Dr Raghuram Rajan Has Identified Many of India’s Problems Accurately. But Are His Solutions Right?
Dr Rajan has identified many of India's economic problems with great clarity as usual. The important question is whether the solutions he proposes adequately address the underlying constraints.
His stature as a former RBI Governor, distinguished academic and long-time participant in India's economic policy debate makes his latest Frontline interview particularly important. His diagnosis draws serious engagement - not least because some of his conclusions point towards questions that the conventional economic framework has not adequately resolved.
There is one proposition on which we should disagree at the outset.
Let China Be the Manufacturing Behemoth
The suggestion that India should hesitate to pursue manufacturing because China has already become the world's manufacturing giant reflects a legacy economic mindset emanating from a reserves-constrained monetary regime.
There is no economic rule that says only one country can build large-scale productive capacity.
Let China be the manufacturing colossus. India can build its own industrial economy.
China's manufacturing strength does not close the manufacturing opportunity for India. On the contrary, for a country of India's size, population and developmental needs, failure to build its own productive capacity could become a strategic weakness.
India has enormous unmet requirements - infrastructure, housing, energy, transport, water, sanitation, healthcare, education, consumer goods and countless other areas.
Nor does manufacturing have to mean a handful of giant factories. It can mean millions of productive activities and innumerable micro, small and distributed manufacturing units, located where people live and organised around local and national requirements.
Virtually every major economy that subsequently became prosperous built enormous productive and infrastructure capacity through substantial public investment before, or alongside, its integration into an open global economy.
India therefore does not have to choose between manufacturing and services, or between domestic production and global trade.
India can do both.
And it can produce not merely what it needs, but much more.
A Poor $4 Trillion Economy Is a Colossal Policy Failure
Rajan is right to emphasise that India remains poor despite having become a roughly $4 trillion economy.
That is not merely an interesting economic peculiarity. It is a colossal policy failure.
An economy of this scale, with India's population, resources, productive capabilities and accumulated technological knowledge, should not have such a large proportion of its people still struggling for a respectable living standard.
The question therefore cannot simply be how India moves from $4 trillion to $10 trillion.
The more fundamental question is why India's economic growth has failed to translate its enormous productive potential into a respectable living standard for the majority of its people.
And this is where we believe the conventional framework needs to look deeper.
The Three Structural Constraints
The Resource Standard emerges from a set of observations about how modern economies operate in practice.
Across many countries, economies simultaneously exhibit:
- underutilised labour,
- idle land and productive assets,
- fragmented supply systems,
- and periodic shortages of essential goods.
These outcomes occur despite the presence of substantial productive capacity.
This indicates that the limiting factor is often not the absence of real resources, but the presence of artificial, system-imposed constraints that interrupt the coordinated deployment of those resources.
The Resource Standard identifies several such constraints embedded within modern economic systems that disrupt the natural coordination between production, distribution, and consumption.
Three observations about these constraints are central:
They are not natural economic constraints.
They entered through the monetary and administrative system.
They now govern how policies are formulated.
Understanding these constraints clarifies why economies simultaneously possess abundant productive capacity and yet experience persistent unmet social needs.
Three structural constraints within modern economic systems are particularly significant.
1. Financial Mediation Constraint
In the real economy, production and distribution fundamentally involve organising labour, land, materials, infrastructure, and institutions. However, modern economic management frequently treats financial availability as the primary condition for initiating production, even when real resources are already present.
In practice, finance performs a narrower function: it primarily bridges timing differences between stages of production, storage, distribution, and consumption. When financial mediation becomes the gatekeeper of deployment, productive capacity may remain idle despite the existence of both demand and resources.
2. Fragmented Production Coordination
Modern economies contain numerous centres of high productivity, including advanced agricultural practices, technological innovations, efficient industrial enterprises, and large populations capable of productive work across different regions.
These capabilities often remain poorly coordinated across sectors and geography. As a result, economies simultaneously experience pockets of production excellence alongside widespread underemployment and regional imbalance.
3. Supply-System Constraint
Economic instability frequently arises not at the stage of production but between production and consumption. Fragmented logistics systems, storage gaps, and volatile distribution channels can produce shortages or gluts even when productive capacity exists.
Governments operating sovereign currency systems possess the capacity to influence supply stability through procurement systems, buffer stocks, and coordinated provisioning mechanisms. When these mechanisms are not effectively aligned with production deployment, supply volatility and price instability can persist.
India’s Employment Problem: Why Must the Answer Be One Sector?
Rajan is right that India cannot solve its employment problem merely by expecting a few large factories to absorb millions of workers.
But this conclusion does not necessarily lead to a services-led alternative.
It leads to a fundamentally different conception of production.
The last credible data put India's organised, formal employment - including government employment - at only about 5.89 crore people.
The e-Shram portal has nearly 32 crore registered unorganised workers.
India's working-age population is about 105 crore.
Even if we take the organised and unorganised numbers together as roughly 55 crore, we are still left with around 50 crore people of working age whose actual livelihood status is not adequately captured by these employment numbers.
This is not simply an unemployment problem.
It is an enormous unused productive capacity.
So why search for one sector capable of absorbing India's workforce?
We don't need to.
Manufacturing Does Not Mean Giant Factories
This is where we differ fundamentally from the conventional manufacturing-versus-services debate.
Manufacturing need not mean a handful of giant factories concentrated in a few industrial corridors.
It can mean innumerable micro, small and distributed production units located where people live.
India has approximately 660,000 villages, home to more than 100 crore people.
We do not have to bring majority of those 100 crore people to cities and a few manufacturing centres.
We can take productive activity to where the people are.
A village can produce.
A cluster of villages can produce.
A district can organise production around its resources and capabilities.
The enormous infrastructure deficit itself represents productive work: roads, railways, ports, water systems, sanitation, housing, energy, logistics and storage.
So do education, healthcare, care services, repair, maintenance, food processing and countless other activities.
This is the fundamental logic behind the Resource Standard - organising production, finance, distribution and consumption around the mobilisation of available real resources to meet human needs.
The VOS production structure and TNRS manufacturing and service units are designed around this principle.
The question is not whether India can create enough jobs.
The question is whether we are willing to organise production around the people who need the jobs and the needs that remain unmet.
Even “Moderately Skilled Jobs” Is the Wrong Framework
Rajan speaks of creating “moderately skilled” employment - plumbers, mechanics, healthcare workers, teachers and others.
These are certainly valuable occupations.
But the deeper objective should not be to classify people according to the level of skill required by their jobs.
A care worker performs essential work.
A skilled mechanic performs essential work.
A teacher performs essential work.
A farmer performs essential work.
A nurse performs essential work.
A nuclear scientist performs highly specialised work.
The economic objective is to engage people productively in meeting human needs.
The level of skill follows from the work that needs to be done.
This is why the Resource Standard does not ask:
Which sector can employ our people?
It asks:
What needs to be produced, what services need to be provided, what infrastructure needs to be built - and how can we organise our people and resources to do it?
That is a very different economic question.
The Domestic Market Is Not a Consolation Prize
Rajan rightly points out that India is an enormous domestic economy capable of generating demand for goods and services.
We would go further.
Domestic demand is not an alternative to the economy. It is the economy.
The extraordinary emphasis traditionally placed on exports has deep historical roots. Under the gold standard and other reserves-constrained monetary arrangements, external earnings were closely connected with a country's ability to acquire and maintain the monetary reserves required to settle external obligations.
That monetary constraint no longer defines the operation of a modern sovereign fiat currency system.
Today, exports fundamentally perform a different economic function: they enable a country to obtain goods, services and resources from the rest of the world that it chooses to import.
In other words, exports are a means of obtaining imports - not an end in themselves.
A country of India's size therefore has enormous scope to grow by meeting its own domestic requirements while participating fully in international trade.
There is no reason to treat domestic production and global competitiveness as mutually exclusive objectives.
The Smuggling Argument
Rajan's argument against semiconductor self-reliance - that sophisticated chips can be smuggled and therefore India cannot achieve meaningful independence in chip manufacturing - is particularly difficult to accept.
Strategic capability is not defined by whether an item can cross a border unnoticed.
The question is whether a country should possess the capability to produce things it considers strategically important.
And this principle extends far beyond semiconductors.
A country does not abandon domestic production of essential goods because another country can produce them more cheaply.
Nor should India look at China and conclude that China has already occupied the manufacturing space.
Let China produce at enormous scale. India can do the same in its own way, for its own needs and for the world.
There is no economic law that permits only one manufacturing giant.
What About Industrial Policy?
Here Rajan's concerns about governments simply handing subsidies to favoured industries deserve consideration.
Picking winners because particular industries lobby successfully is not a development strategy.
But industrial policy need not mean handing cheques to selected corporations.
There is a much broader conception of industrial policy:
organising the ecosystem required for production.
Land.
Power.
Water.
Transport.
Storage.
Logistics.
Skills.
Research.
Universities.
Technology.
Procurement.
Standards.
Finance.
Markets.
And, above all, coordination.
In this sense, Rajan's own examples - tourism infrastructure around Hampi, EV charging infrastructure, university research and industry linkages - actually move closer to the Resource Standard approach.
The difference is that we would apply this logic systematically across the economy rather than selectively around particular sectors.
Finance: We Do Not Have to Fight the Financial System
There is another point on which the conventional framework needs reconsideration.
In a sovereign fiat monetary system, the government is not operationally dependent on first obtaining financial resources in the manner of a household, business or sub-national government.
But we do not need to make that the battleground.
There is a more immediately usable route.
If finance is understood for what it fundamentally does - bridging the timing differences between stages of production, storage, distribution and consumption - a much wider range of financial structures becomes possible.
We can work through the financial system rather than challenge the monetary architecture.
This distinction is crucial.
The Resource Standard does not have to demand that governments directly spend newly created sovereign money into every development programme. It can work through financial bridges required to mobilise real resources through an organised production system.
These could include warehouse financing, packing credit, NPV-based financing and other appropriately designed forms of long-term financial intermediation.
That makes the proposition far more practical within the existing institutional framework.
The Real Issue Is Not Lack of Resources. It Is Coordination
This brings us back to Rajan's central concern: how do we energise India's people?
On this, we agree completely.
But we arrive at a different answer.
India does not lack people.
It does not lack needs.
It does not lack productive resources.
It does not lack pockets of excellence.
It does not lack enormous investment opportunities.
What it lacks is a mechanism to coordinate these elements at the scale of the nation.
That is the purpose of the Resource Standard.
It seeks to address the three structural constraints:
financial mediation, fragmented production coordination and supply-system fragmentation.
And it proposes to organise production, finance, distribution and consumption around actual human requirements.
India Can Do It
Rajan says India is running out of time.
He is right.
He says India's young people are India's greatest asset.
He is right.
He says we must build human capabilities.
He is right.
He says India must invest massively in education, healthcare, infrastructure and research.
He is right.
But these are not arguments for accepting India's present economic architecture.
They are arguments for reorganising it.
India does not have to choose between manufacturing and services.
It does not have to choose between exports and domestic demand.
It does not have to choose between large industry and small production.
It does not have to choose between high-skilled and low-skilled employment.
And it certainly does not have to accept that China's success has closed the manufacturing door for India.
India can do all of them.
The resources are there.
The people are there.
The needs are there.
The productive opportunities are there.
What is missing is the coordination mechanism.
The Question Rajan Asks - and the Question We Should Ask
Rajan's fundamental question is:
How do we energise India's people?
The Resource Standard asks a slightly different question:
Why are India's people, resources and productive capacities not already being organised to meet the enormous needs of India?
That is the problem we need to solve.
And once we stop treating finance as the ultimate constraint, stop treating manufacturing as synonymous with giant factories, stop treating employment as a search for one “winning” sector, and start organising production where people actually live and where needs actually exist, the scale of India's opportunity becomes very different.
India does not need to wait for another economic miracle.
It needs to organise the resources it already possesses.
That is the proposition behind The Resource Standard.
Rajendra Rasu
The author writes on monetary systems and political economy
Comments
Post a Comment