Raghuram Rajan's recipe for generating jobs

With 7 per cent economic growth, India is not creating enough jobs as reflected by the number of applicants for vacant posts in some states, Reserve Bank's former governor Raghuram Rajan said and suggested the government needs to focus on promoting labour-intensive industries to generate employment.

Rajan further said some Indians, especially those at upper level, are comfortable and have high incomes, but consumption growth from the lower half of the country has still not recovered to pre-pandemic level.

"That is the unfortunate part...You would think with 7 per cent growth, we would be creating a lot of jobs.

"But if you look at our manufacturing growth, it is more capital intensive," he told PTI.

Rajan was asked whether the Indian economy, which is growing at 7 per cent, is creating enough jobs.

According to him, the industries that are more capital-intensive are growing faster, but labour-intensive industries are not growing.

"It is not going well at the lower level.

"I think the desperate need is for jobs.

"And you can see this, forget the official statistics.

"You can see it in the number of applications for government jobs, which are overwhelming," said Rajan, who is a professor of finance at US-based Chicago Booth.

He said that in the medium term, the Indian economy will grow at 6-7 per cent.

While welcoming the apprenticeship schemes announced by the finance minister in this year's Budget, Rajan said, "But we have to monitor that very closely, see what works and expand what works much more."

Finance Minister Nirmala Sitharaman had announced in the Union Budget of FY25 that the government will launch three employment-linked schemes based on enrolment in Employees' Provident Fund Organization (EPFO).

Citing examples of Vietnam and Bangladesh, which are doing well in labour-intensive industries like textile and leather, he said, "We need to look at this (labour-intensive industry) very, very carefully, we cannot be left out."

Asked why the private sector is still lagging as far as capital expenditure is concerned, Rajan said it is a little bit of a mystery.

"When you look at capital utilisation (of the private sector), it is about 75 per cent...

"t seems as if demand has not kept up to the point where they feel they need to make all that kind of investment," he opined.

And more importantly, Rajan said, India has a short span of 15 years to reap benefits of demographic dividend and it should not lose this opportunity.

Responding to a question on benchmark interest rate cut by the US Federal Reserve, Rajan said, "The 50 basis points rate cut by Fed has given them (central banks) more room to proceed at a pace that they think appropriate."

According to him, if the Fed had not cut rates, there would be a sense that, oh, the Fed is keeping rates high, so 'we have no room to moderate our policies'.

"I think the Fed has created more room for others to perhaps reduce interest rates, and so in that sense, people will be looking at their policies," he said.

To a question on Goods and Services Tax (GST) rates rationalisation, Rajan said after a policy has run for a fair amount of time, it is useful to ask, what has been the experience and 'do we need the policy change'.

"I would try and appoint an expert committee to go into it, to take the opinions, just like the Finance Commission does, take the opinions of the various stakeholders, including the states, and come up with something that meets the needs of the country," he said.

Currently, GST is a four-tier tax structure with slabs at 5, 12, 18, and 28 per cent.

The new taxation regime came into effect in 2017.

Responding to a question about the ongoing debate on economically and socially better-off southern and western states 'subsidising' the northern and eastern states, Rajan said the Finance Commission has always been about the appropriate sort of allocation of taxes between the Centre and states.

"If India grows together, (then) in fact, it prevents this kind of conflict...

"There is the equity issue, which is that the states that are growing faster, have also in the process, typically grow wealthier.

"And that is what is happening in the case of western and in the southern states," he said.

Rajan pointed out that the western and southern states feel that they are penalised in two ways -- one is, they have to hand over more of their revenues to help some of the states who are falling behind.

"Plus, on the political front, they may lose seats if there is a delimitation process (where seats in the Lok Sabha are to be allocated based on the results of the next Census), because, you know, the more populous states will get more seats," Rajan said.

Observing that there has to be some transfers from the richer states to the poorer states, he said, "We need to bridge this gap."

Rajan pointed out that poorer states are not going to sit in isolation, they are going to buy more goods from the richer states.

"So there is some partial compensation for them (richer states)," he said, adding that delimitation can be done keeping in mind the concerns of different parts of the country.