India would be lucky if it clocked even five per cent GDP growth in FY23. But India far exceeded Rajan's expectations and registered 7.2 per cent upswing in the last financial year. That way, Rajan failed to predict the right trajectory of India's growth. His latest comments on PLI seem to be on similar lines.

Its time Rajan makes constructive criticism when it comes to the Indian economy, as the country needs his wisdom and global experience. Otherwise, he will become irrelevant and no one will take his assessments at face-value. Moreover, he can extend support to Congress without compromising on his core strength and credentials. To do this, he can take cues from Shashi Tharoor, Congress MP from Kerala and like Rajan, also a global face.

In the past, I had also communicated with Rajan via email a couple of times. A few months after he completed his tenure as the RBI government, I requested him for an interaction. He did not give that interview, citing one-year silence clause after demitting the office as the RBI governor. On another occasion, we invited him for the launch of Bizz Buzz. This time also he expressed his inability.

I have nothing against him and will always admire him as an outstanding economist. But his politically-loaded comments are surprising.

But I am not saying that there are no shortcomings in the Modi government. The elevated petrol, diesel and cooking gas prices despite fall in crude oil prices, high incidence of taxation in the post-GST era, tax compliance burden and alleged favouritism to some industrialists, obviously show the Modi government in poor light. But barring these, the Union government did a fairly commendable job on the economy front. Its focus on infrastructure will obviously have a multiplier effect. So is its focus on fintech. However, there is no guarantee that these positive efforts will bring in votes for the saffron party. That's crystal clear!

Nevertheless, it's the right time for India to focus on exports as China is losing its grip over global trade in the post-Covid era. Furthermore, the Indian Diaspora is spread across the world and a large chunk of it is well-off. This Diaspora will obviously patronize India-made global brands as well as domestic brands that export quality products. Therefore, a bright future awaits India on the global trade front. So, India needs more and more effective PLI schemes to emerge as a global manufacturing hub, irrespective of which political party is in power. It's high time everyone realises this. Isn't it?