American and Indian Scholars’ Plan for India Made Chinese Scholars Laugh

Recently, I spent four days reading the book Breaking the Mould co-authored by Raghuram Rajan, former Governor of the Reserve Bank of India, and Rohit Lamba, a professor at Pennsylvania State University. The book delves into a core question about India’s future: Should India rely on manufacturing or the service industry for its development?

Breaking the Mould, co-authored by Raghuram Rajan and Rohit Lamba

In the book, the two authors argue that India following the path of manufacturing development is a dead end and must instead pursue the path of a service-led economy, particularly focusing on high-end services. They provide three main reasons:

Firstly, manufacturing has low value addition. The authors cite the smile curve theory to argue that the front-end design and back-end sales have higher value addition than the manufacturing process itself. Therefore, India does not need to engage in low-profit manufacturing and should directly aim for high-value services at both ends of the smile curve.
Secondly, the manufacturing competition is too strong. With China dominating global labor-intensive manufacturing, and countries like Vietnam and Bangladesh claiming the remaining space, it would be a strenuous effort for India to compete. Even if India manages to secure a position, there is no guarantee of a smooth transition to future industrial upgrades. Therefore, India might be better off abandoning manufacturing for the service industry track.

Lastly, manufacturing demands high labor requirements. The majority of Indian workers lack the physical ability and educational qualifications needed for manufacturing, making them ineligible even for being exploited at a large scale by capital. Therefore, India should focus on a small elite group capable of participating in high-end international division of labor and then disseminate the dividends to ordinary citizens through a trickle-down effect.

Frankly speaking, Rajan and Lamba are considered top experts in India with broad knowledge and a global perspective. However, their prescription for India seems flawed and lacks practicality. Ironically, while the book is titled Breaking the Mould, the authors have not yet broken free from their Western model, exhibiting a typical Brahminical sense of superiority and detachment.

Can high-end services truly exist independently of high-value manufacturing? Without the substantial profits from industries like energy, defense, pharmaceuticals, and aviation, how long can sectors like consultancy, finance, education, and law sustain prosperity? When the U.S., Europe, and Japan dominate the global industrial hierarchy, India could benefit from service outsourcing. However, if these developed countries face shortages, what entitles India to a share of the top-tier resources? Is it just because of its democratic system?

Regarding the smile curve theory mentioned in the book, even in Western business consulting, this theory would face criticism for prioritizing capitalist self-interest over national strategy, leading to industrial hollowing-out in the West. It’s surprising that Indian economists of this caliber would use such a theory as evidence and intend to guide policy implementation with it.

Smile curve theory

The examples cited by Rajan in the book are even more amusing: Apple’s market value is 50 times that of Foxconn. So why doesn’t India follow Apple’s model of focusing on research, design, consultancy, and sales instead of imitating Foxconn’s manufacturing model? It’s evident that these Indian economic gurus are detached from reality.

After reading this book, one thing is clear: the ruling Bharatiya Janata Party (BJP), with Modi at the helm, despite their populist and unrefined approach, is strategically correct in prioritizing manufacturing for India’s survival, growth, and strength as a billion-dollar economy.

However, at the tactical level, the Modi government’s reliance on cronyism, engaging in shady dealings with corporate conglomerates, and doling out subsidies might not yield the desired outcomes. There’s a high probability of retracing the old path of import substitution strategies. Simultaneously, the much-needed land, labor, and environmental reforms in India involve politically sensitive issues, making any attempts at change equivalent to political suicide. Scholars nurtured on Western ideas dare not speak up, while power-hungry politicians won’t propose reforms that could jeopardize their authority, leading the country towards decay.

Lastly, it’s a relief to see that the Chinese government possesses strong strategic focus, not fixated on pursuing glamorous industries but rather starting from the grassroots and gradually advancing to the forefront of industries. It is a testament to the diligence and perseverance of the Chinese people, enduring the inequality of global industrial division to secure a dominant position after going through the hardships of basic industrialization.