‘Govt must focus on labour-intensive industries’: Raghuram Rajan on 7% economic growth not creating enough jobs 

Former Reserve Bank of India (RBI) governor Raghuram Rajan suggested that the government needs to focus on promoting labour-intensive industries to generate employment. 

Rajan said that with 7 percent economic growth India is not creating enough jobs as reflected by the number of applicants for vacant posts in some states. 

“That is the unfortunate part... You would think with 7 percent 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. 

The former central bank chief said some Indians at the upper level are comfortable and have high incomes, but consumption growth from the lower half of the population is yet to recover to pre-pandemic levels. 

According to Rajan, 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. 

According to the former RBI governor, the Indian economy will grow at 6-7 percent in the medium term. 

While welcoming the apprenticeship schemes announced by the Union Finance Minister Nirmala Sitharaman in Budget 2024, Rajan said, “But we have to monitor that very closely, see what works and expand what works much more.”  

In the Union Budget of FY25, Sitharaman had announced 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...It 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. 

The former central bank chief said India has a short span of 15 years to reap benefits of demographic dividend and it should not lose this opportunity.  

Speaking on the US Fed Reserve’s interest rate cut, Rajan said the 50-basis points rate cut by the Fed has given central banks more room to proceed at a pace that they think appropriate.  

Commenting on Goods and Services Tax (GST) rates rationalisation, Rajan said after a policy has run for a fair amount of time, it is required to be asked what has been the experience and ‘do we need the policy change’. 

Currently, GST is a four-tier tax structure with slabs at 5, 12, 18 and 28 percent. The new taxation regime came into effect in 2017.  

Speaking on 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. 

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 in a more sort of respectful of the concerns of different parts of the country.