dspnair

Chartered Accountant

[Sridhar Vembu @svembu]

In a recent interview, Dr Raghuram Rajan says we are getting only low paying manufacturing jobs in Tamil Nadu. He also opposes industrial policy at the national level. Let me explain the intrinsic contradiction between these two ideas.

Let us consider the iPhone factory in Tamil Nadu. It would take the average worker there about 5 months of work to afford the entry level iPhone. In China, it would take only 1 month of the same factory work. The work is the same.

High paying jobs, which I agree we need, come from high value addition and that requires that we not only perform the R&D but we also own the IP in India and capture the resulting economic value addition. Only then would pay in even products where India does not have much IP (like the iPhone) would go up.

If you look at major IP-rich, successful companies in the world, all of them do substantial R&D in India. But only a tiny fraction of the economic value added by these companies (measured by their gross profit, as distinct from the net profit) actually is accounted for in India. Gross profit captures employee compensation, net profit and taxes, and goes directly into GDP calculation.

I will present two admittedly crude examples, just to illustrate the issue.

Nvidia has a gross profit of well over $200 billion a year and 24% of Nvidia employees are in India, mostly in R&D. Microsoft has a gross profit of about $230 billion a year and 10% of its R&D staff are in India. India's economic accounts will not show anywhere near 24% of value added by Nvidia or 10% of value added by Microsoft. India would only show a small fraction of the $48 billion value added by Nvidia or $23 billion of value added by Microsoft (presumably) arising from Nvidia India and Microsoft India R&D operations. Again, crude example, for illustration purpose only etc.

If we create Indian companies that own the IP in India, much of their economic value will accrue in India.

This is why long term R&D and capability building is so important.

Now let me come to industrial policy. The only mechanism the world has known for a "developing country" (no IP, low value addition) to become a "devloped country" (lots of IP and value addition captured locally) is to spur the domestic entrepreneurs and industry to gain the know-how and capability. This is the lesson from East Asia, and a great book on that topic is "How Asia Works".

Dr Raghuram Rajan represents what is called the "Chicago School" economic theory, originally arising from Milton Friedman. The Chicago School does not agree with industrial policy.

Following the Chicago School will get us to Mexico's economic situation (lots of low wage manufacturing) but never to Japan or Taiwan or South Korea and now China. Getting to Japan or Taiwan or South Korea or China require us to understand "How Asia Works". China rose from very low wages and now has overtaken nations like Mexico, because China has the know-how and IP and Mexico does not.

In one interview, Dr Rajan has managed to both want high paying jobs (yes!) and oppose the very policy needed to get us there!

Book link below.

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@RussianSpoof 75%

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@Geetashloks Hare Krishna

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@badhombre Do remain hydrated

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@sathyashrii Zero

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@MeghUpdates I recommend that they loose no time in trying out their fantasy. A break Bharat would cherish

[Randeep Sisodia @Randeep_Sisodia]

I have never seen an MP sit like this with an armed raised and rested on the back rest in Parliament. Thankfully, the back rest is not there on his left side, otherwise he would have raised that arm too.

And another despicable act…coming in a T-shirt to parliament.

Lack of basic decency & decorum. Treating the temple of democracy with disdain!

Such a shame!

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@Eaglequotes_ Absolutely