Capitalisn’t: Raghuram Rajan’s Vision of an Indian Path to Development

Raghuram Rajan: I really think India needs to rethink its development path. And I think if it does all this, here is a coherent path which is different—I want to emphasize—from the path we are currently on.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: During the last couple of years with Bethany, we have focused on the interaction between capitalism and democracy. At the end of the 20th century, this combination looked triumphant. As the Berlin Wall was crumbling down, capitalism and democracy were spreading the world over.

Now that we are approaching the end of the first quarter of the 21st century, this relationship looks much more problematic. Democracy is in retreat and basic democratic principles are questioned, even in the ultimate cradle of democracy, the United States of America.

If this was not enough, the enormous economic success of China makes people wonder whether democracy is an obstacle to development. I regard democracy as a value regardless of its economic effect. And I think that you, Bethany, feel the same, don’t you?

Bethany: I do, although it’s sometimes hard for me to know if I feel so strongly about it because that’s what I grew up with, and I don’t know anything else, and I’m naturally a defender of it.

Then, I also wonder, as you and I have explored a lot on this podcast, the ways in which supposed democracies, including ours, are not really very democratic and the ways in which they become corrupted. And so, I also worry about the gaps between the values that both democracy and capitalism espouse, both of which I’m big believers in, and then the reality as they are practiced.

Luigi: Yes, but actually, I regard democracy, i.e., the ability of people to express their opinion and to influence the direction of the government, as a value per se. Even if you were to tell me that you lose a little bit of GDP by being democratic, I would prefer to be democratic over nondemocratic. Now, if the question is whether you’re starving, that’s a different story.

Bethany: Yeah.

Luigi: I think that other people have started to question whether maybe there is a trade-off between being free and being wealthy. The success of China really makes people wonder, and the natural comparison is India. India is now rising very quickly and is currently the fifth-largest economy in the world. They recently passed the United Kingdom, and as you can imagine for Indian people, that’s a very important step. But according to the FT’s chief economics editor, Martin Wolf, by 2050, the Indian economy will be 30 percent larger than the US economy, at least in purchasing power parity.

Bethany: I think that’s why you see so many large corporations, from Netflix to McDonald’s, localizing their content for the Indian market. But India just recently overtook China to be the world’s most populous country, and it’s still extraordinarily young. And so, I think the question remains if India has achieved its growth because of its democracy—and India has been a democracy since independence—or despite it.

Luigi: And, of course, a lot of people are asking the question, is it the fault of democracy that India fell behind or not? One interesting statistic is that in 1960, India, China, and Korea had the same GDP per capita. Today, China is five times as wealthy as India. This is really remarkable, and it makes people question, should India give up democracy for prosperity?

There is no better person to address this question than Raghuram Rajan, who is not only my colleague at the University of Chicago, but more importantly, was a former governor of the Reserve Bank of India, which is the Indian central bank, and a very informed and acute observer of the Indian economy.

He just released a new book with a younger colleague, Rohit Lamba, and the book is called Breaking the Mould. The subtitle of the book reveals a very ambitious goal, which is “Reimagining India’s Economic Future.” The main thesis of the book is that India is now trying to emulate the path to success that China followed, and so many other so-called Asian tigers followed, but the book says it’s too late to follow that path.

The persistence of China and many other China-like developing countries in the low-skilled manufacturing sector, and the competition coming from automating manufacturing, make the traditional path of specializing in low-skill manufacturing, then working your way up, not feasible. One of the things that the book points out is that if we plot the value added per employee against the value stage or value creation, we get a smile-shaped curve. So, value added is very high in the design phase, low in manufacturing, and very high again in distribution.

Just one statistic the book reports that is very interesting in this dimension: Apple, which does not produce anything but only designs and distributes, today is capitalized at roughly $3 trillion. Foxconn, which produces the iPhone and specializes only in manufacturing, is capitalized below $50 billion.

Bethany: Part of the core argument in Raghuram’s book is that pursuing the manufacturing way to development by subsidizing new plants is hopeless for India. It’s unable to provide a young generation with enough jobs, and those jobs will not be that well paid. So, his argument is that the future is in service, and India, which has demonstrated excellence in a number of sectors, like software and consulting, should aggressively pursue the service route. This gets to his defense of democracy because he argues that this requires freeing the creative spirit of Indian entrepreneurs, and so, it can only be pursued by making India more, not less, democratic.

But Luigi, we could keep talking forever. Let’s discuss these ideas with Raghuram himself.

Raghuram, just to set the stage as we get started, how would you describe India’s economy today? Would you say it’s successful? Would you say it’s in a good place?

Raghuram Rajan: Well, it stands out as one of the few fast-growing economies in the world today, but that’s a headline number, and we have to look beyond that. One of the big concerns for Indians is jobs. Even at this pace of economic growth, around 6 percent, 6.5 percent, if you look at an annualized basis, India is not generating enough jobs. What seems to be going on is really that the higher-end firms, the more capital-intensive firms, are doing very well. What is not going so well is the small and medium sector, which is often the job-creating sector in the economy.

Luigi: One of the many things I find interesting in your book is the intersection between economics and politics. When you discuss the India you imagine, the Indian path to development, democracy plays a critical role. To what extent are the institutional features and the economic features interconnected?

Raghuram Rajan: I think hugely. We are making the argument that without emphasizing human capital, without increasing the investment in education, in healthcare, in nutrition, it’s going to be very hard for India to elevate the quality of jobs in its workforce. Already, with automation taking place, even in large firms in India, it’s harder to find good-quality jobs for the average worker.

As we see automation take place in more of the world, as robotics comes in in a bigger way, you will have to upgrade the skills of the workforce to manage the robots rather than to do the work instead of the robots. Similarly, when we are thinking about artificial intelligence in services, you have to be at a higher plane in terms of creativity, in terms of innovation, in terms of ideas.

The last aspect of development we emphasize over and above human capital is that, today, the highest-value aspects of the global value chain are in creating the intellectual property, in creating the ideas, creating the products, designing the products, and for that, again, you need to elevate the quality of human capital in India.

How does all that happen? That happens typically in an environment which is more open, more democratic, more open to free exchange. But we argue democracy is critical from at least two other angles. One, bottom up. If you are a parent who’s sending a kid to school, and you want to protest against the quality of the school, you should have the strength of conviction as well as the protection that comes from a democracy to be able to protest. It shouldn’t be easy for the village authorities to slap you down. The second aspect is, for governments which are trying a new path, democracy allows for transparency, allows for data to inform people, allows for criticism to happen, and allows governments to change course.

Bethany: Would you argue that even though it may look on the outside, based on China’s growth rate over the last bunch of decades, that their approach, a more authoritarian approach, has been more successful, it’s not all it’s cracked up to be? Or that those numbers are misleading, or that perhaps with the advent of AI, that’s all about to change, and democracy is going to become even more important?

Raghuram Rajan: Well, I think China is a real thing. It has done fantastically well over the last four decades, but I don’t think it’s an example to emulate for a couple of reasons. One, we don’t have the strengths that China had, including the strength in terms of education, mass education, which China had when it started, but also its ability to impose certain costs as well as certain outcomes on its people.

For example, land acquisition is tremendously easy in China. Just take it because it all belongs to the state. Try doing that in India. Impossible. If you want to build out infrastructure, it takes a much longer time. China built a huge high-speed railway network in the span of close to a decade. We’ve spent about that much time trying to get one railway line from Mumbai to Ahmedabad, simply because we can’t do the acquisition of land in appropriate time.

We are very different countries. The China path of export-led manufacturing growth is closing rapidly. How much is the West open to another 1.4 billion-person economy trying that? We also have a whole bunch of China me-toos. Vietnam is following pretty much the path China did, and China is still there on that path. China has not moved on, taking much of its population out of the low-value-added manufacturing to high-value-added. There’s still assembly going on in China, so you cannot, at this point, take that path as easily as China could 30 or 40 years ago.

You have to find a new path, and this has to build on India’s strengths. We’ve already talked about democracy. We need to strengthen it rather than weaken it, as we sometimes do now, but we also can build on the culture of debate, and also the willingness to take a different path. India has focused on services. You can see some enormous success stories in services today, including providing direct services to the West. So, I think these are parts we can build on very effectively.

Luigi: Now, in the United States, when we think about Indian people, we think about extremely successful people like you, Satya Nadella, and lots of very successful leaders. However, what is striking looking at the statistics is how behind India is on education. As you said, it was behind in 1960, but it’s still behind today.

Tell me if my statistics are wrong, but what I read is that if you look at the people above 25, basically almost a quarter are still illiterate, another half do not have a high school degree, and then the rest are the India we know, to some extent. My concern is that even if you were God, and you could transform the educational system overnight—which probably not even God could do—and train the new generations in the best possible way, you have a stock of people, three-quarters of a population, who are really, really behind, and it’s hard to educate them. What do you do with them?

Raghuram Rajan: You’re right, and some of the numbers are worse than you think because you said 25 percent are college educated, but of that 25 percent who are college educated, the quality of colleges varies considerably. We cite a survey in our book which says 50 percent of college graduates are unemployable.

For those who have already received some education, remedial education or reskilling or upskilling is quite possible. That, we need to do. I think for those whose brains are stunted because they had malnutrition as children, it’s going to be harder. Today, India has a malnutrition rate of 35 percent. That’s horrendous and above a number of countries in sub-Saharan Africa. Of course, this varies across India. In Kerala, it’s 6 percent, at OECD levels. In some states in the east, it is 55 percent, which is among the worst in the world.

But what we’re saying in this book is, let’s wake up and recognize that so many Indians will not have a chance going forward unless we make a change today. Of course, what the elite Indian would like to hear is much more about how we reached the moon, and we have. But those stories don’t actually compensate for the fact that the average Indian is actually not doing that well, and that’s what we need to also focus on, even as we create more Satya Nadellas and Sundar Pichais.

Bethany: No matter how good your plans for future education are, you’re still only likely to affect the younger generations. What do you do with the adults who are probably going to remain uneducated until they die, and especially with the advent of AI, what kind of jobs are available to them now and in the future?

Raghuram Rajan: Well, that’s sort of a little bit of the tragedy. The fastest-growing job in India was that of security guard. There are jobs like that. It is possible, and this is where I think automation sometimes helps, where machines are simple to use, and so, a man or woman with a machine can actually, even with very moderate skills, do a lot of work.

One example is these sweeper trucks. Historically, you used to sweep with your hands, but if you have these vacuum trucks, and you basically know how to drive, much else is taken care of, and it still is a very valuable thing to have a human behind the wheel. We still haven’t gotten to the point where we can fully automate those. I think, over time, some of these jobs will have to be what occupy people as they come out of agriculture. Now, any of these jobs actually generates more productivity and value added than staying in agriculture and being the sixth person on a small field, when the field can really employ one or two.

But I think, over time, we have to invest tremendously in upskilling, adult education, and remedial education, retraining those who’ve gone through college but haven’t really learned anything. There’s a huge industry that is emerging. This itself is a source of employment. There’s a huge industry emerging in India in these kinds of things. As soon as machine learning becomes a big thing in the US, there are a ton of small shops setting up in India, offering machine-learning courses. They’re of variable quality. I think the government can help if it can cleanly and transparently certify quality, but the private sector is willing to step up and ramp up in these kinds of situations, and that can also help with the adult-education piece.

Luigi: Actually, if I may, having read your book, I would have answered in a slightly different way. Let me try, and feel free to trash what I say. It seems that there is no doubt that formal education is not super pervasive in India. However, I think people have other skills, and I always found people in India fantastic in many dimensions. The question is, how do you exploit or take as an opportunity those skills that they have?

There is an example in your book that I really like. Why can’t India launch a sophisticated fashion industry or sophisticated craftsmanship? At some level, the skills that built the Taj Mahal are still there in some form or another. This is not formal education. This is maybe transmitted from father to child or mother to daughter, but they’re still there and can be exploited. As can tourism, and I think India is a fantastic country to visit. At the moment, it is mostly focused on very high-level tourism, and most of this high-level tourism is actually dominated by large multinationals.

But I think that with a better system you could have accessible Indian food. I love Indian food, and my temptation would be to eat off the street. Unfortunately, if you do that, most of the time you get sick. But not because it’s poisonous, it’s because our stomachs are not ready for the Indian bugs. So, trying to take advantage of these skills in the 21st century, I think that should be a part of your plan, and I think it is, but I would like you to elaborate on this.

Raghuram Rajan: You’re exactly right that our plans are not just about exporting services or services into manufacturing. It’s also about services within India. We have a whole bunch just along those lines. One you mentioned was handicrafts. Now, handicrafts are dying out in some parts, but there are superb handicrafts available across the country. Kashmir has a fantastic history of handicrafts. If you can popularize those, create brands, assure quality . . . One example we talk about in the book, which you mentioned, is this firm which looks at weavers of Banarasi saris. What is interesting is, why don’t they actually take risks? Why do they have the sameness in quality, which is then easily replicated, and you have fake products?

The reason they don’t is because they have to take the entire risk of the sari themselves. For a sari, they work three months on it, and then if it turns out that it doesn’t sell or there’s a small defect or something, it’s a huge risk. So, they’re very, very conservative. But once you say, I’ll take the risk, you just produce saris, you suddenly see a whole variety of new designs coming out, and this brand Tilfi is trying to do that. That’s an example of how you can market skills which didn’t exist before, create a worldwide market for it, and then expand while maintaining quality control and offering new designs.

In healthcare, there are these sort of barefoot doctors in India who basically used to work in a pharmacy and know the various diseases and know what is prescribed, and they start a business as your local doctor. They have no certificate, no nothing, but people trust them. Well, why not upgrade their skills? Give them a manual of 18 common diseases. Let them identify them, test them, give them a certificate, let them be able to prescribe, and then let them know what they don’t know. If they don’t know what it is, let them push people up to the next layer.

You immediately create much more healthcare for people than there is now of better quality. But that requires the medical association to accept that, in fact, these guys can prescribe. We need to make some advances there, but that’s a huge source of employment. There’s a lot more that can be done.

Luigi: What I got from your book is that one of the important things is an issue of priorities because of course, it would be nice to do everything. In the United States, when they sent a man to the moon, they also started the War on Poverty and all these things at the same time because they were much richer. What I did not fully appreciate until I read your book is how much these priorities do matter because I got from you—and correct me if I’m wrong—that the amount of subsidies that just one chip manufacturer got for 4,000 or 5,000 jobs had the same cost as a third of all the budget for the IIT, which is the most prestigious school.

Raghuram Rajan: It is worse than that. It’s the whole central budget for higher education. It’s one-third . . . I mean, this is $2 billion. We don’t spend a huge amount on higher education. We should probably spend much more, but the subsidy to Micron to build a factory in India, which is coming from both the Gujarat government and the central government, is $2 billion out of the $2.8 billion investment.

This is a prestige project. It’s one of those which you think will bring an aura to the country because we are manufacturing chips, but of course, these aren’t state-of-the-art, H100 Nvidia chips. These are just ordinary chips, often not the logic chips that everybody cares about. These could be memory chips and so on.

But the bottom line is that you’re spending so much on that. Why not spend that on schools, on colleges, on universities? India doesn’t have one university in the top 100. If you are trying to move up the creativity ladder, if you are trying to build drug patents, new drugs, as opposed to generic, me-too drugs, it’s high time we moved up the ladder.

If you’re trying to do AI, you need top-quality universities. Spend money on chip design rather than on trying to bring chip manufacturing to India, which anyway . . . And this is the thing that I find hardest to explain to people. You’ll never be independent in terms of chip manufacturing, no matter what you do. For machines, you need ASML in the Netherlands. For any kind of chip input, you require the rest of the world because India doesn’t have a lot of silicon and this and that that it can use in chips. For most of the intermediate products that go into chips, you’re going to rely on the rest of the world.

It’s not that this is a strategic choice that you can become independent of the world simply because you have a Micron factory. You’re still going to be dependent for every chip that is more complicated on the outside. A better way to ensure national security is to be friends with everyone rather than try to build your own supply chains.

Bethany: This is a bit of a tangent from your book, but is there a broader lesson in that, as we’re all talking now, at least in the US, about bringing semiconductor manufacturing back here in order to ensure national security? Is there a lesson in the “be friends” approach, and is it actually maybe a good thing for the world that everyone needs each other? Is there a way to make that argument in a utopian kind of way?

Raghuram Rajan: It is naive to make that argument saying, OK, it’s all going to be concentrated in Taiwan, and the rest of the world will be dependent on Taiwan, and then we hope and pray that Taiwan never gets invaded, right?

Bethany: Right.

Raghuram Rajan: I do think that it is important to also center that chip manufacturing elsewhere, so that in case something bad happens, you have alternatives. I don’t quarrel with the fact that the West wants to build independent factories in the United States, getting TSMC from Taiwan to build in the US, getting Samsung and even Intel.

What I do worry about is India trying to do it when it’s at this point so far behind, but also because of the cost. Any factory worth its name and size is going to cost $20 billion, $30 billion. That’s how much is being spent on the Intel factory on TSMC. And at the end of it, what you’ll do is replicate something that’s already elsewhere.

For India, it makes sense to free ride on the West. Maintain good relations with the West and buy our chips from the West. Spend more money on chip designers. By one metric, 20 percent of chip designers are Indian. Why not make it 30 percent or 40 percent? Be the Nvidias of the world. It’s also going to take some time there, but by being that rather than the TSMCs of the world, you actually increase value by doing that.

Luigi: Speaking of successes, one of the big successes of India that maybe our listeners are less familiar with is the uniform payment interface and the so-called stack system that I learned from the book that you had some part in launching. It has become, in my view, the best standard around. In fact, when I was in Italy and there were people collecting information for . . . Mario Draghi’s new task is to give suggestions to von der Leyen and to the European commissioner about what the technology strategy is for Europe. I said, you should ally with India because they have the best framework. Can you explain what this is and why this is so fantastic?

Raghuram Rajan: The UPI, universal payment interface, works on what is called the India stack, and it’s the brainchild, in many ways, of Nandan Nilekani. It’s a public interface owned largely by a whole conglomerate of banks. If I have an account in a bank, I can transfer money to you, who have an account in another bank, using a third bank’s app or a third party’s app, and it’s basically interoperable to the nth degree. Information can be collected on payments, et cetera. That can also be transferred based on whose information is collected.

It is actually a very vibrant and versatile structure. As I write in the book, the one decision I had to make was, really, should we allow the banks to monopolize this, which they were very eager to, or should we bring in the nonbanks? And Nandan was very, very emphatic that the nonbanks were important because banks would kill the innovation. And we managed to persuade the RBI staff that that made sense.

I looked at the numbers a few days ago. It turns out we are about 10 billion transactions a month. That is billion with a B. In India, you see beggars, street vendors, all of them have the QR code, so you can make transfers to them directly at short notice.

What is interesting is 95 percent of these transactions are done by the nonbanks. Clearly, the banks haven’t moved fast enough. In fact, now they’re using the regulatory route to say, hey, you nonbanks, you are occupying too much of the territory. We need to cut you down to size. But the bottom line here is competition works, and it worked effectively here.

The last point I’ll make is, what is interesting is India is rightly saying here, we have a nice set of structures we can teach other countries how to use. Countries in Africa can do this very effectively. What is important is India has created a separate sort of outfit to do this. And I keep saying that it will be especially beneficial if India can assure other countries that it’s not going to use this technology transfer as a backdoor way of spying on them or generating data on their citizens that can be misused. Having privacy laws, having protection, will make us a much more confident and reliable ally to those countries than superpowers who don’t have those constraints on themselves. Democracy will help.

Luigi: If I may say, this is where I think the alliance with Europe is a match made in heaven because Europe does not have a platform like this. It has a very strong privacy rule and a desperate need to adopt a platform like this. Europe and India are natural allies in a world that is divided between China and the United States.

Raghuram Rajan: I couldn’t disagree with that. I think it’s important to explore. I mean, this is why an open India, an open, democratic India, I think would be a big player, an important player, but we need to work on all these elements.

Luigi: Now, one of the side effects of the stack system and in particular of the Aadhaar, the anthropometric measures of identity that it is based on, is that it made it easier for the government to do direct transfers. During COVID in the United States, we experienced these difficulties that the government had some physical inability to transfer money fast to individuals. I think the beauty of the Aadhaar system is that you can. The problem is that you can. And so, it seems that the government tends to abuse that by doing direct transfers everywhere. Because if you’re running an electoral campaign, there is nothing as big as having a few extra dollars or rupees in your bank account.

If you think it’s just the Indian government, I can tell you that the Italian prime minister at the time, Renzi, did the same before the European election. He put 60 euros in the pocket of every Italian and won that election by a landslide. On the one hand, this seems like the nightmare of conservatives that once you enable the transfer, you make it more diffused. But there is a huge cost of transfer in a country like India. Good transfers to people who really need them are fantastic, but they have a budgetary cost, and they replace other government expenditures. To what extent does the combination of a system that is based on this welfare transfer in a very democratic country induce an economic policy that is not sustainable in the long term?

Raghuram Rajan: It is a very real concern because what we are seeing in the most recent state elections is that parties are competing with each other to give these transfers. At some point, you bankrupt the state through transfers. I’m not denying the need for targeted transfers to the poorest because if they have cash in their hands, they become a different person. They can actually change their consumption basket in ways that are better. They can maybe send their kid to a private school. At least, they should have the choice relative to the public school.

The problem, of course, is when it becomes the only thing. And what is important is that public services in India have been the orphan child. You haven’t got good government schools; you haven’t got good government health clinics. Part of the reason is that India’s very much centralized. These services don’t decentralize to the local level, to the municipality level, to the village level. They’re all commanded at the state government level. The state of Uttar Pradesh is 240 million people. That’s one state, and everything is run from the capital, Lucknow, which means that at the local level, who do you complain to when your teacher doesn’t show up?

We need far more decentralization. One of the big points in the book, as you mentioned, is how the politics and the economics come together. With decentralization, you can get better public services, which then can lead to better, improved human capital. The one state which is decentralized is Delhi because it’s really a city, and it’s about as big physically as, say, a district in India. Delhi has focused on improving schools, on improving healthcare clinics, and has done a very reasonable job there. But that’s an example of how decentralization can actually improve social services.

Bethany: Let’s see. I would ask then, as the last question, about how you think Western business should engage with India moving forward, keeping in mind that there are a lot of US-based businesses who are expanding in India. I was actually just talking to David Solomon at Goldman Sachs about how much bigger Goldman’s office in India is now than it was when it was first opened in 2007. What do you think the lesson is for US businesses?

Raghuram Rajan: At this point, many are going in looking for exactly what Goldman is looking for: smart engineers, MBAs, to do some of the stuff they would find it more costly to do in the US—build programs, build risk-management structures, build trading structures, all of which Goldman’s 8,000-person office is doing in India. I would say that’s the easiest thing to exploit right now.

But manpower is going to be an issue because there’s a huge competition for the available talent there is. This is where we keep saying India has to create more of that talent by improving the quality of its schools and colleges and service that global market.

I think, as far as manufacturing goes, infrastructure is improving in India. It will become easier to manufacture in India. But I would say that, yet again, the quality of the workforce is going to be very important over and above the infrastructure. And, of course, India has to do a better job in clearing away some of the rules and regulations that hamper business. They have done a lot, but there’s still some way to go to welcome foreign businesses.

Luigi: The very last question: This book is half a superb summary of economic-development theories and half a political manifesto. Are you providing these ideas for somebody else to carry forward, or are you planning to actually push these ideas yourself in India?

Raghuram Rajan: No, as with any academic, I’m trying to put the ideas on the table, hoping somebody will take them forward because I really think India needs to rethink its development path. I think if it does all this, here is a coherent path which is different—I want to emphasize—from the path we are currently on. I think we need to change that path because I worry about the direction we are going, both economically and politically. I think changing the path will be good for India and will be good for the world. I hope somebody takes it up, even somebody in the current government.

Bethany: Luigi, you’re very familiar with Raghuram’s work, obviously. He’s a colleague of yours. Did anything in this book or in our conversation with him surprise you? Did it seem like a continuation of his way of thinking to you? Or was there a moment when you thought, wow, he thinks differently than I thought he did after all these years?

Luigi: That’s a very good question. This idea of a different path, of an Indian path to development, I think is a new idea. I’m still struggling to put together the pieces. As with all the big ideas, there is a lot of work to be done to cross the t’s and dot the i’s. I think that this book is more of a manifesto book rather than an implementation book. But I think that it’s a very new and intriguing idea.

Bethany: Yeah, I hear you. I couldn’t help thinking as I read the book and as we talked to him that there are aspects of it that are manifesto-like to me, too, and that if India can solve the education question, then, oh my, maybe they can tell us how to solve it here in the United States.

It’s very easy to say that education is the way forward, and of course, it is, but actually making that work, particularly in societies as India does, as we do, that have legacies of racism and huge disparities as a result of that—wow, it’s difficult. But I did think as I listened to him that there are so many things that both countries can learn from each other. So many things that we can learn from India because certainly, if they can figure out the educational piece, then there are lessons that we might be able to use here in the United States.

Luigi: But I think that the educational piece might be easier, paradoxically, in India than in the United States. First of all, in India, there is enormous prestige associated with education. The average person dreams of sending the kids to the most prestigious school, which might not be true throughout America. And, number two, from what I gathered from him, the system so far has been so starved of funds that just reallocating the funds a bit might go a long way. Aren’t you shocked that one factory absorbed a third of the entire budget of all the university system?

Bethany: That was a stunning number, stunning.

Luigi: And, by the way, that factory is employing 5,000 people. It’s not like employing an army that would make you say it is worth it. In a sense, his job—and I don’t want to make it too simplistic—is easier than the job here because just the reallocation of priorities might make an enormous difference.

Bethany: I had an even more basic question, and maybe we should bring our Capitalisn’t team member in to discuss this. I was wondering, realistically, how far is India from the vision that Raghuram espouses? And what direction is it realistically going in? In other words, is it close to what he’s talking about, and is it moving in that direction? How real is the risk that it’s going in the opposite direction, and that this really needs to be a manifesto and an urgent one? We should bring Utsav in to answer it.

Utsav Gandhi: Hi, I should probably caveat first that I’ve been living in the United States for almost 12, 13 years now. But I grew up in India myself, and every time that I return to India in these last few years, I’ve seen growth in leaps and bounds, whether I go to the big cities or even if I go to mid-center or mid-tier cities as well.

Where I agree with Raghuram for sure is where he says that India is at a crossroads, firstly, and it needs to rethink its approach moving forward. Specifically, where I think his ideas are interesting are in the notions of telemedicine, for the consulting industry to move from the back office to the front office, and then maybe even exporting educational services. And I certainly think the points he makes about democracy more broadly are something we all need to keep in mind, especially as we talk about in the podcast a lot how that intersects with economic growth in general.

I was wondering if either of you would want to talk about what your personal experience has been. I don’t know if either of you has traveled to India before, but maybe our listeners would like to know what your perspective is.

Luigi: I traveled to India twice, many years apart, so my first time was in 2000, and then I went back in 2018. I did see an enormous change in the country. There is a phase of economic development where you see the change in the street. Going from $600 per-capita income per person to $2,500 means going from not having a private bathroom in the houses to most people having a private bathroom in their houses. That is a dramatic change in the quality of the street, in the quality of everything.

I think that is really the step that they made, and they’re rightly proud of that. Now, what is interesting, when I was listening to Raghuram, et cetera, I couldn’t not think about the experience of Italy because Italy at the end of World War II was a really underdeveloped country. It was an agrarian country; industry was very peripheral. In the first 20 years, 30 years after the war, there was a major transformation that used to be called the Italian Miracle. It was a huge success, based like China on manufacturing, but we actually did it as a democratic country. That was to our merit.

The problem is that we completely missed the transition. When we became a developed country, we needed to invest in the stuff that Raghuram was saying we should invest in: massive education, top education, and we didn’t do enough. And so, the tragedy of Italy is the opposite. We have not grown in per-capita income for the last 25 years. This is something that I keep repeating to people. The surprising thing about Italy is there is not a revolt yet because if you don’t see your standard of living increase, if the majority of the population doesn’t see any increase in their standard of living for more than 25 years, that’s a very long time.

Bethany: Yeah, I couldn’t help thinking as you were talking, Luigi, that maybe the ultimate lesson of this is, don’t take anything for granted. Just because you get your country or your company on the right trajectory for a certain period of time doesn’t mean anything for whether it will stay on the right trajectory. And I guess that’s obvious, but you can’t remind yourself of it too often.

Then, the other thing I thought, hearkening back to our Chile episode, both as Raghuram was talking and as you’re now talking about Italy, is that inequality really does matter in a way that is so much beyond the headlines. I think sometimes the way in which we talk about inequality does a disservice to it because we talk about it in a headline kind of way without getting at the very real instabilities and resentments that it creates.

Luigi: But it is not only the instability and the resentment; it is the wrong political choices. I think Raghuram in his book is very clear that one of the reasons why India is so behind in education is because there was so much inequality, and the rich people didn’t think that the poor people needed education. With all the negative things we can say about communists, there is one good thing: they educated everybody. Paradoxically, communist China set the perfect stage for a capitalist boom because it created education for everybody, making it possible to have the boom that we have observed since the 1980s.

Bethany: Maybe I should add another leg to that, although this isn’t quite the right way to think about it, but the relationship that democracy and capitalism have to education is really interesting, in that you need education for either democracy or capitalism to succeed. But if you really push capitalist logic, then some people don’t deserve to be educated, and thereby you undermine the very thing that gives capitalism its mojo, its ability to survive.

Luigi: That’s an excellent point, Bethany.

Bethany: Back to your point, Luigi, about democracy being a value in and of itself. I think there is a teeny bit of arrogance in that view and that it sounds like, to us, we would give up a little bit of extra wealth to preserve freedom. But for a lot of people, the increase in wealth, that dramatic disparity between India and China, it’s not the difference between having one car versus five cars or having a 5,000-square-foot house versus a 1,000-square-foot house. It’s the difference between having one bad meal or three nice ones a day. The difference between being unable to give your kids a formal education or seeing your kids graduate from college. The difference between having just one bike and having a car. And confronted with the extreme nature of those choices, many people might prefer an autocratic regime that delivers rather than a democratic one that does not.

I think Raghuram’s new book is really important because it makes the argument that I think we want to hear, that democracy is key not only to what has been achieved but to what can be achieved in the future. And I think while the book is clearly targeted to India, it’s of great interest to all of us because it really does provide an interesting lens through which to think about this very, very relevant debate everywhere, which is how a country’s government can promote economic development.

From a very parochial perspective, namely that of the US, it seems that we should care a lot about India and perhaps more so than we all do, especially, or at least it should be more in the forefront of all of our minds, given the ongoing tensions with China and the importance of India to the global economy going forward.

Luigi: Oh, absolutely. Imagine a world in which India sides with China. It would be a very difficult world to deal with for both the United States and Europe.

Bethany: But I wondered about his view of democracy and regulation. Does a democratic regime need more regulation than an authoritarian regime, or does it need less? He mentioned at the end of our conversation the need to roll back regulations in India. And so, I started to think about that as sort of . . . maybe it’s not really a third leg of this. Maybe it’s just another tangent. But if we think about this ongoing dance between democracy and capitalism, what role in that does regulation play? And if democracy and capitalism are on axes and you want to be in the upper right of a very democratic and a very capitalistic regime, where does regulation sit on that? Does that make sense?

Luigi: It’s interesting that in one of the chapters, he quotes a proverb from Ram Raja, which is from an Indian religious text, in which he says that the aim of government should be to govern well and in the best interest of the people over the long term. This should be the goal of any democratic system. Now, having regular elections doesn’t guarantee that that’s the outcome. And so, I think that the question is, when we say democratic, are we saying that they have periodic elections, or are we saying that the government is really aiming to act in the best interests of the people over the long term?

Bethany: That’s a really interesting question.