Interview: Former Indian Central Bank Chief on a Global Economy in Flux

The interview with Raghuram Rajan, former Governor of the Reserve Bank of India and former chief economist of the IMF, centers on the dynamic shifts in global manufacturing, especially as they relate to China and India. Rajan offers insights into India's gradual emergence as a manufacturing hub, critiques the U.S. efforts at reshoring, examines China’s transition toward a service-based economy, analyzes technological competition and cooperation between India and China, and weighs in on the regulation of cryptocurrencies and productivity trends influenced by artificial intelligence (AI) [para. 1][para. 2][para. 3].

Rajan notes that while there has been some relocation of manufacturing to India, the process remains slow and incremental. Currently, Indian manufacturers focus on final product assembly, with aspirations to move up the value chain by producing more components in the future. He stresses that India should learn from China’s expertise in manufacturing and engineering but suggests that any collaboration should benefit both nations. The pace of progress will largely depend on the acquisition of new capabilities and creating mutually advantageous scenarios [para. 4].

Addressing recent layoffs in the U.S. tech sector, Rajan attributes some job losses to productivity improvements driven by AI, though he acknowledges this dynamic can lead to higher future demand for programmable labor. He suggests that the technology sector’s hiring spree in previous years has led to natural adjustments, but he remains optimistic about AI’s transformative potential. Rajan anticipates increased demand for engineers, software developers, and data scientists as AI continues to permeate business operations, stressing that these are still early days for such profound change [para. 6].

On the topic of attracting manufacturing back to the U.S., Rajan is cautious about the recent announcements of large investments. He observes that such commitments often span many years, and the realization of announced investments is uncertain, potentially influenced by shifting political priorities. Protectionism and tariff volatility further complicate decision-making for companies. Thus, Rajan expects that much of the returning manufacturing will be highly automated, limiting job creation, and insists that a more stable tariff regime is crucial for long-term planning [para. 7][para. 8][para. 9].

With respect to China’s pivot to services, Rajan recognizes the growing importance of the sector and its share of national employment. He sees a natural progression for countries to become more service-oriented, with manufacturing representing a shrinking but increasingly productive segment of the economy. Rajan raises critical points regarding the challenges of exporting services, particularly surrounding data privacy and international trust—issues that must be addressed to unlock further growth [para. 10][para. 11].

Rajan also explores the technological landscape, noting India’s success in IT and consulting services and China’s lead in AI research and world-class technical universities. Rather than competition, he is hopeful for cooperation between China and India in areas where their strengths do not directly overlap, advocating for collaboration over rivalry [para. 12].

On cryptocurrency regulation, Rajan favors a balanced approach that fosters innovation while maintaining control, noting Singapore’s experimental but cautious framework as a model. He cautions against outright bans and stresses the complexities of introducing new financial products at scale [para. 13].

Finally, on U.S. productivity, Rajan observes decent performance in recent quarters but remains uncertain about the full impact of AI. He notes that the current productivity improvements might also be influenced by slower labor supply growth. Ultimately, he emphasizes that it will take several years to assess AI’s true effect on productivity [para. 14].

In summary, Rajan provides a nuanced analysis of the interplay between global manufacturing, technological transformation, economic policy, and labor markets, advocating for measured and forward-looking responses to these evolving trends [para. 1][para. 2][para. 3][para. 4][para. 6][para. 7][para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14].