Former Reserve Bank of India (RBI) Governor Raghuram Rajan says if one takes away the 'fluff' from India's growth numbers, its real rate of growth could be around 6-6.5% and not 8-8.5%.
To become a developed country by 2047, India would need growth rates of 9-10% over a sustained period of time, he added. Rajan was speaking at an event at Northwestern University's Kellogg Business School which also featured Krishnamurthy Subramanian, India's former Chief Economic Advisor.
Why is Rajan not convinced with India's growth numbers? "Let's say we're growing at 6 to 7%...the big question is why aren't we seeing inflation at this rate of growth," Rajan said in reply to Subramanian's point that post pandemic, India has consistently grown at a rate of more than 7 per cent.
"What creates this kind of inflation is when you are growing fast and you run out of supply. Typically your labour, wage rates start going up but in India they are not." Rajan points to the surplus labour anomaly in India's farms and not in manufacturing, which has Centre's emphasis, or services.
"For a fast growing country, for agricultural employment, growth is a travesty. Why do people find jobs in agriculture? That's low productivity. They should be finding jobs elsewhere," he said.
Rajan said that India's labour market is not doing well, which is why a large number of people apply for government jobs in the country. Rajan says manufacturing growth is happening in capital intensive parts and not the labour intensive ones.
"If you look at the labour intensive parts of manufacturing in 12 out of 23 sectors that form the IIP were actually lower in production than in 2016. A lot of the damage was done during the pandemic that in the pandemic you saw a whole bunch of this industry shrink. Why it's not come back is partly a mystery to me. But there is a potential answer, which is that our demand also has not picked up strongly since the pandemic," he mentioned.
Citing example of two-wheeler and four-wheeler sales in India, Rajan further mentioned that post pandemic, demand has not picked up that strongly in the country. "Look at four wheeler sales. People like us. What they buy, passenger cars, going through the roof has gone past the pre pandemic levels. Look at two wheeler sales, what the middle class drives. They have been growing really slowly for the last decade, but particularly they went up before the pandemic. They haven't reached the pre-pandemic levels. So put all these together, not enough employment," he said.
Rajan says these points suggest of an economy that is two- faced. "One is a face we all see which we talk about in conferences about China plus one, Apple creating factories in India. The other face is a hurting middle and lower middle class, which is desperate for work."
Rajan said that India's labour market is not doing well, which is why a large number of people apply for government jobs in the country.
