India's path to economic success lies in powering services sector: Rajan

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has called on India to prioritise the enhancement of its services sector over the expansion of manufacturing to achieve sustainable economic growth and create jobs. Speaking at the Annual World Bank Conference on Wednesday, Rajan argued that manufacturing is not the "holy grail" for India’s economic success.

Rajan highlighted that the manufacturing sector faced challenges due to limited export absorption and was no longer competing against high-cost labour in the US, instead facing intense competition from countries such as China, Vietnam, Indonesia, and Mexico, which also offered cheap labour and had more capital than India.

“Both politically and economically, the manufacturing ladder is harder to climb,” he added.

According to him, services and services embedded in manufacturing have higher value added in value-chain activities compared to manufacturing, which has a much lower value addition. “The big part of the value added is in intellectual property in the services, not in the actual manufacturing. We need to consider services as a potential for the leading edge of the economy,” he said.

The former RBI governor further argued that India should prioritise improving education and healthcare services through decentralisation and local empowerment to achieve better outcomes, focusing on human capital rather than just physical capital.

He also stated that India must foster innovation and creativity to capture high value-added opportunities.

According to Rajan, the Indian government should focus on creating jobs across all levels, rather than just targeting high-end positions. “The need of the hour is more jobs,” Rajan argued during his recent comments.

Rajan highlighted that India must address both current job availability and future employment opportunities by upskilling individuals for the jobs that exist and providing “last mile remedial training.” He stressed the importance of creating employment opportunities that match the skills people already possess while also investing in training programmes for future job prospects.