India Needs to Create More Jobs: Krishnamurthy Subramanian (Transcript)

Now I estimate based on the difference change in inflation that the rate of depreciation of the rupee going forward will be less than 1%. It has been about 3.5% historically. But I’ll come to and I’ll explain why in the book I estimate it’s 1%. Now because depreciation reduces the value in dollar terms compared to rupees, you have to subtract that 1%. So 13 minus 1 makes it 12%.

Now at 12% rate of growth in dollar terms, your GDP multiplies every six years. This is the rule of 72. So 72 divided by 12 – six years over a 24 year period from 2023 to 2047, if GDP multiplies every six years, there are four doublings, that’s two into two into two into two, which is 16 times. That’s basically what I’m talking about.

And I’ll explain this in even more detail. In 2023, India’s GDP was $3.28 trillion. Let’s approximate it $3.25 trillion. So the four doublings means from $3.25 trillion to $6.5 trillion, that’s your first doubling. $6.5 trillion to $13 trillion, that’s your second doubling. $13 trillion to $26 trillion, that’s your third doubling. And $26 trillion to $52 trillion, which is close to the $55 trillion.

Now this is where the power of compounding can be illustrated. If on the other hand, GDP grows only at 9% in dollar terms, then GDP multiplies only every eight years, doubles every eight years. So a 24 year period you don’t get 16 times multiplication, you get only eight times multiplication. This is what Japan and China actually saw. They grew at very high rates in dollar terms during their 25 year period. So we need to seek inspiration from that and I think India can.

If you look historically India has grown at about 7% in real terms. So 8% is a stretch goal. And I’ve kept that stretch goal so that we have that ambition and we can deliver that 8%. In other words, the rest of it actually is not as critical as the 8% goal.

Let me just spend a minute on explaining why the rate of depreciation is likely to be lower. So if you look, from 1991 onwards the rupee has depreciated on average by about 3.5% annually. Now this has been during a period where India’s inflation has been about 7.5%.

Now one of the fundamental credos in international economics is that if a currency faces higher inflation, its value in purchasing terms actually erodes faster. For instance, to make sure things are understood very well, if I have 100 rupees in my pocket today with 5% inflation, I can buy only 95 rupees worth of goods or services next year. If you take the US where inflation is 2%, $100 worth of money in the pocket can buy $100 worth of goods and services now, but only $98 next year.

So the 5% inflation is eroding value of the rupee much more or much faster than that of the dollar. When inflation was 7.5% it was eroding even faster. And that is why one of the fundamental aspects therefore is that higher the inflation, higher the rate of depreciation, conversely, therefore lower the rate of inflation, lower the rate of depreciation as well.

So a fall from 7.5% inflation, which is what has prevailed in the past, to 5% now with inflation targeting regime in place will shave off at least 2.5% on the rate of depreciation. Which is why I think actually the rate of depreciation about 1% now, not 3.5%.

Challenges and Threats to Economic Growth

PALKI SHARMA: You’ve done a lot, you’ve done your math. Obviously there are a lot of assumptions there also and there are a lot of variables. You know, when we’re looking at a 25 year projection, then obviously a lot can change.

KRISHNAMURTHY SUBRAMANIAN: Let me just intervene, actually say, I wouldn’t say assumptions, Palki, in the sense that, you know, I’m building everything ground up. Not just that, I’ve also tested the framework for previous 25 year periods. Even for instance the 8% growth that I’ve talked about. Actually in one chapter, I’ve devoted an entire chapter to looking at the investment rate that you know, what investment rate and what productivity can deliver. So everything I’m building up, building it grounds up in some sense rather than sort of just being superficial and making an assumption about the growth rate itself. I am building it from more, you know.

PALKI SHARMA: No, no, when I say assumption, of course it has basis in your understanding of the subject and so on and so forth. What I’m trying to say is that even in the last 10 years, if you were to look at this 10 year period, India has seen stupendous growth. We’ve emerged as a force to reckon with on the global stage. But there have been challenges. There has been a pandemic which no one could have foreseen and the disruption was immense.

KRISHNAMURTHY SUBRAMANIAN: Tell me about it.

PALKI SHARMA: Right. There have been two wars, 32 conflicts at last count that we’ve seen across the world. We’ve seen climate crises, we’ve seen geopolitical tensions.

KRISHNAMURTHY SUBRAMANIAN: Indeed.

PALKI SHARMA: So there are challenges. As you, as we as a country chase this $55 trillion target, what according to you is the biggest threat to India’s economic ambitions?

KRISHNAMURTHY SUBRAMANIAN: No, I think that’s a very good question, Palki. Let me again draw on the example that I gave you of Japan. As I said, Japan’s GDP multiplied 26 times from 1970 to 1995. Now this was not a honeymoon period for the economy. There was the Vietnam War, there was the oil shock which led to hyperinflation in the United States, double digit inflation and therefore growth was impacted. In fact, that kind of inflation the United States has not had ever since, even during COVID for instance, and following the Ukraine war.

So Japan actually managed to grow its GDP 26 times despite these challenges. I think there is an important lesson in there. If you take China as well, which I gave the example of it’s multiplied its GDP 22 times. It did that during this period where there was a global financial crisis. There was also Covid.

So I think whenever one looks at a 20, 25 year period, headwinds will certainly be there. Equally, there is also possibility of tailwinds. That’s the balance that you have to keep in mind. I would rather not focus only on the headwinds. I would say there are both of them from the perspective because you’ve asked me about this, the headwinds that I see, I think there are a few.

Certainly climate change is one and I’ve written about it. Therefore there is the possibility of already we are in there, the de-globalization and I think as a result impact possibly on some of our exports and also industrial policy actually changing tack in many of the advanced economies when they’re facing competition. So those are actually, I think potential headwinds that India will have to face.

But here I’ll give you an example again, one more. So when I think about the potential that I’m assessing about the Indian economy, I think about how Sunil Gavaskar assessed Sachin Tendulkar’s potential in 1993. At that time, Sachin had played cricket for about four years and he had performed. Based on that performance, Sunil Gavaskar said, “If he does not end up with at least 30 international hundreds and 15,000 runs, I’ll be very disappointed.”

In a similar way, based on past performance, I am assessing India’s potential. No claims to be Sunil Gavaskar of anything, let alone cricket.

PALKI SHARMA: But you’re saying India will be the Sachin Tendulkar.

India as the “Sachin Tendulkar” of Global Economy

KRISHNAMURTHY SUBRAMANIAN: India will be the Sachin Tendulkar of the global economy. And the important lesson here is it’s not as if Sachin did not face challenges. He had the tennis elbow surgery. He had to bat at a different position during Greg Chappell’s tenure. So they may be self-created, there may be other challenges. But I think the important point is he worked hard and creatively worked to overcome these challenges, which is what India will have to do as well.

Any 25-year period will obviously not be just a straight line. There will be challenges, headwinds and tailwinds. But I think the important part is we should keep our focus on delivering that 8% growth. And across 27 chapters I’ve laid out what are the policy steps we need to take. If we do that, I have absolutely no hesitation in saying that we can counter those headwinds, utilize the tailwinds to deliver this ambition.

Impact of West Asian Conflicts on India

PALKI SHARMA: Yes. And since we’re talking about challenges, we’re meeting on the 7th of October. Last year on this day we saw an attack on Israel and that sort of set in motion events that have impacted the whole world. Now we are seeing an even bigger conflict loom between Iran and Israel and the fighting that’s going on in Lebanon. How do you think this impacts India? And do you think that a wider war in West Asia will be detrimental to India’s interests?

KRISHNAMURTHY SUBRAMANIAN: Again, I think that’s a nice probing question, Palki. So let me give you a sense of why I think the focus on our own policies is really critical. And I gave the example of Japan and China which actually focused on their domestic economy.

If we take the various components of GDP, India’s GDP – so GDP is comprised of consumption, investment, government spending and exports minus imports or what are called net exports. About 60% of India’s GDP is accounted for by consumption. 30% is investment and the remaining 10% is basically government spending with the net exports contributing a much smaller portion. Imports being actually higher than exports overall.

Why am I saying this? I’m saying this to highlight that 60% of the consumption that is domestic, investment – actually FDI is about maybe 1.5%, maybe 2%, even if we go to 3% is still a small contribution compared to 30% overall investment in the economy. And 10% government spending is what the government decides here.

In other words, if we start thinking about it more rigorously, in my opinion, we end up overestimating the impact of the global economy on India. Because as you can see through these numbers that I’ve shown, a large part of our GDP comes from domestic sources.

PALKI SHARMA: Yes, but we’re talking about West Asia which is an oil producing region and we are an oil dependent country. We import a lot of it. So any disruption in the oil market has a direct bearing on our finances, both individual and the government level.

KRISHNAMURTHY SUBRAMANIAN: Indeed, I think, but I’m saying again, if you look at it using these numbers that I said. So I’ve looked at this. If you take for instance the impact of oil earlier when there were administered prices, whether it was petrol, diesel, etc., it would directly impact our fiscal deficit. Now it does not because those prices actually are passed on and rightly so. So fiscal deficit is not going to get impacted by the crude oil price directly.

What does get impacted is inflation because you have especially transportation costs can go up and middle class actually uses petroleum. But the component of that overall contribution to inflation is about 15% maximum. And so even if, let’s say if there is a $1 increase in the crude oil price, the impact on inflation will be about 15% of that or 6% or so. Through that, the impact on consumption again actually is not very high.

I think that’s what, when you crunch through these numbers and start thinking quantitatively, what I’m trying to say is that yes, these factors are there, but I think quantitatively they are not as important. And therefore as long as we ensure domestic policies are done well, I think we can tide over.

PALKI SHARMA: Governments cannot blame international disruptions beyond a point.

The Role of State Governments in Economic Reforms

KRISHNAMURTHY SUBRAMANIAN: Beyond a point. Indeed. Indeed. In fact, actually here I will put far more onus on the state governments because irrespective of the political dispensation since 1991, central governments actually have pushed on reform. Some governments more so, some others not as much. But really the onus, when I look at whether it’s on governance or on reforms, it is on the states, for instance.

One of the things that puzzles me when I was part of the government, it used to, but certainly now, is that when the central government budget is presented, there’s a full sort of set of attention, full party and questions asked. Rightly so. But why is it the case that when state government budgets are presented, basically nobody pays any attention? There isn’t a single media channel that basically goes and asks, let’s say the Maharashtra government or the Gujarat or the Andhra Pradesh, Telangana or Tamil Nadu government, saying, “What reforms did you do? How did you enhance the quality of life of the common citizen?”

Manufacturing – we talk a lot about manufacturing. Again, if you start analyzing carefully, almost 80% of policy relating to manufacturing is at the state level. Land, that’s a state subject. Labor – good part of it actually is a state subject. Power, which manufacturing sector firms need – that is basically against states because if they give free power to their farmers, it becomes costly for manufacturing firms. Ease of doing business, all the permissions that are to be taken, whether it’s actually land permissions, environmental, all these are states.

So what I’m trying to say is that rather than trying to always say, “Oh, the international situation isn’t as favorable,” that to me is actually not good enough reason. If our state governments in particular can actually pull up their socks and we citizens need to highlight to them that you need to start talking about reforms and we need to ask questions.

And this is something I’ll use your platform to also put the onus on a CII, a FICCI or an ASSOCHAM saying, “Why aren’t you holding seminars basically after a state government budget, together with the media and saying how many reforms were done, what is it?” This is really critical because states now need to start delivering on reforms. And that is what will be really critical for us to be able to achieve some of these goals.

PALKI SHARMA: That’s a point well taken. I suppose regional platforms do highlight it, but we could obviously do more. At the same time, I have to say that when the economy does well and the credit goes to the central, when the economy is flagging or there are challenges, the flak also goes to the central government. That’s how it works.

KRISHNAMURTHY SUBRAMANIAN: No, I concede that, Palki. I think that’s rightly so. When you get bouquets, you should get brickbats too. And that’s a fair game. All I’m trying to point out is that while the macro economy of course is a responsibility of the central government, there are aspects actually which are the responsibility of the states.

And I think it is really critical to make sure that because responsibility and power are two sides of the same coin when it comes to for instance, things like GST or other aspects. States focus on their power of saying, “You’re stepping into our shoes,” which is they’re exercising their power rightly so to do that. But then what about your responsibility? What about delivering on some of the reforms? And I think I have absolutely no hesitation to say that overall states have actually disappointed in the last 30 years.

PALKI SHARMA: Some of the states are doing very badly there. That situation is very bad.

KRISHNAMURTHY SUBRAMANIAN: But it is also because we all people, we get the governments that we actually deserve. If you don’t put the attention on the states actually on asking them questions, the right questions, they will continue to do what they’ve been doing.

Reforms, Globalization and Risk Management

PALKI SHARMA: Yes, I think there’s a lot that can be done in that sphere. We’re talking about reforms, we talked about liberalization. You also spoke about deglobalization. That is what a lot of countries in the world are also now looking at. Looking at India. Do you think the reforms and the opening up have made us more vulnerable to external shocks or do you think that’s the only way we could have grown?

KRISHNAMURTHY SUBRAMANIAN: So this is an aspect of economics and general business itself. Risk and return go together. If we want zero risk, then we can only get the risk-free rate which is deposits in banks, etc. In general, if we have to generate higher return in the form of higher GDP growth, etc., we have to take some well-managed risk. I’m not saying basically throw caution to the winds, but zero risk is not the way to go actually.

And there’ll be some exposure to obviously global factors. And I think Indian economy has become more integrated. But as I was explaining earlier as well, by decomposing the various aspects of GDP, clearly the impact of the global economy on us in terms of the direct manner is not as much.

Yes, sentiments actually and maybe here as well, I think people overread the sentiments because they do not sort of analyze it in this manner saying if 60% is consumption, 30% is investment and 10% is government spending, all of which are mostly domestic, then maybe we’re actually overreading the sentiment aspect.

So I think there are some risks, undeniably. But as I spoke using the examples of other countries, or Japan or China or even India, the way we actually encountered COVID, for instance, and the way we’ve come out of that, I think is indeed commendable. So there is enough evidence, actually globally and in India itself, that we should be able to tackle these challenges with sensible policy.

US Elections and India-US Economic Relations

PALKI SHARMA: You’re based in the US now, and in less than a month from now, the US is going to vote for its next president. It’s been called a very tight race between Donald Trump and Kamala Harris. Do you think the outcome of that election will have a bearing on India’s economic policy?

KRISHNAMURTHY SUBRAMANIAN: Very marginally. I think if we look at the governments in the two different spectrums, each one of them emphasizes different aspects. But overall, I think the simple fact remains that the US and India are natural economic partners. Of course, both countries are democracies. We are the largest democracy, they are the oldest democracy. So there’s clearly a natural alliance there.

And I think mutual interest there is what governs these relationships. And I think if you look at over the last eight years across two different governments, the strength of the relationship has only grown. So I don’t see much of a risk on that dimension.

PALKI SHARMA: Even if it’s Donald Trump who has been fairly critical of India’s economic policy, although he says good things about the Prime Minister of India. He’s raised the issue of tariffs on imports in India. Do you think a Trump presidency potentially will put us at more risk?

KRISHNAMURTHY SUBRAMANIAN: See, I think the way what I’m trying to say is while there might be some aspects where they may actually focus on, there’ll be others where actually there’ll be benefits. And I think it is true that the earlier Trump administration had focused on some of these aspects of tariffs, etc. But equally, there were also other aspects where there was far more cooperation too.

So I think net-net there will be actually not as much impact, in my opinion, irrespective of whichever administration that comes. I’m a firm believer, actually. Like, if you remember cricket captains, if you ask them actually a day before the match, they’ll say – ask them a question about the opposition. They’ll say that “We are focusing on our team.” That is basically what is my message. We should be focusing on our team. And I think extraneous factors should not be really driving much of our responses.

China’s Economic Slowdown and Recovery Prospects

PALKI SHARMA: China, our neighbor has been going through a slowdown. And after brazening it out and not admitting that there was a problem, Beijing finally seems to be doing something. We’ve seen some interventions, some stimulus measures in the recent past and the debate is still on, on whether that’s going to be enough. Do you think it’s enough what they’ve done so far? And do you see China coming out of this slump in the near future?

China’s Structural Economic Challenges

KRISHNAMURTHY SUBRAMANIAN: So one of the aspects, and I think there’s been a lot written on this already, is that there are some structural aspects that I think are at the heart of what we are seeing in China. And I think a key part of that is the demographic change that has that in the next 25, 30 years, I think their working population is likely to decline significantly.

Also, if you look at, even in their growth phase, their GDP growth was far more investment driven. It hasn’t been as much consumption driven. And I think the demographic change will only exacerbate some of those aspects.

So I think the aspects that the Chinese economy actually right now encounters is more structural and one would have to wait and see how the responses come about because I think these kind of stimuluses, I don’t think really address the structural problems. They are sort of temporary solutions that potentially can help in the interim. But without a fix on some of the structural problems, I think long term growth may, we’ll have to wait and watch.

I’m actually not sanguine about the impact of the policy response because the optimal policy response would be one that focuses on some of the structural problems.

PALKI SHARMA: And how do you see the approach of the current leadership both in terms of how they deal with the issue of wealth at home, big corporate players that the Chinese government, their engagement and their interaction and the actions that some of them have faced, their engagement with the rest of the world. Do you think that also has a bearing, their politics and their policy has a bearing on the way the economy is moving?

KRISHNAMURTHY SUBRAMANIAN: You know, as an economist, actually I’m generally averse to talking about domestic politics itself. You’re trying to ask me about international politics. I don’t really have much of an opinion on their politics, but I think all I will say is that the economic aspects are what I think need focus at this point in time. But in any country, I guess the politics and the economics do combine.

India’s Opportunity from China’s Slowdown

PALKI SHARMA: Fair enough, that was steering clear of the question, but that’s fine. Do you think India stands to gain from China slump in any way?

KRISHNAMURTHY SUBRAMANIAN: I think that’s been the “China plus” aspect that has been talked about. India definitely has the potential and India is benefiting from it. But we can do more.

PALKI SHARMA: How?

KRISHNAMURTHY SUBRAMANIAN: Yes, if you look at, for instance, manufacturing sector growth last year, if you look at the economic survey numbers, manufacturing sector grew at 9.8% on a GDP growth of 8.2%. So if you look at semiconductors, for instance, there’s been significant growth there. But I think as I said, actually we can do more. We are a country that can actually provide an equal sort of replacement for China.

And I think that’s where, therefore the focus needs to be on far more on policy. Especially if you look at manufacturing, as I said, labor laws, which were passed in 2020, I think it’s high time now that the subordinate legislation is passed. States need to focus, especially land.

I think whenever one talks about, when I talk to people who actually want to start a manufacturing firm, they always lament about how difficult it is actually, and how involved and complex it is to be able to get land. And I think that is something that states have to focus on.

And I think aspects of power and some of the transportation, there’s been good improvements on some of these aspects. Logistics, I think our ports have started delivering, the turnaround times, they’re much better. Our roads have improved significantly. But I think power cost still needs to come down substantially.

Because when you think about a manufacturing sector firm that wants to set up base in India and wants to move away from China, then their overall costs have to actually have to be similar to what they face in China or maybe a Vietnam or a Thailand. And I think that’s where we have to offer. And it’s all the policy aspects, especially on some of these parts that I mentioned, that is where the focus needs to be.

So I think we are benefiting. We have the potential to benefit even more. And that requires, I think the onus to be on policy relating to manufacturing where states in particular and center need to move faster.

For instance, if you think about it, and this is many entrepreneurs have shared this when they go to China, for instance. If they want to set up, let’s say a factory in some city, the municipal person basically, whoever is ahead comes with a file which is actually everything is taken care of, all permissions person just needs to see through and sign and lo and behold, the factory is ready to be set up.

Overcoming Bureaucratic Challenges

PALKI SHARMA: That is not possible. You know, we are a democracy at the end of the day and it is messy and we sort of operate on the principle of consensus with all the stakeholders, which may not be the case in China. So how can we create our own unique model?

KRISHNAMURTHY SUBRAMANIAN: No, I wouldn’t say that is not possible. I think it’s difficult, but impossible is not a word that is there in my dictionary. I think what I’m talking about is if not let’s say having something ready immediately, but there can be a situation where let’s say within two weeks. I think that’s a very reasonable period of time.

And one of the main aspects is the permissions. Right now actually what happens is, especially at the state level, entrepreneurs have to often run from pillar to post to get every kind of permission. And many times actually files sit in desks for reasons that we all know which must be attended to.

PALKI SHARMA: So red tape and corruption.

KRISHNAMURTHY SUBRAMANIAN: Yes, I think the combination of that and this is something that I don’t think we can or we should be saying that it is impossible to. We should at least be reducing, maybe making it zero. I think no country ever, I mean in every economy you actually get varying degrees of this. But I think we should definitely be aspiring to reduce it significantly and make it easier for our entrepreneurs.

And as I said again, I put the onus on the state significantly with also the onus on labor reforms for the center. I think even capital, for instance, cost of capital needs to go down. These are aspects, if we do that, we will be able to realize this potential even more. There is a lot of potential and I think time is ticking. We have to actually make sure that we avail these benefits and act quickly.

From Assembly to Manufacturing

PALKI SHARMA: Yes, because for all the talk of de-risking, decoupling, etc. A bulk of the players are still going to like you said, China, Vietnam, Thailand and so on. And even in India, whatever we are doing is mostly assembling rather than manufacturing.

KRISHNAMURTHY SUBRAMANIAN: So see there. Actually I have a nuanced view, Palki. I think if you look at not just in India, and I’ll give you examples of India, but other countries too. Wherever every industry actually stands, typically starts with assembling and then graduates into value added manufacturing.

If you take for instance automobiles in the late 80s when Maruti started basically manufacturing the Maruti 800 car at that time all the components used to come from Suzuki and they were assembled here. Now over the next 40 odd years, actually close to 40 years. The entire supply chain has grown in India.

Similarly, it’s happening with semiconductors now. And I think that is the case with, if you look at every export country that has become export, very powerful in exports. It has started with basically assembling and then graduated into value added manufacturing. It’s like, if you have to learn to run, you have to first learn to walk.

PALKI SHARMA: We’re on the right track.

KRISHNAMURTHY SUBRAMANIAN: We are, but I think speed, I think I tend to be impatient on these. We should definitely do assembling, but we should also have the aspiration to quickly graduate into value added manufacturing. All I’m saying is, we cannot target value added manufacturing right away without doing the assembling part. But it shouldn’t be a reason for us to say we’ll continue assembling all the time for the next decade or so. No, that is not how we will be able to utilize the opportunity that we have right now from the “China plus” focus.

India-China Economic Relations

PALKI SHARMA: The other thing is our own trade dependence on China which has grown despite all the political and defense related concerns as well. And post Galwan we saw an attempt to limit Chinese presence but we’ve not been able to really do that. And off late there seems to have been a rethink with more opening up to Chinese companies, investment visas and so on. We’ve seen like a string of policy moves and thinking along these lines. Do you think that’s the right path for India to pursue? Do you think that’s the only option as things stand?

KRISHNAMURTHY SUBRAMANIAN: In my opinion, I think whenever we think about economics in our country, we have to keep the geopolitics in mind as well. So this is a very nuanced issue. And I think while some people will believe that there is no color of money, I’m actually not given to that belief and especially given the episodes that you mentioned. I do care about the color of the money. So I would leave it at that.

PALKI SHARMA: I don’t want to leave it at that. I want to ask you. So you think that we should reconsider our engagement with China economically and we should look for options rather than, because this year in the budget and post that we’ve seen a shift in that direction, that it’s okay, let’s work with them.

KRISHNAMURTHY SUBRAMANIAN: I think it’s good to have a conversation, a debate on this, but I think the final thoughts on this must not be only about the economics. It has to actually factor in the geopolitical aspects as well. That is what I’m saying. If you say, for instance, just focusing on the economics, I think the solution might be one. But if you factor in the geopolitical aspects, then the solution may be different. And I think it’s good to have a conversation. But my own view is that this is far too important for just economics to be driving the answer to this question.

Global Response to China’s Economic Practices

PALKI SHARMA: Do you think the rest of the world is sort of waking up to this? Europe for instance, after a lot of back and forth and despite divisions that still persist, they last week decided to impose higher tariffs on Chinese made EVs and it is going to cause short term pain and disruption to their own economies and markets. But they have. Well, we don’t know if they’re going to stay the course. They have till the end of this month to decide. But they seem to be finally going down that path.

KRISHNAMURTHY SUBRAMANIAN: I think in general. And this was, we were talking about this earlier as well, about the change in industrial policy or some of these trade policy even in the G7 economies. I think this is an aspect that I’ve been mentioning earlier as well where a few years back when some of these advanced economies were talking about some of the tariffs, let’s say that were being put on finished goods, for instance.

The thought that I had is that every country tries to do what is good for its economy and India was doing that as well. It’s not good to put on, let’s say raw materials and intermediates because that hurt our own economic interests. But I think finished goods actually, so that’s a nuance to it. I think now countries are doing it and that is sort of, in some sense, vindicating what the nuanced approach that India took as well.

I think overall, in the kind of geopolitical situation we are in, the interaction between economics and some of the geopolitical aspects actually is something that is here to stay.

India’s Demographic Dividend and Job Creation

PALKI SHARMA: Absolutely. The other advantage that India clearly has over others is the people, the talent. You know, we could be the talent headquarters. We talk about the demographic dividend. But without the right policies, it could be a ticking time bomb too. And the bigger challenge is creation of jobs. How do you think India should deal with this jobs crisis?

The Critical Importance of Jobs for India’s Future

KRISHNAMURTHY SUBRAMANIAN: I’m glad that you asked this, Palki, because of the four pillars that I’ve talked about in the book, the second pillar, which is social and economic inclusion is essentially really capturing the importance of jobs for social and economic inclusion.

Let me put it this way. If you were to wake me up at 3 o’clock in the night and said, “Hey, you’re a policymaker, you think about what is policy for India, then tell me three things that keep you awake at night.” I would say jobs, jobs and jobs. Because we have a young population and I think, no better example. You started out with talking about my father. I use that as an example.

If he had not, for instance, gotten a job in Indian Railways that was a formal sector job, there is no way I and my brother would have been educated and I wouldn’t be here talking about the Indian economy. So I think a job lifts not only one family, but generations. And I think the kind of stories that we have, not just mine, but many others, we know so many friends of ours who actually have had similar stories coming from lower middle class families.

Actually their parents, working in, let’s say in formal sector firms, were able to educate them. And I think that story needs to actually permeate across India. Sections of the population that are still below the lower middle class even they need to have such stories so their kids maybe 30 years later should be sitting here and talking about these stories. For that jobs therefore are by far the most important. And I think our policies therefore need to be geared towards that.

I think I’ve already spoken about manufacturing. I emphasize manufacturing because that’s the way to create high quality jobs. For instance, to give an example, let’s say some of the young boys that come to do housekeeping work, let’s say maybe in our homes, if they go and work in a manufacturing sector firm, they’ll earn higher wages. They’ll actually be much more sure about job certainty, they’ll get skilled as well. And that’s the kind of progress that needs to happen in a widespread manner.

Not just that, and that will also develop the confidence that the economy is working for everyone. I think jobs are really the way in which the support for economic reforms is bought. Without jobs, without actually the common people really seeing the benefits of progress, especially through jobs, then you get this sort of tension between, “Oh, reforms are benefiting only a few.” And that’s why the emphasis on jobs and through jobs, social and economic inclusion is critical.

Also, I think manufacturing is important because from an external sector point of view as well. Even if, let’s say India grows the way, for instance, an estimate predicts, which is $26 trillion in 2047, I don’t think that estimate is correct. But even then there will be a large middle class that will get created and this middle class will need things like phones, refrigerators, televisions, all these consumer goods.

And if you’re not producing it here in India, we will have to actually import them from abroad, which will affect our current account deficit and thereby trade deficit. So it is therefore really critical to focus on manufacturing and thereby create jobs in the economy. I think there is no other national imperative, in my opinion at this point, as important as jobs.

Technology’s Impact on the Future of Work

PALKI SHARMA: I’m glad we agree on that. Jobs are critical. What complicates this for policymakers is the fact that the job market is also changing. We’ve done quite well in the digital financial infrastructure. We’ve seen the benefits of technology, but there are a lot of unknowns as well, including AI, which is going to be a big disruptor. No one really knows what it’s like. And we’re calling it the Wild West. When you see the $55 trillion mark for 2047, how do you foresee the future of work?

KRISHNAMURTHY SUBRAMANIAN: Yeah, no, this is actually three, four questions loaded into one. So the first thing I have to tell you actually, I think on jobs and employment, the narrative, and especially the negative narrative has, I think, run far ahead of the reality. And I think I want to explain to our viewers using data, high quality data. Oftentimes these negative narratives actually have been spoken about using the very poor quality CMI data. I worked with that data before and that’s why I say this. I’ve written a paper that is there on SSRN as well.

For instance, just to give an example, even when positive news basically came, let’s say from CMI when I was in government, I would ignore it because I was not sure it was actually really news or was it noise. Now if you look at, for instance, high quality data that PLFS uses, which basically is what the International Labor Organization had a report on the employment situation in India which uses the PLFS, does not use the CMI at all. I think there is an important signal there.

Or if you go by, for instance, the RBI report which uses the KLEMS database and from the vantage point that I occupy actually at the IMF, KLEMS database is available for several countries. And we know that data is actually high quality data. RBI being an independent institution using a high quality database. What do they find? They actually find that over the last 10 year period leave out jobs that are created in agriculture, which is about 35 million. Even if we leave that out, 90 million jobs have been created over the last 10 years. That is 9 million jobs a year.

I think if you look at the PLFS data from 2017-18 to 2022-23, each of the metrics, whether it’s actually unemployment rate, whether it’s labor force participation ratio, whether it’s worker population ratio, all these metrics, we are better off now compared to then. And even in terms of the quality of work, for instance, salaried class, basically that salaried and wage, those who draw regular wage, that has increased as well. So I think overall that’s why it’s important this kind of data is spoken about because it has not been the case. Many people say, “Oh, jobless growth.” That has not been the case over the last 10 years. That’s a response to the first part of your question.

The second part I think you talk about AI. And that’s a very good point. I want to refer our readers to a couple of chapters in the book. I’ve covered this in extensive detail because this is a fear that exists. There is a paper, and I cite that, written by two authors from MIT, Daron Acemoglu and David Autor. They start out by basically looking at the U.S. census data in 1960 and 2020. They look at professions that were there in 1960. What has happened to those professions in 2020?

Now over the 60 year period, there’s been a lot of technological change that has happened. You know what they find, and I think that is quite interesting for us to remember, is that of the 40 broad professions that were there in 1960, only one of them is not there in 2020. And which one is not there? It’s elevator operators. Because now it’s automatic. Two, three, four sectors have had some change. Like typewriters for instance, now replaced by computers. But so nature of jobs changes. But it’s not that there’s been significant job loss.

Even for instance, if you take something as common an example as ATM, for instance, when the ATM machines came, people said, “Oh, tellers will lose their job, there’ll be job loss.” If you look at it just as a snapshot, basically physical teller being replaced by the ATM machine. It looks like there is a job loss, but if you look at the entire supply chain then it’s not obvious because ATM machines actually have to be produced.

PALKI SHARMA: There’ll be newer jobs is what you’re saying.

KRISHNAMURTHY SUBRAMANIAN: Not just newer jobs, there’ll be change in jobs. I think technology does change the nature of jobs. It’s not obvious that it necessarily leads to significant job loss. That’s the point that I’m making here. And I think when it comes to AI, this is where the difference will be. Every other technology that basically preceded AI really changed the nature of blue collar jobs far more. But AI will actually have an impact on some of the white collar jobs.

For instance, things like software developers. I’ve been using ChatGPT now for instance. ChatGPT, I just give instructions in English and it generates Python code for me or I can actually choose if I want C code, whatever, I can actually generate that. So as a result what you see is that the impact will be far more on white collar jobs. There’ll be a change in the nature of those jobs, but I don’t think what research seems to suggest will be there’ll be job loss as such.

So in this area generally there’s either people respond either complacently or people respond with some fear, fear mongering. But I think the reality is far more nuanced. Actually it’s not as bad. There’ll be transformation in the nature of jobs, but I don’t think there’ll be job loss as such.

And from the Indian perspective I think I see it as a significant opportunity here for two reasons. One, the kind of data infrastructure that we’ve created especially for the public infrastructure, we have data on various things and that becomes a wonderful oil for AI. At the same time actually we are a country which speaks so many languages we have actually and use of AI can facilitate economic transactions which is across states as well, if you utilize that well. So I think there is an opportunity here which India can utilize in an unprecedented manner much more than other countries given the sort of some of the enabling factors we have.

Breaking Free from the Middle Income Trap

PALKI SHARMA: Right. And as we grow, our middle class obviously is expanding, but so are the challenges, inflation, taxes and so on. And you’ve talked about it in the past about being caught in a middle income trap. How can India ensure that we break free of it?

Economic Policy and the Middle Income Trap

KRISHNAMURTHY SUBRAMANIAN: So actually, you know what I’ve written about in the book, this is I think chapter four or five in the book – the middle income trap. Research talks about the middle income trap. And I remember for instance in 2018 when I’d taken over as chief economic advisor when there was a growth slowdown because of all the financial sector problems, there were a few people who said that India is hitting the middle income trap. I said there is nothing structurally wrong and India is not hitting the middle income trap, which is what growth actually clearly reveals. 8% or 7% plus growth is not middle income trap.

I think it’s important to understand that the definition of middle income countries itself has been done so broad. It’s almost like from I think $3,000 to maybe even $2,000 to $20,000. So that’s a very large range. Even if let’s say a country grows its GDP per capita by 5, 6 times, it still is a middle income country. In other words, if you make the definition so broad that despite large growth – five, six times – you still remain in that same bracket, then it becomes actually tautologically laying out the middle income trap, if you will.

And I think it is also – I’ve shown in the book – if you look at the transition of countries from let’s say lower income countries to low middle income or even upper middle income, there has been adequate transition as well. So the thought that India actually, or that the middle income trap is something that is a very, very large trap and possibility of India getting entrapped there is very high, I don’t think that is the case. That’s point number one.

Second point is if there are some lessons, there are some countries that have been caught in this trap and especially Latin American countries, I think there are important lessons that India can draw from them. And I’ve laid those lessons out in that. And I think what I want to highlight is that importantly for India, as our GDP per capita grows as we become more and more developed, we have to continually refine our economic models.

The PLI Scheme and Economic Evolution

For instance, just to give a very specific example, now the production linked incentives PLI scheme is being used and I think it’s an important aspect because from moving from the current equilibrium where manufacturing basically policies are not as amenable to one where actually there’s more enabled, there’s a bridge that enables us so that our domestic firms and other firms actually can focus on manufacturing. It’s right for now. But you know, this is not something that should be continued ad infinitum.

And that is important because what happens is when subsidies are given, I think it should be given at this point in time. But later, you know, there will be a constituent that actually will benefit from it and they will protest when the time is right for these benefits to be taken away, it should be taken away.

And I think at some point in time, I’ll give you an example just to illustrate this point. I mean, I’m sure you’re a parent. I’m a parent too. If for instance, somebody says, “Okay, you know, my 18 year old wants to go and wrestle with your 5 year old,” I will say, “No way, give me 13 more years, let me equip my 5 year old and then he or she will go and compete.” That’s the aspect. That is what basically subsidizing domestic companies when they don’t have the capabilities to compete with international firms. I think that is the part of parenting.

But at the same time, if my kid, for instance, knows that I will be there even when the kid is 50 years old to take care of him or her, then he or she will never ever develop his or her capabilities. That’s the other aspect. In a similar way, if for instance, private sector knows that these subsidies are going to continue forever, they will never develop their capabilities as well.

So both these aspects of parenting, I think are equally important for the government to focus on. On the one hand, when the domestic firms are not strong enough to be able to compete, you know, hand hold them a little bit, but that hand should be reasonably loosely held with the expectation that it will be taken away so that the industry can become capable. I think that expectation that this hand is not there forever is a very, very important expectation to set, much like a parent does. I think government needs to do that too.

These are aspects. If we don’t do that, then the risks of staying in a middle income trap is there, which is what Latin American countries, for instance, have. So in other words, I think economic policy has to be taught in this dynamic sense that what is good for the current state of the economy, the way where we are, that’s not right necessarily for years later.

PALKI SHARMA: You have to move on. Let me take your example. You said 5 year old, 18 year old, and then there are newborns like your startups and innovation and entrepreneurship is believed to be a key driver of economic growth. We had a very good scene going then post pandemic we saw some disruptions. People talk about a funding winter. There is enough and more talent in this country, but there have to be some cushions in terms of policy and support from the government. What do you think can be done to help these players in India to insulate them from shocks?

Entrepreneurship and Innovation Ecosystem

KRISHNAMURTHY SUBRAMANIAN: So I think, see again, a very nice question which actually I’ll have to answer at least. There are two, three aspects that I want to highlight. First aspect is that entrepreneurship in and itself, intrinsically there is risk involved. I think that’s the nature of the beast, if you will. So while for instance the policy environment can try and reduce some of this and I think the focus on ease of doing business in particular is really critical and I’ll give you data here.

If you look at for instance from 2004 to 2014, the rate of new firm creation, I’m using World Bank data to highlight this. The rate of new firm creation annually was 3.2%. This wasn’t a period where there was actually adequate emphasis on ease of doing business, for instance. If anything, actually it became more difficult to do business during that period and that was reflected in very poor rate of entrepreneurial growth.

In contrast from 2014 to 2024, when there’s been far more emphasis on ease of doing business, the rate of new firm creation orders of magnitude higher, close to 200%. I think that illustrates clearly how critical it is to focus on ease of doing business because incumbent firms or large firms can sort of somehow circumnavigate. But new firms need things to be easy for them. And therefore one of the most important aspects that policymakers do is to ensure that for small firms, startup firms, actually doing business is relatively easy. Don’t load them with a lot of regulation. I think that’s the most important because that will also reduce the risk for them because many times actually in having to move from pillar to post, they lose very precious time and thereby lose value as well.

That’s the key aspect that I will mention now related to entrepreneurship and I think in the startup ecosystem is the innovation ecosystem as well. They’re sort of in some sense twins, if you will. So innovation and I think there’s been again some very good momentum on this global innovation index shows that in 2015 we were ranked 85th. Now we are ranked 39th. So from 85 to 39 actually is a significant move, much like in the ease of doing business rankings as well, which have been discontinued. But we moved from about 140 to 60s. And I think that’s good in this. I think the emphasis, the national research foundation that’s been created together with the one lakh crore, one trillion rupees that was allocated in this budget. I think that is something which is quite important.

Private Sector’s Role in R&D

And that brings me to the third aspect that I want to focus on here, which is the role of the private sector in innovation and entrepreneurship. So if you look at the composition of the R&D dollar, or the R&D rupee, if you take India, for every 100 rupees that is spent on R&D, 2/3 comes from the public sector, 1/3 from the private sector. Same thing if you go and look at, in the advanced economies, $100 that goes into R&D, 2/3 comes from the private sector and 1/3 from the government. So it is exactly flipped.

And this is therefore a message to India Inc. For them to actually focus on innovation and entrepreneurship. They have to now have the mindset that they are basically on a treadmill where they have to continually innovate in order to stay where they are. They cannot be just basically myopic and say, “I’ll just focus on the profits here and now.” With the kind of entrepreneurship that is happening, if they don’t innovate, their business basically will be taken away by startups.

So I think the focus needs to be on for incumbent firms. In fact, one other idea that I want to actually lay out for India Inc. Which is in the US and in some of the advanced economies there has been this phenomenon of corporate venture capital. For instance, you have a Dell, let’s say, creating Dell ventures, others similarly, I think many of our corporates need to create these venture firms as well, take some profits out. And that can be really important as well, because carving it out and creating a startup kind of ecosystem there, some of the ideas there can be then onboarded onto their firms and that can really help.

So overall, I think the government needs to just ease doing business because that really impacts, reduces risk as well for startups. Private sector needs to start really getting into the R&D scheme of things. We have a few sectors, IT and maybe pharma, but other sectors need to start competing with the, you know, it’s not enough for them to actually just basically applaud saying that, “Oh, you know, our Olympians are the best, our chess players are the best, our cricketers are the best.” We need to start asking and actually, and I’ve in fact tweeted as well, saying our industry needs to also start being best in the world. As they say, imitation is the best form of flattery.

PALKI SHARMA: Right. The other challenge, since we’re talking about challenges and what we need to fix in order to achieve the goal that you have set for the rest of the country is skill development. You spoke about ease of doing governance. That’s something that this government at the center has been talking about from the word go. Skill development is another policy intervention that they have, they say they’ve championed but a lot more needs to be done there. How should India approach this?

Skill Development and Demand-Side Training

KRISHNAMURTHY SUBRAMANIAN: I think, you know, there has been effort on this, but I think the effort has not yet yielded the results that we would like. And I think the focus on demand side scaling and I think the emphasis in this year’s budget, there are some promising avenues there I think which can be built upon especially for instance this internship program.

You know, I’d be watching keenly how that goes because internship, all of us have actually done our internships when we interned at a firm, we did learn some important skills. Not just skills, but also how to work in the culture of that firm. And I think those are if for instance, let’s say a youngster now goes and works in a top 500 firm, now just the experience of working in a top 500 firm, some of them may get hired by the best ones, will get hired by the top 500 firms, but these interns actually can be hired by other firms as well.

And I think in that sense actually it will be skilling that is on the job and it will also be more demand driven because the firm is going to only skill the intern on things that they want basically. And that’s why it enables demand side skilling. I think that’s the aspect that has been in my opinion sort of had been missing earlier. I think the internship program is certainly it looks to be promising from the perspective of skilling being driven by demand side also.

Focus on ITIs and Manufacturing Skills

At the same time I would also focus on the ITIs a lot. We talk a lot about the IITs and I think IITs are important of course, but the ITIs are as critical because that’s where the skilling actually for manufacturing needs to happen. And I think here a policy which brings together firms that will hire from these ITIs. They should be given the opportunity to set the curriculum and maybe a franchisee model as well.

For instance, why shouldn’t some ITI maybe called basically Firm X’s ITI or you know, so they get to set the, you know the. Or they said to, you know, they have the opportunity to shape the teaching agenda there and then they in promise for hiring from there. So I think that brings in sort of the brings the demand and supply together like that. I think focusing on ITIs, I think will be really useful for India to up its skilling game because that’s something that is really critical for job creation in the economy as well.

PALKI SHARMA: Right. A lot of India’s neighbours are dealing with very high debt burdens and they invariably turn to the IMF, which is called the lender of the last resort for a reason.

KRISHNAMURTHY SUBRAMANIAN: It is the lender of the last resort.

PALKI SHARMA: It is. Right. So as an executive director of the IMF, what is your advice to these countries that often find themselves in the Chinese debt trap?

Managing Debt: The Key to Avoiding Debt Traps

KRISHNAMURTHY SUBRAMANIAN: So I’ll speak about the portfolio of countries that I handle and I think the important lesson there is to make sure that good economic policies are implemented. And I think when debt is taken to do revenue expenditure or sort of give freebies, that is what typically leads to the debt trap. And I think this nuance needs to be understood very well.

If you look at India for instance, during COVID India did increase its debt to GDP. At that time we had written in the economic survey saying that India’s debt to GDP will come back to 80%. Why? Because that debt that was taken was actually to invest in capital expenditure.

When debt is taken for asset creation, I think that is infrastructure creation that aids to, that enables growth in the country and that’s good. But if debt is taken only to sort of provide subsidies or provide, you know, let’s say invest in ungainly expensive expenditure that does not lead to value creation, then that is what is basically a recipe for a debt trap. And I think that’s the important aspect that must be mentioned.

And also if you look at many times, you know, when countries have taken debt to fund sort of do revenue expenditure, there’s also an aspect of governance that’s been involved too. And I think that’s an aspect that countries need to focus on as well.

Overall, I think in general managing the fiscal situation in a way that any debt that is taken is actually used for gainful purposes, I think is the most important lesson to take. Because the reason I’m pointing this out is, you know, many times when you look at the narratives, the narrative is “all debt is bad.” No, all debt is not bad.

Actually, debt that is taken, I think even at the household level, if I’m actually, let’s say, borrowing to go on a vacation, obviously I’m actually sort of setting up myself for a debt trap. But if I’m borrowing, let’s say, to buy a house or maybe if I’m buying a car, for instance, which enables me to become more productive on my transportation or a two wheeler. If it leads to asset creation, whether it’s at the household level or the country level, I think that is something that is good. And that’s the lesson that all countries need to keep in mind from the perspective of debt traps.

IMF’s Approach: Necessary Medicine or Harsh Treatment?

PALKI SHARMA: I think that’s very sound advice. We’ve all seen a pattern of sorts emerge when a country comes to the IMF, say in Africa or South Asia. The advice is to implement austerity measures, to cut down on the freebies and to increase taxes. But in the short term it leads to more pain for the common man who then protests and it leads to political instability or challenges for the government of the day, which then focuses all its energies on being in power and retaining the seat rather than actually fixing the economy.

And so a lot of these people start thinking that China is a better option because they’re not asking so many questions and it sort of becomes a vicious cycle. Do you think that the IMF could also relook at its approach? Do you think it’s harsher with countries, especially of the Global South, when it comes to dealing with their debt?

KRISHNAMURTHY SUBRAMANIAN: So, you know, I can speak for the portfolio of countries that I am in charge of. And I think the important aspect that must be kept in mind is that many times, you know, the medicine that is being given is medicine that the government or the, you know, the government of the day should have implemented much before, you know, otherwise the problem wouldn’t have happened.

Think about it actually, where let’s say, you know, you became sick and you go to a doctor, the doctor gives the medicine. You don’t blame the doctor for, you know, for having given the medicine. And that medicine may be bitter medicine, but that is something that is required. You thank the doctor for having diagnosed the problem and then said, “Okay, give you the medicine” and also said that “you have to eat it, otherwise you’re not going to get better.”

So I think it’s important that as we were speaking earlier as well, many times these countries actually take debt to do spending that is not optimal. And that is what leads to these problems. And I think in the role as a lender of last resort, basically the fund, in the context of the countries, at least that I speak for, is being a doctor that is basically administering the medicine that is necessary.

PALKI SHARMA: So I think the IMF should remain the dispenser of the bitter pill.

KRISHNAMURTHY SUBRAMANIAN: Well, let me put it this way. Many times when you want some tough things to be done. For instance, actually, typically if you can prevent some disease on our own, we don’t go to a doctor. We take care of that ourselves. It’s only when you know, as they say in Hindi, “pani upar se guzar gaya,” you know, when things have gone far, too far, too ahead, that’s when you go to the doctor. And at that point in time, I think you need to take that medicine to be able to get well. So that’s the way I would characterize this situation.

Looking Ahead: India’s $55 Trillion Vision

PALKI SHARMA: Right. But we are like, I’m glad we could cover all the points that we did. And even if the IMF is doing what it’s doing, I think your prediction for India, the targets that you stretch, goal, as you call it, $55 trillion for 2047. I hope we have a conversation a few years down the line to take stock of how we progress there. But thank you very much for sharing your thoughts and your ideas with us here.

KRISHNAMURTHY SUBRAMANIAN: My pleasure, Palki. It was thoroughly enjoyable having this conversation.

PALKI SHARMA: Likewise.

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