Dr C. Rangarajan outlines five priorities—investment, technology, labour‐intensive sectors, diversified growth, and human capital
—to sustain India’s growth amid global economic shifts.
Dr C Rangarajan
Former Governor, Reserve Bank of India & Chairman, Economic Advisory Council
The topic of growth in a changed world context has become critically important because of certain developments that have shaken the global economic order. In the last few years, the world economy has faced many shocks. First came the Russia–Ukraine war, which shattered the smooth functioning of global supply chains and compelled nations to rethink whether critical inputs such as semiconductors must be manufactured at home. Then came the unilateral actions of the United States under President Trump, which fractured the multilateral trading system that has evolved since the end of the Second World War. Weaponising tariffs to achieve non-economic objectives was a profound shock to the principles on which global prosperity has been built.
It is against this background that we must ask what India can do to achieve a higher and sustained rate of economic growth. The aspiration of every Indian is that India should become a developed country by 2047 — when we complete a hundred years of independence, what is called Viksit Bharat. There is no unique definition of a developed country, but analysts use the World Bank’s criterion of $14,000 per capita income as the high-income threshold. By 2047 that threshold will have risen; my estimates place it at approximately $18,000 per capita, and some put it as high as $21,000. Either way, to travel from India’s current per capita income of around $3,000 to $18,000 in just over two decades requires us to grow at a sustained rate of 7 to 8 percent — closer to 7.5 percent. It has been done. South Korea’s per capita income in the 1950s was exactly equal to India’s. Today South Korea is a member of the OECD and has been a developed country for decades. So it is possible.
Let me place before you five directions in which India must move. The first is to raise the investment rate — technically, the gross fixed capital formation rate — by two percentage points. India’s current rate hovers around 33.8 percent of GDP. A simple formula: the growth rate equals the investment rate divided by the incremental capital-output ratio, which has recently been around five. So 33.8 percent of GDP gives us roughly 6.5 percent growth. To reach 7.5 percent, we need to lift the investment rate by at least two percentage points. Government capital expenditure has been doing much of the heavy lifting — after COVID it surged by 28.3 percent in 2023–24 — but this cannot go on indefinitely. Private investment must pick up. I would urge every person assembled here, with your rich experience in industry and institutions, to seriously introspect: why has private investment not picked up strongly in recent years? That is a question the government and the private sector must answer together.
The second direction is absorbing new technologies. Arrival of new technologies has been the defining feature of growth since the Industrial Revolution. Artificial intelligence is a textbook example of what economists call horizontal innovation — it affects virtually every sector of the economy, not just specific industries. The Nobel Prize in Economics this year went to economists working precisely on how innovation drives growth, and their verdict is unambiguous: nations that invest in technology thrive. AI will increase output and productivity, but it also raises legitimate concerns about employment. One might say this fear has existed since the dawn of industrial mechanisation. The difference today is the speed and breadth of displacement. Even so, a populous country like India cannot afford to ignore AI. We must absorb it, apply it, and use our existing strength in computing and communications technology to lead in its deployment. India is in an advantageous position to do exactly that.
Third, we must focus on relatively labour-intensive activities. India is a country where technologies of different centuries coexist — I still see bullock carts on some roads. That breadth is actually an opportunity. There are sectors — leather and leather products, apparel, hospitality, food processing — where employment per unit of output is considerably higher. We should identify these sectors systematically, using data from the Annual Survey of Industries, and deliberately cultivate them even as we also adopt AI. Fourth, the strategy of development cannot be unidimensional. The East Asian model of pure export-led growth served South Korea, Taiwan, and Thailand in an earlier era. That is no longer replicable. China’s share of world exports went from 1 percent in 1973 to 15.2 percent by 2021 — India’s moved from 0.5 to only 1.6 percent over the same period. The lesson is not to copy China’s past but to adopt a multi-dimensional approach: agriculture, manufacturing, and services must all grow together. Fifth, India must invest substantially more in health and education. Healthy bodies and skilled minds are not welfare expenditure — they are the infrastructure of growth.
On the changed global context: the imposition of tariffs has cut at the root of the free and fair trade principle that the developed world preached to us for decades and is now dismantling. Those who taught us comparative advantage are the ones now erecting barriers. A few weeks ago I would have ended this talk on a gloomy note. Things have somewhat shifted. The India–EU trade agreement — which allows India to export jewellery, textiles, and leather goods at near-zero tariffs — is genuinely positive. The India–US trade framework is still being worked out, but it appears to be moving in a balanced direction. Dr Bhanumurthy and I wrote a paper recently arguing that diplomacy is the only answer to the fall in the rupee’s value — capital was flowing out not for economic reasons but because of geopolitical friction. A friendlier investment climate will do as much for the rupee as any monetary policy measure.
Let me close with this: a growth rate of 6.5 percent per annum is today almost assured for India. Our potential rate is already there. All our efforts must now be directed towards raising that potential from 6.5 to 7.5 percent. That gap is where your minds and your decisions will count most. I hope the discussions today send you home wiser and more determined.
In Conversation
Dr N R Bhanumurthy in dialogue with Dr C Rangarajan
Dr N R Bhanumurthy: Sir, you have argued persuasively that we need to raise the investment rate by two percentage points. But a large part of that additional investment must be financed by domestic savings, and domestic savings have actually been declining in recent years. If the causality runs from savings to investment and then to growth, what must we do to improve domestic savings? We cannot depend indefinitely on foreign savings without letting the current account deficit run uncomfortably wide.
Dr C Rangarajan: Savings and investment are two sides of the same coin, but they are driven by different sets of factors. The first priority is to create conditions in which the demand for investment rises — that is what I have been discussing this morning. Once investors are convinced that India can sustain a higher growth trajectory, the appetite for investment will increase. At that point the question of financing becomes pressing. You are right that government savings have improved somewhat, but the government’s ability to further expand capital expenditure is reaching its limits. Private investment must therefore carry more of the burden.
The savings question then becomes critical. Part of additional investment can be supported by foreign savings — that is, the current account deficit — but there are clear limits. A very wide current account deficit creates vulnerability. So household savings within the country will need to rise. This raises a delicate question about interest rates. The business community here will always advocate lower interest rates as the prime mover of investment — and there is truth in that, but only when the rate of return on capital exceeds the cost of borrowing. Lowering interest rates too aggressively also depresses returns on financial savings, which can reduce the very household savings we need. Aggregate savings may not be dramatically affected by interest rates — some economists argue it is the composition rather than the total that shifts — but the point is well-taken. When investment demand picks up, we will have to act simultaneously on mobilising domestic savings. It is a sequenced challenge, not an either-or.
Dr N R Bhanumurthy: Sir, India has long been a services-led economy and has done reasonably well averaging 6 to 6.5 percent growth over three decades. But to move from 6.5 to 7.5 percent, many argue that manufacturing must play a larger role. The target of raising manufacturing’s share to 25 percent of GDP has remained elusive. Given constraints on both land and labour — two critical factors of production — how do we revive manufacturing? And is this structural constraint also responsible for the regional disparities we see in investment flows across states?
Dr C Rangarajan: The manufacturing question is real, but I would caution against being overly anxious about the share. The share is essentially a relative concept — it reflects whether manufacturing is growing faster or slower than services. Services today account for more than 50 percent of our output, and growth in services is not a bad thing. The boundary between services and manufacturing has also blurred considerably; many activities once classified as manufacturing are now classified as services because production, packaging, and distribution have been unbundled.
That said, the absolute base of manufacturing must expand, and I agree emphatically with that. A factory absorbs workers across the full spectrum of skills — from top management to the person who keeps the floor clean. That breadth of absorption is manufacturing’s great advantage over high-end services. We cannot afford to give up our services competitiveness, but we also cannot afford a stagnant manufacturing base. The approach must be multi-dimensional. On the question of what to produce, I am struck by how deeply China has penetrated product categories that are not remotely rocket science. During the kite festival, even the thread is made in China. Indian industry must carefully audit what it is importing that it could be producing — not the import substitution of the 1950s and 60s behind high protective walls, but competitive import substitution: producing domestically at global standards of efficiency and cost.
On land and labour: labour reforms are long overdue and the new labour codes are a step forward. Concerns about rising labour costs are familiar — minimum wage legislation always attracted similar objections — but some things must be done from a broader social perspective. On land, our early post-independence instinct to prevent large land holdings has left us with severely fragmented agricultural holdings that are no longer economically viable. Government-held land that is underutilised can in principle be monetised to fund infrastructure — but it must be done with exceptional transparency and care, because land sales are always politically charged and vulnerable to accusations of undervaluation. Centre and states must work in genuine partnership here: states that have advanced land digitisation and clear records are already attracting disproportionately more investment, and that is not a coincidence.
