Raghuram Rajan: Focus on the export of services to drive India’s economic growth

Multinational firms—from Goldman Sachs to Rolls-Royce—are hiring talented Indian graduates for India-based global capability centres (GCCs), where engineers, architects, consultants and lawyers create designs, contracts and content (and software) that are embedded in manufactured goods and services sold globally. These centres already account for over 50% of all GCCs globally, employing 1.66 million Indians and generating $46 billion in annual revenues as of March 2023.

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Following the pandemic-induced changes in work habits, and given improvements in communications technology, Indians also have started providing a much wider range of remote services, including consulting, telemedicine and even yoga instruction. 

Once a service goes virtual, it matters little whether the provider is ten miles or 10,000 miles away. An Indian consultant in Hyderabad can now make a presentation to a client in Seattle on behalf of a team whose members span almost every continent. She not only is well trained and fluent in English; she also costs one-fourth of her US counterpart.

True, Indian manufacturing has also benefited from these changes, but this has happened in precisely those areas where engineering, innovation and design matter more than just the manufacturing process itself. 

Hence, Agnikul, a Chennai-based firm working to launch small satellites into space, has dispensed entirely with manufacturing supply chains by 3D printing its customized rockets in its own facility. And Tilfi, which sells hand-woven Banarasi silk sarees globally through its website, employs trained designers to create fresh fashions for traditional craftsmen, who in turn are encouraged to embrace innovation.

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It would seem to be a no-brainer that India should build on its strength: millions of high-skilled, creative, educated workers, many of whom speak English. Unfortunately, it’s running out of such workers. While India graduates 1.5 million engineers per year, only a minority attend institutions that impart the high-quality education that is in demand at a GCC or a company like Agnikul. Wheebox, a work-skill assessment company, estimates that half of all graduates are unemployable.

Some of these graduates need only a little remedial education to be brought up to speed. But for many Indians, the educational deficiencies run much deeper. While nearly all Indian children start school, fewer than one-quarter can read at a second-grade level by the time they reach third grade. 

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The further behind the stragglers fall, the less sense it makes to stay in school. Many ultimately drop out, incapable of anything but unskilled work. No wonder the share of workers in agriculture is growing in India today, contrary to the usual path for fast-growing countries. India faces a crisis of joblessness today.

So, apart from expanding the creative high-skilled sector, India must create jobs that are broadly targeted at the skills people have. It also needs to improve education and skills, both in the short term and over the long term, so that Indian workers can do the jobs of the future. 

Sensible reforms would recognize that the solutions to both challenges are related. For example, a study shows that if a government-run daycare employs a part-time worker—perhaps a high-school-educated mother—children’s learning improves significantly. With more than one million such daycares in India today, that is potentially one million more workers set on the road to longer-term employability.

Similarly, public funding for vocational and apprenticeship programmes that allow students to cross the threshold of employability could convert millions into productive workers. There is no shortage of demand for health-care providers, plumbers, carpenters, and electricians.

Why India’s election matters: One can find these kinds of proposals in opposition party manifestos. When coupled with reforms to support businesses—especially small- and medium-size firms in labour-intensive sectors like garments, hospitality and tourism—India could put many more people to work. But this will require carefully designed programmes, funded in part by reallocating the tens of billions of dollars now being promised as subsidies to large manufacturers.

In the longer run, there is no alternative to increasing the number and quality of childcare, education and health-care institutions to capitalize on India’s greatest asset: its people. The currently low level of public spending in these areas should be seen as an opportunity, because it means that there is plenty of room to grow.

India also can draw on its vast diaspora to seed some of the new higher education and research institutions it must create to expand the numbers of the highly skilled. When people have the right skills, and engage with idea-producing institutions, entrepreneurship will create jobs in the most unlikely of places. It wasn’t the government, after all, that created India’s software industry.

Could growing protectionism impede this path? Not necessarily, because high-end services exports are hard to stop at the border if delivered virtually. Moreover, industrialized countries also sell such services globally (think of US management consultants and venture capitalists), which may mean that protectionism in these sectors will be less attractive. 

And, given their ageing populations, industrialized countries have much to gain from India-provided services like telemedicine, since these will reduce the need to attract and assimilate foreign doctors and nurses.

Finally, it is in the rest of the world’s interest if India eschews the Chinese path. If India grows richer faster, it will be able to buy much more from others; and if it grows primarily by producing high-value-added services, this will mitigate the impact on the climate. There is indeed a way for India to grow rich before it grows old. But it will not be easy and it will require a change in vision at the top. That, ultimately, is what India’s general election has been about. ©2024/project syndicate