Dr. Syama Prasad Mookerjee Research Foundation

Seeing without Looking: ‘Eminent’ Economists and their (Myopic) Understanding of Indian Economy’s Colossal Transformation in PM Modi’s Era

In a recent podcast in Youtuber Akash Banerjee’s Deshbhakt channel, eminent Economist  Dr. Raghuram Rajan was dismissive of India’s recent economic growth, or at least its ability to lift millions out of poverty. To quote Rajan from this interview “Parts of the Indian economy are first world. People in Noida or Gurgaon are essentially operating in a first-world economy”.

What Rajan was trying to say was that India’s growth story has been confined to a few urban pockets, and largely to an increasingly affluent urban middle-class. This statement underlines both how out of touch with actual economic realities some of our eminent economists are, and their elitism. They are seeing, but not really looking. Or perhaps they do not even want to look.

Take Noida and Gurgaon that Rajan used as examples. As globally competitive clusters of services and advanced manufacturing, these cities provide thousands of jobs to India’s aspirational lower middle-class coming from rural backgrounds.

Where Raghuram Rajan Misses the Point

Rajan sees only the white-collar jobs in the glass and steel towers with MNC offices, he does not understand that these offices are supported by maintenance workers, auto-rickshaw drivers transporting office workers from their homes and metros to these offices, security guards, technicians, caterers and many more such service related workers who are not white collar in nature.

Rajan’s elitist prism also misses the maids, gardeners, drivers, personal care workers in the gig economy i.e., all of the service providers for Ola, Uber, Zomato, Swiggy, Urban Company etc. This demography of urban workers representing an aspirational lower middle-class has almost doubled since 2010 from 150 million to 300 million, with fastest growth coming in during the tenure of Prime Minister Modi starting 2014.

The Rise of Aspirational India in Modi Era

Coming mostly from rural and semi-rural backgrounds, this aspirational middle-class work long hours, with often both spouses in the family working extremely hard to maximize income. Three common objectives drive these families. First is their commitment to their children’s future. They invest a very large chunk of their income to provide their children with the best education possible so that the next generation can jump upwards in the socio-economic scale. This is a massive investment in India’s future productivity and competitiveness.

Second, strong familial bonds tie this group with their home villages and small towns. Many send money back home regularly. An estimated 250,000 to 280,000 crores worth of such remittances are transferred annually. This is a massive transfer of wealth. To put it in perspective, this amounts to USD 31 to 34 billion USD per year, close to half of the annual FDI received by India in FY 22-23. This money is used by its rural recipients to invest in education, improved housing, capital goods and inputs that improve agricultural productivity, and invest in small businesses that generate employment.

In other words, this transfer enables greater consumption and investment in the rural economy adding to the overall growth cycle. The improvement in quality of life due to such transfers has been a critical factor in the rapid reduction in overall poverty in India. It should not come as any surprise that real indicators of economic health, such as GST collections and consumer spending have been on a healthy upward trend over the last 8, with some disruptions during the pandemic.

Third, this aspirational middle-class drive consumption. They save assiduously to purchase a slightly better smartphone or television set. They look forward to an occasional meal at a local fast-food joint or an evening with friends or family at the nearby multiplex. Since leaves are in short supply, many would save small amounts over months so that can buy an airplane ticket to a nearby airport instead of travelling two days by train. This author, living in Gurugram for a decade has been a live witness to such consumer behaviour.

The economic impact of these million aspirational consumer decisions is massive. The economies of scale of India’s market for products like smartphones and electronic durables is the country’s greatest leverage in pursuing a successful industrial policy and attracting investment and technology.

Global MNCs intrinsically understand the power of this massive aspirational middle-class whose size will only keep growing, and they have been investing in India and scaling up their operations accordingly. The millions of passengers using air services have led to India becoming a serious contender in the aircraft maintenance and manufacturing supply-chain. All of this leads to a virtuous cycle of development.

Every single app download, every single online consumption such as OTT entertainment by these 300 million strong consumers creates the basis for venture capitalists investing huge sums in India led innovations and technology. This aspirational middle-class in India is the test bed for innovation in goods and services for the rising middle-class not just in India, but across the developing world.

How Modi Government’s Policies Catalysed the Transformation of Indian Economy

The genius of Prime Minister Modi is his understanding of this dynamic and developing policies and interventions that accelerate and strengthen this virtuous cycle. Let us just take a few examples.

One of the biggest disruptions to income and savings to such aspirational middle-class comes from major health emergencies in their families, wiping off hard earned savings and forcing them to divert away from planned investments in their child’s education or aspirational consumption. Ayushman Bharat is designed to address and soften the impact of such health emergencies on this aspirational middle-class.

The JAM trinity and Unified Payment Interface (UPI) has significantly reduced the cost of domestic remittances and made the process faster and much easier. This will ensure that the massive capital infusion of 280,000 crore into India’s rural economy from urban remittances continue to grow without impediment, and with minimum costs and hassles for senders and receivers.

The several schemes for MSMEs, including MUDRA, Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) has facilitated entrepreneurship in rural and rurban eco-systems. This means that this massive urban to rural remittance flows can now also be more productively invested in businesses that generate employment.

The entire focus on Ease of Doing Business (EoDB) across a range of areas is also to reduce the cost and time of starting and running businesses and are especially important to MSMEs. Prime Modi’s mission mode focus on EoDB initiatives came from his deep understanding and respect for India’s MSMEs, and the role they play in our economy.

Harnessing the power of India’s massive consumer base and the economies of scale they provide required targeted interventions that went beyond the hackneyed business-as-usual approach. Prime Minster Modi incrementally developed the eco-system for this starting with a big picture approach in ‘Make in India’ and supported by specific schemes under PLI. Similar initiatives for the innovation and tech-sector exist in the form of Start-up India.

Modi Government’s Whole-of-Government-Approach

What Prime Minister Modi has done is to replace piece-meal, half-hearted programs with an eco-system of initiatives that feed into each other representing a whole-of-government approach. The Prime Minister himself hails from a humble semi-rural family that used hard work and commitment to improve their lives. In other words, the Prime Minister is personally and emotionally invested in this aspirational middle-class of India and understands its power. And he has put in policies and initiatives to help ensure that this group to continues to thrive and in turn help the Indian economy to strive.

Dr. Raghuram Rajan on the other hand fails to understand the power of the common Indian man and woman. In fact, he does not even see them. As his comments on Noida and Gurgaon being first-world underline, he is oblivious to the hundreds and thousands of lower-middle class Indian brothers and sisters living in such cities whose lives are anything but first-world. They live in one or two room cramped accommodations, work very long hours, and face typical developing world struggles. But this it is precisely this struggle that is powering India forward to becoming one of the world’s leading economies.

There was a time when a common refrain was that India grows despite the best efforts of its governments. It is time to re-phrase this. The Indian economy now grows despite the best efforts of some of its eminent economists.

Dr. Pritam Banerjee is a Senior Research Fellow with Dr Syama Prasad Mookerjee Research Foundation.