An Indian Way to Prosperity

A review of Breaking The Mould: Reimagining India's Economic Future, Raghuram G. Rajan and Rohit Lamba, Penguin Business, 2023.

Have you ever heard of the smile curve? Chances are, if you have completed an MBA or attended policy forums, you are already familiar with the concept. As Raghuram Rajan and Rohit Lamba define it in their book Breaking The Mould: Reimagining India's Economic Future: “The idea of the smile curve is that most of the value addition in a product is at the beginning and the end of the supply chain, where services are embedded in the product” (p.32). The middle part of the curve, which corresponds to labour-intensive manufacturing, creates relatively low value. Due to competition from China and automation of the shop floor, the labour-cost advantage of late developers like India has almost completely disappeared. India should therefore concentrate on the higher value-added segments of the value chain. This is where services get intertwined with manufacturing, giving India a competitive advantage due to its strong position in services exports and business-process outsourcing.

There are several ways by which India should “break the mould” and redefine its economic future.

First, India as a nation should aim higher: “A country that accounts for one-sixth of humanity should aspire to one-sixth of all Nobel laureates, patents, multinational CEOs, and Olympic gold medallists” (p.xxv). The authors see no reason why India shouldn’t “have brands of the kinds the Italians and the French do in fine clothing, accessories, furniture and other such luxury crafts” (p.36). They quote a CEO asking: “If Indian engineers can make products for Google from India, why can’t they make products for Indian companies that we can sell to the world?” (p.237). Breaking the Mould contains several vignettes of start-up companies presented as future world leaders, from the emerging luxury brand Tilfi selling high-quality sari and traditional crafts to the AgniKul rocket factory in Chennai that was the first to launch a 3D-printed rocket engine.

Second, India should not imitate China or other emerging countries. It should chart its own course to economic development. The authors give reasons why India has not industrialized to China’s extent: “Not only did China start earlier, it also grew at a brisker pace” (p.16). In any case, that road is now closed, or too heavily congested: the labour-cost advantage no longer exists. Economists should not think of manufacturing export-led growth as the only way to jump-start development: putting all hopes and resources on attracting low-skilled investments like mobile phone assembling factories “betrays both a lack of ambition and imagination” (p.xxiii).

Third, India has what it takes to implement a new economic model based on innovation at the technology frontier, integration in global supply chains, excellence in services (including services embedded in manufacturing), strong human capital, and democratic pluralism. All the government needs to do is to concentrate on providing public goods and the regulatory framework to create a level-playing field: focus on education, skilling, and health care; provide an enabling environment that will allow entrepreneurs to thrive; avoid the pitfalls of authoritarianism; and adopt a vision of where India needs to go.

As the authors themselves underscore, there has been dozens of books and consultancy reports outlining the direction that India should take and the reforms that the government should implement. What makes this book different?

1/ Breaking the Mould was written by two top-notch economists. A distinguished professor at the University of Chicago Booth School of Business, Raghuram Rajan is the opposite of the arm-chair theorist. His past policy positions include Governor of the Reserve Bank of India (RBI) and Chief Economist of the International Monetary Fund (at the time I was working for the French Executive Director at the IMF Board). Twenty years his junior, Rohit Lamba studied and taught in some of the best US universities, and has also worked as an economist at the office of the Chief Economic Advisor to the Government of India.

2/ The two authors base their recommendations on an abundant literature, to which they have themselves contributed. They believe policymaking should be evidence-based. Experts should be consulted on what works, what doesn’t and why. Policies should be scaled after modifying them based on results and feedback. In the end, “people should simply be given greater choice, and what works best will emerge” (p.178). Rule by experts is also tempered by transparency and norms of scholarly discussion: “Academic culture requires the freedom to debate, to subvert hierarchies and challenge the existing received wisdom with radical ideas” (p.158).

3/ Their analysis doesn’t read like textbook economics. If only for pedagogical reasons, they try to remove the complexities associated with economic theories and present their ideas in an unembellished prose devoid of complex jargon. They tend to prefer management metaphors (the “smile curve,” the “value chain”) over economic concepts. They also borrow from other disciplines, from political science to psychology or nutrition. But their analysis is based on sound economics: a central result in the discipline over the past two decades is that new ideas, innovation, and human capital are becoming much more important in growth and development. In economic terms, Breaking the Mould means India should operate at the production possibility frontier and focus its resources on increasing total factor productivity.

4/ Rajan and Lamba do not shy away from challenging conventional wisdom and talking straight to the powers-that-be. Central bankers are famous for their convoluted speech and ambiguous answers. While at the RBI, Raghuram Rajan tried to break that mould by responding to a question at a press conference in a James Bond vein: “My name is Raghuram Rajan… and I do what I do.” While at the IMF, he inaugurated a series of policy interventions titled Straight Talk. Along with Arvind Subramanian (who later became Chief Economic Advisor to the Government of India), he published a working paper on the costs and benefits of foreign aid that went against the grain of received wisdom in developmental institutions.

Breaking the Mould may be read in some quarters as a partisan intervention (readers will be especially curious about Raghuram Rajan’s stance on demonetization), but the authors are neither cheerleaders of the government nor unconstrained critics: they want to make it work. Indeed, their writings and direct involvement in policymaking have contributed to the current government’s economic roadmap over the past decade.