Former RBI Governor Raghuram Rajan has batted for a services-led export model for India instead of following China‘s manufacturing-led one in order to grow faster.

In a lecture on globalisation and climate change, Rajan focused on the positive impact of liberalising services which offers massive potential in reducing inequality.

Liberalising trade in services is good for both industrial as well as emerging market economies. Since many of these services are weightless, they have low climate impact benefiting the efforts to mitigate climate change.

“Weightless services also consume little energy on the way to the final consumer, unlike manufactured goods. Export-led services growth will be much less environmentally harmful – the world cannot afford India to follow China’s path, even if it were open to it,” Rajan said.

He said liberalising manufacturing has diminishing returns and is politically fraught.

“One reason industrial countries have soured on open borders is their manufacturing workers have been disproportionately hit by global competition and outsourcing, while service workers have benefited. Both politically and economically, further liberalization of manufacturing has diminishing returns.”

He explained that services, unlike manufacturing, can be distributed across a country and reduce pressure on megacities that are turning into heat sinks and becoming increasingly unlivable.

Such a distribution of services away from large cities will boost rural incomes and provide an alternative in case of loss of agricultural incomes.

“The production of these services can be distributed across a country. In developing countries, this will reduce the burden on the large megacities that are becoming heat sinks and increasingly unlivable. It will also generate a source of income and a reliable stock of human capital to seed rural communities that would otherwise lack the economic capacity to survive the loss of agricultural incomes,” Rajan highlighted.

This is not the first time that Rajan has spoken about the benefits of a services-led growth model. In the past, he has cautioned against the perils of blindly following a China-led manufacturing growth model. He has quite often said India needs to focus on spending on education and skilling its youth to create jobs which will come from services rather than manufacturing.

Rajan has also called for a careful analysis of the benefits of the production-linked incentive scheme (PLI) to boost manufacturing in the country as the benefits accrue to bigger industrial houses rather than the small and medium manufacturers.

Rajan is not the only one to talks about the importance of services-led growth. Noted economic commentator Swaminathan Aiyar, writing for ET, argued for a services-led growth model stating that the future lies in services and not manufacturing. He said that India needs to focus not just on services like IT but education and health that have been grossly underfunded for years. He is of the view that the outsized focus on providing subsidies for manufacturing will undercut the limited resources for human development.

The PLI scheme is one of the flagship programmes of the Modi government to attract manufacturing to India. Multinational corporations want to diversify their manufacturing base away from China due to strict COVID policies along with rising costs of doing busisness in the country.