“Eswar Prasad is the Tolani Senior Professor of Trade Policy at Cornell University. He is also a Senior Fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a Research Associate at the National Bureau of Economic Research. He was previously chief of the Financial Studies Division in the International Monetary Fund's Research Department and, before that, was the head of the IMF's China Division.
Eswar Prasad's latest book is The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance (Princeton University Press, February 2014). His new book, Gaining Currency: The Rise of the Renminbi, will be published by Oxford University Press in October 2016. His extensive publication record includes articles in numerous collected volumes as well as top academic journals such as the American Economic Review, American Economic Journal: Macroeconomics, Brookings Papers on Economic Activity, The Economic Journal, International Economic Review, Journal of Development Economics, Journal of Economic Perspectives, Journal of International Economics, Journal of International Money and Finance, Journal of Monetary Economics, and Review of Economics and Statistics. He has co-authored and edited numerous books and monographs, including on financial regulation and on China and India. Current research interests include the macroeconomics of financial globalization; financial regulation, monetary policy frameworks and exchange rate policies in emerging markets; and the Chinese and Indian economies.
Prasad has testified before the Senate Finance Committee, the House of Representatives Committee on Financial Services and the U.S.-China Economic and Security Review Commission, and his research on China has been cited in the U.S. Congressional Record. He was a member of the analytical team that drafted the 2008 report of the High-Level Committee on Financial Sector Reforms set up by the Government of India. He serves on an Advisory Committee to India's Finance Minister and is the Lead Academic for the DFID-LSE International Growth Center's India Growth Research Program. He is the creator of the Brookings-Financial Times world index (TIGER: Tracking Indices for the Global Economic Recovery; www.ft.com/tiger).
Many of his research papers and quotes from his speeches have been cited extensively in prominent media outlets such as the Economist, Financial Times, Forbes, International Herald Tribune, New York Times, Newsweek, Time, Wall Street Journal, Washington Post, and USA Today. His op-ed articles have appeared in the Financial Times, International Herald Tribune, Wall Street Journal Asia, Washington Post and other newspapers. He has made frequent appearances on BBC, Bloomberg, CNBC, CNN, C-SPAN, Fox, NBC, NPR, PBS, Reuters and other radio and television channels.
Prasad is also a Research Fellow at IZA (Institute for the Study of Labor, Bonn). He has served as the co-editor of the journal IMF Staff Papers, was on the editorial board of Finance & Development and was the founding editor of the quarterly IMF Research Bulletin” (“Eswar S. Prasad.” See citation below). He was interviewed by Anna Balderston CMC ’18 on April 26, 2016.
"Eswar S. Prasad." Cornell University. Cornell University Charles H. Dyson School of Applied Economics and Management, Web.
“Eswar Prasad - World Economic Forum on East Asia 2012” by World Economic Forum — Own Work. Licensed under CC BY-NC-SA 2.0 via Flickr Creative Commons — https://c2.staticflickr.com/8/7088/7306237650_b024bbd924_o.jpg
In 2014, Prime Minister Narendra Modi announced his government’s plans to launch a “Make in India” program to create manufacturing hubs across a range of sectors. What were the primary challenges India faced in manufacturing that motivated the Make in India campaign?
Unlike many other developing economies that have gone from being agricultural economies to manufacturing-heavy economies, and then economies dominated by services, India is still in its intermediate stage. It has become an economy that is more dependent on services and still remains heavily dependent on agriculture, with manufacturing not having played a key role in India’s economic development. There has been a range of issues keeping India’s manufacturing sector from growing large. One issue is that there has been a lack of physical infrastructure in India. For the average developing economy, the domestic market tends to be rather limited, particularly in those economies that have become manufacturing powerhouses through exporting. When those economies have higher income levels, more of their manufacturing can be consumed domestically. But in India’s case, there has been a lack of good roads and ports, as well as a lack of sufficient energy, especially electricity. This means that the manufacturing sector could not scale up easily. In addition, there were many labor regulations that made it harder to set up large firms. In particular, there were many restrictions on firing workers if the firm was unprofitable, and restrictions on shutting down an unprofitable enterprise. These restrictions make it harder to get investment in manufacturing. As a consequence of all of these weaknesses in the economy, in addition to red tape and bureaucracy, Indian manufacturing never really took off. That is what the Make in India campaign is meant to address.
The Make in India National Manufacturing Policy has a strong focus on the implementation of National Manufacturing and Investment Zones, the greenfield townships of at least 50 square kilometers for large-scale manufacturing hubs. The policy states that the central and state governments will be responsible for the acquisition of land, the planning of these zones, and the design of their infrastructure. What do you see as the advantages and disadvantages of having large centrally-planned zones to boost national manufacturing?
Certainly such zones can be useful, especially because of something I did not mention in my response to the previous question — the difficulty in the acquisition of land to boost manufacturing. The industrial zones get around many of the problems that I listed earlier, and in particular they make it easier to get the land, electricity, and other sources of energy necessary in industry. They are also trying to cut the red tape and bureaucracy, which is certainly useful in capitalizing manufacturing in these zones.
These zones could be seen as substitutes for the more significant policy changes that are needed at the national level. If they are seen as substitutes for broader policies to encourage manufacturing, these few industrial zones are not going to be sufficient to make up for other weaknesses in policies and institutions to help improve manufacturing in India.
Which manufacturing sectors in particular have the biggest growth potential in India despite these perceived policy shortcomings?
India still has some advantages in terms of labor cost relative to a country like China. However, it is not obvious that India can compete effectively at the low end of manufacturing compared to countries like Vietnam and Bangladesh. Nonetheless, I still think there is some competitiveness that India can maintain at the lower end of manufacturing value-added chain; even basic things such as clothing and footwear, goods that China has been very competitive in manufacturing. So, in principle, India could compete in some of that low-end manufacturing because not only could it compete with an exporter like China, but there is also a large domestic market that India can potentially take advantage of. But I think it would be a more fruitful strategy for the medium-to-long term for India to focus on moving further up the value-added chain, just as China is trying to do right now. India does have a fairly significant amount of young skilled labor that could put the country at an advantage. Young labor is perhaps a better term, because some of the labor is not very skilled. Unless India can increase the skill level of its young population through better education and training, it cannot really take advantage of that labor force. So the solution is going to have to be a range of policies, not just directed toward manufacturing but also toward increasing the skill level of the labor force.
What is your opinion and outlook in regard to policies to help grow this skilled labor force?
There have been attempts to increase the number of institutions of higher education - for instance, there are the elite Indian Institutes of Technology, which have been seen as intellectual powerhouses in terms of generating many cohorts of students who are very technically well-skilled. The government has indicated that it plans to open a few more such institutes: that certainly helps educate the labor force, but only at the margin. This is because India needs to spend more resources on both primary and secondary education. In addition, creating better universities is going to be important as well. Across the board, the education system in India suffers from a variety of deficiencies, often related to extensive government involvement in the system. Additionally, at the college level in particular, private institutions have a relatively modest presence. Second, India hasn’t spent as much of its public funds as it could on the education system. Third, there is a lack of focus on the right sort of skills, especially technical and vocational skills that are going to be important for India’s labor force to compete effectively.
How effective do you expect the Make in India Campaign to be in attracting higher levels of Foreign Direct Investment? Is the climate ripe for attracting new FDI?
India certainly has been able to attract a lot more FDI. In fact, as a proportion of GDP, India’s FDI inflows are catching up to the level of China, though of course China’s economy is about five to six times larger than the Indian economy, so, in absolute terms, India still has a long way to go. Having said that, there is certainly a lot more interest in investment in India because India has been opening up to foreign investors in many more sectors. Additionally, the Indian government has tried to encourage foreign investment by reducing the amount of red tape and bureaucracy they have to deal with.
Among the emerging market economies, India’s relatively good growth performance in the last couple of years is expected to continue in the short- to medium-term, so foreign investors do seem to be placing more bets on Indian growth. The big question that India faces is whether it will use this opportune time, when India’s economy is growing at a reasonably rapid clip and foreign investors seem to be almost swooning over India, to put in place the reforms that are necessary to lock in a high level of medium-term growth. Unless the Modi government shows commitment to a broad range of reforms, it cannot count on being seen as a favorite target for foreign investors for very long.
What are the potential downsides of this approach to growth and development? For example, how does prioritizing manufacturing hubs compare to channeling resources to promote India’s service sectors?
It will be difficult for India to make an effective transition to being a high-middle income country unless it has a strong manufacturing base. Manufacturing generates higher wage jobs, and productivity levels in manufacturing tend to be higher than in services. The key issue is not government involvement in promoting manufacturing, or in picking winners and losers, but rather resolving the impediments that have kept the manufacturing sector from growing well. So, important changes for the manufacturing sector’s arrival in India have been reducing red tape and bureaucracy, improving investment in physical and soft infrastructure, improving the education system, and improving the financial markets. All of this is going to create a much more balanced development in India, not only in manufacturing but even the services sector, and, for that matter, even the primary sector. Rather than having the government as the key actor that tries to pick winners and losers in the manufacturing sector, going back to the basics and putting in place the reforms that are necessary for the economy to work better will help the manufacturing sector and also the economy more broadly.
Are there significant drawbacks to creating large manufacturing zones for India’s environment? How has India reconciled its manufacturing goals with global efforts to limit carbon emissions?
The Chinese global growth model is delivering very well in terms of headline GDP growth, but has fairly negative consequences in some ways. These include the destructive environmental impact of heavy industrial growth, and also the fact that a lot of resources have been wasted with inefficient investment. India could learn some useful lessons from China about how an excessive focus on a model with a lot of investment going to heavy industries might not be a very productive approach. Having said that, India is so far behind China in terms of industrialization that it certainly has some catching up to do. Nonetheless, given what has been learned from Chinese growth experience, and given that there are new, greener technologies to be had, India could perhaps benefit from some leapfrogging. This would mean that when India promotes industry, it does so using technologies that are more advanced, more high value-added, and are also more environmentally friendly. The government could play a useful role by providing the right kind of incentives, both positive and negative, to encourage manufacturing firms to adopt greener technologies. Thus, perhaps starting off late in some sectors might not be entirely to India’s disadvantage if the government provides the right sorts of incentives.
Do you think the rise of automation makes manufacturing-driven economic growth unstable? Or do you think Make in India’s comprehensive approach takes this risk into consideration?
There is definitely a tension between using higher tech manufacturing as a way to promote overall economic health and its detriment to job growth. A balanced approach to economic growth might be important because the service sector, as well as small and medium enterprises, tend to be much better at generating employment growth rather than heavy manufacturing or high-end manufacturing. The key issue is to allow for different parts of the economy to flourish, and one of the important issues is getting the financing right. Households in India, not corporations or the government, do save a fair amount. So, if both the domestic savings and foreign capital could be effectively channeled into productive investments in manufacturing, the services sector, and small and medium enterprises, India could grow in a variety of dimensions and generate decent employment growth. This growth would be in the services sector and in small and medium enterprises rather than only in heavy or high-end manufacturing. India needs to create a supportive environment across many sectors of the economy for job growth. This is why focusing on the basics is much more important than trying to promote a particular sector or a particular industry.
Would you mind elaborating on the financing issue, maybe on how India has done some restructuring to support these programs and policies?
In India, the financial sector is bank-dominated, and state-owned banks still play a very important role in the banking system and in the overall financial landscape. One of the key challenges the government faces right now is getting the banking system to work better. One of the problems in the banking system, especially the state-owned banks, is that banking is not used just for financing, but also for advancing the government’s multiple goals. For example, one such goal is lending to priority sectors, which are sectors of the economy the government has chosen to encourage, including agriculture. The banks have also been seen as conduits of financing government budget deficits. The state-owned banks in particular have had to lend to state-owned companies. As a consequence, banks, especially the state-owned banks, have a lot of bad loans on their books. Thus there is a big burden that Indian banks face--a lot of bad loans that need to be taken off their books.
The incentive structure of the financial system needs to be changed so that banks can start lending to the more dynamic sectors to the economy. In addition, what the government has been trying to do, which is very important, is to develop other parts of the financial system — not just equity markets, but also, for instance, corporate bond markets. Corporate bond markets, if they work effectively, can be used to help in the financing not just of large enterprises, but also for small and medium enterprises. This is because they provide yet another channel to raise capital and also for savers to diversify their portfolios. Getting the banks to be able to lend more effectively on commercial terms, and to improve the financial markets in general, will be very important in allocating both domestic and foreign capital to the most productive uses in India.
In the midst of Make in India’s second year, what do you see as the greatest on-the-ground successes of its policies?
One disappointment is that there hasn’t been that much progress made in the structural policies that are necessary to improve the functioning of the economy. However, there has been very important progress on certain items. One of the key things that has been accomplished, partly as a consequence of policy and partly as a consequence of luck, is that the macroeconomic situation looks relatively stable. By that, I mean two specific things: first, inflation over the last couple of years has come under control. India was suffering from high levels of inflation, due to high food price inflation but also other factors. They had CPI inflation close to double digits. Inflation is coming down quite significantly; consumer price inflation is now somewhere in the range of five to six percent, while India’s central bank is targeting a level of about four percent in the next one to two years.
The government has also maintained fiscal discipline, meaning it has tried to keep the budget deficit and the public debt level under control. Those are important areas of progress. The government has also made progress in certain key areas, such as its focus on financial inclusion, or bringing more Indian households under the coverage of the formal banking system. This means many more households now have access to bank accounts and mobile banking, which allows them better ways to save money or acquire credit if they need it. That accessibility makes people feel better and more connected to the economy, which is very important. The government has also indicated its commitment to improving governance, that is, making public services work better and trying to reduce the levels of corruption. The progress in those areas has been less than desirable, but there has certainly been some improvement.
In terms of building the foundation that is necessary for reforms in India (such as generating macroeconomic stability and improving public governance and financial inclusion) some progress has certainly been made. This is due in part to good policies, but also due to some good luck. India has been lucky, for instance, because of low oil prices, which has been a big boon for the country.
The big challenge for India now is to use this foundation and this very opportune time, when both the domestic and external circumstances are very favorable to the country, to make some very substantive structural reforms. I hope the Modi government will use this opportunity to push forward on the big reforms that India really needs to lock in now.
Distance to Frontier: The distance to frontier score aids in assessing the absolute level of regulatory performance and how it improves over time. This measure shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. This allows users both to see the gap between a particular economy’s performance and the best performance at any point in time and to assess the absolute change in the economy’s regulatory environment over time as measured by Doing Business. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. For example, a score of 75 in DB 2015 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time. A score of 80 in DB 2016 would indicate the economy is improving. In this way the distance to frontier measure complements the annual ease of doing business ranking, which compares economies with one another at a point in time."
"Distance to Frontier." Doing Business. World Bank Group, Web.