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0:00 Capital is in shortage and labor is in surplus which is where we are now. Inequality tends to rise. What I've seen in government is that at any point of time on any big decision there are 150 people who don't formally need to sign on the document but who need to nod. 80% of them generally don't know much about the subject. When it comes to using AI deploying AI I think India will do really really well. If oil prices are going to be $85 plus for one whole year, then the economy, if oil prices stay at $100 a barrel for one whole year, you have a 60 to80 billion of Namaste sir. Thank you so much for making the time. It's been a year since we spoke. Lot to discuss. I want to focus this podcast on something you keep talking about often which is that we have to grow rich before we grow old.
0:56 But I want to delve on what it's going to take for us to be able to do that, right? the cost we will have to bear, the kind of policy changes we'll need, the culture we'll need and how should we react to some of these external factors, right? Geopolitics, AI and so on. but you know something topical to start with. the prime minister has made recent remarks you know on on u urging the citizens to cut down on petrol diesel usage use public transport you know non-essential foreign travel so on and largely you know I mean to balance our forex and so on but you know is there a larger significance to this and if you could also talk about a solution you know that you wrote about today.
1:40 >> Yeah Rajan thank you for having me again on the podcast. this is a very important set of questions you asked on the more topical thing I think it's primarily about the dollar meaning that look if you're energy prices go up and you are net importer I mean you net import 48 to 50% of your dense energy you have what economist call significant terms of trade shock so you now are paying paying so if say oil prices average $100 a barrel about at an annualized level $80 billion or 2% of GDP more than they used to. Now the government in the interim can cushion it by significant fiscal interventions meaning like in ura whatever be the price of ura globally the Indian farmer will continue to get it at 5.3 rupees a kilo now it may be very distortionary it may be ruining the the fields but for 16 years we haven't seen a change >> where it is politically too difficult to do it. But anyway, point is that there is a fiscal cushioning that can be done given that the government has been so disciplined on the fiscal side in the last four years postco there is space. So if the government wants it can almost perpetually well at least for a year keep the fuel prices and everything the same. The challenge is that you still need to pay dollars for that.
3:23 >> And if oil prices stay at $100 a barrel for one whole year, you have a 60 to80 billion of balance of payment deficit. Meaning that you need extra 60 to $80 billion. And that is I think a very unwise thing to do. So meaning that that balance of payment deficit has to be brought down. the the RBI has reserves. It can deplete those reserves and sustain that. But that's actually unwise and unfair for everyone.
3:54 the economy needs to adjust. So it is less about a sacrifice. It is more adjusting to reality that if petrol and diesel prices are going to be higher for longer than as in from the purpose of efficiency we are perhaps better off letting those prices show. So because more than exhaltations it is I think the prices which are a very broad-based influencer of people's behavior economic behavior >> right >> so if we let petrol and diesel price now that we know right see what has happened with u China intervening heavily through inventory releases they in the month of April they released about three and a half million barrels a month a day so or nearly a tenth of their strategic reserves for release. So they're very worried that the world is is going to get into a m massive recession if oil is not provided. So what they've done is they have brought down the physical shortages in the near term. But in the process now the oil market is worried that the Chinese will have to restock >> and therefore oil markets will remain tight for a much longer period. Now if oil prices are going to be $85 plus for one whole year then the economy needs to adjust. people need to understand that you know there is the economic cost of driving from point A to point B versus taking public transport is no longer justified and the the strongest signal for that is market prices. So I think the government very prudently was trying to cushion the economy from this volatility. So suppose they had let diesel prices go from 90 rupees a liter to say 140 rupees a liter just in the you know letting market prices go up and then or are reflecting what was happening in the world and then 2 months later the the straight of opens up and that 140 has to become 90. the economy would have gone through unnecessary volatility and therefore it was prudent so long as you expected that this was a short-lived disruption.
6:10 >> Right? >> If it is a longer live disruption then you need to let the prices go through. But yeah, this is a this is an important adjustment that needs to happen on the on on the energy pricing side so that as an economy where we are so energy deficient we need to use it a lot more efficiently right is pricing the only constraint or or is there some kind of wizardry that we can do on the currency side of things you know adjusting the US dollar Indian rupee rates somehow someway to sort of balance our forex and stuff.
6:50 >> The you see there are only two options. the first is that you manage it through the capital account meaning that you somehow attract dollars. So you get a lot more FDI or a lot more foreign portfolio investment or you get Indian companies to borrow more in dollars. So the dollar inflow happens or that you learn to export a lot import less. So basically management of the current account side.
7:25 So there is a current account, there's a capital account. In the capital account as I narrated the three types of capital that you can go after on the current account u you can without letting the rupee weaken the only way to to reduce imports or increase exports is to improve productivity. So basically make land more easily available make power prices much more efficient make labor much more easily available and but if you're not able to do that then you need to let the rupe appreciate right because that is the again the market pricing mechanism where everything gets marked down in dollar terms and then your exports become more efficient more more competitive and your imports become more expensive. and the economy then adjusts accordingly. if you just keep doing that and don't target the the productivity metrics then the rupee has effectively no bottom.
8:29 but the the good thing is that the government is working a lot on the reform side as well. >> So hopefully the decline in the rupee does not need to be excessive. >> Right. a more fundamental question and perhaps I mean this will you know address the meat of the subject which is you know after about four or five years we're going to expose our people to these kind of shocks obviously there's an emotional response it affects people's lives very tangibly right now when we say that you know we have to grow rich before we grow old most countries I mean we can think of whether it is like England during the industrial revolution or America during the guilded age or Japan post second world war and so on. there is a generation or two that goes through absolute hell right so which is long hours of working decreased consumption and so on so that the generations after that benefit from it what is the cost that we will have to bear it doesn't necessarily have to be a cost look the way you framed it I mean you're you're right in that a large part of the growth acceleration seems to be tends to be concentrated in one or two generations. It was the not just the guilded age which of course was very powerful but also I would say the first decade after the first world war the first decade of the inter war period and then >> the 1950 to I would say 70 period where there was a substantial improvement in productivity >> in the US. the Chinese have had I think 1980s onwards till about 2015 substantial very strong growth.
10:12 again see the the suppression bit is something that >> the way you posited or the way you asked the question I think you are assuming that you can't grow without that suppression. I I don't think so. look there is there is a difference between causality and coincidence in the sense that if at a at a certain stage of growth capital is in shortage and labor is in surplus which is where we are now >> right >> inequality tends to rise.
10:57 Now is that suppression of the poor. if the and especially given that we are a democracy this cannot last very long because the po people will then vote out the government where where inequality is rising so rapidly >> and the so long as there is real wage growth and and and even the poorest of the poor are improving in their quality of life.
11:32 if the inequality is rising, it will still not result in a democratic reversal or or or I would say a revolution. if it is it is only suppression if the elites have captured the the resources productive resources in the economy and are then manipulating them. So for example take some of the subsaran African countries where you have you know prodigious natural resources and they get captured by the elite and the returns are kept away from the masses.
12:25 >> Those would be called repression. But what we are seeing today is a natural part of growth. there is no other way to grow. >> So as long as as the baseline improves for a large mass of people it should be fine then in that case we don't worry about inequality. >> Correct. >> That's just a >> Yes. So inequality we Exactly. So we need to be conscious about inequality. We need to continuously monitor it so that to the extent that it can be minimized there are efforts to do so. So for example despite the fact that between 20 say 1213 to 2022 23 because the 112 to 2022 this is the household consumption expenditure surveys snapshot that I'm talking about during that period consumption inequality fell very sharply and remember that even at that time labor was in surplus and capital was in shortage but we still saw that the the reason why that happened in my view was that we focused aggressively on improving the productivity at the bottom of the pyramid.
13:44 So providing everyone electricity access to roads, phones, paka houses, toilets and now even solar power so so if you piped water, cooking gas like you know dense energy is a very important driver of productivity. So if you if you help their productivity through these roots these mechanisms you can actually have slightly more equitable growth.
14:19 >> the question to ask is what next in terms of helping productivity for them you know using AI to provide better education, better skilling having u much fairer u say exams which u act as the channel for diffusion between the elites and the non- elites. to to give you this political framework which I find very useful.
14:49 you see whatever be the form of government whether it is an autocracy communist government single party government a democracy oligarchy whatever form it is always about 10 15% of the people ruling over 85 90% of the people. as some political theorists say the revolutions only change the elites. They they they recycle the elites. The the structure remains the same, >> right?
15:25 >> And revolution happens when see over a period of time elites of course try to perpetuate the the that their progeny remain in the elites. U now if you make the B boundaries between the elites and the non- elites too rigid. >> Mhm. >> and so over a period of time what you may find is that in the non- elites there are people with exceptional skills exceptional training exceptional knowledge who have the ability to be elites but they are accumulating in the non- elites and you barred them from entering and in the elites there is natural depletion. I mean someone may have totally useless progyny or even if after trying they're not able to do right stuff or may not have kids or whatever. So that number dwindles. So it's almost like pressure building up >> that and then it bursts and that's when the revolution happens and then there's a flood of elites into from the non- elites and and and some of the elites get downgraded to non- elites and that happens but again it's then the same animal farm kind of culture starts to settle in. So the so an examp like Goka in China say J or UPSC or neat in India these are very important channels for the non- elites to become elites >> social mobility >> social mobility and if if these are seen to be unfair then revolutions happen if If if we can make it even more equitable. See for example till till 30 40 years back if you were going growing up in a village you couldn't even get access to any of the good books required to prepare for some of these exams. even if you were in a small town where kind of where I grew up you would get these books with like a two month three month lag and you go tell a bookshop that I want this book and they will say oh fine I'll look for it and then you keep going every week to check did you get it and you would not in a big city you had it for granted right so there was a natural privilege that came from being part of a good family in a big city today those PDF circulate on WhatsApp groups >> okay I don't not on telegram But yeah, but those those things circulate very freely, right? And >> so >> that's great >> because then the the the the opportunity is much more equitably distributed. So that's the point I'm making that >> if we keep making efforts that to the extent possible we don't have artificial barriers I think some increase in inequality is not well one it is I think unavoidable to some extent but it'll also not be very disruptive.
18:28 >> Right. So to improve this baseline right I mean if you think of hard assets soft skills and good policy right I think this government has done phenomenally well on the hard assets side of things in terms of roads water electricity and so on and so forth infra and whatnot on the skills soft skills and the policy side of thing I think policy as well I mean we've tried to take a stab at it we have not been able to do this factor reforms or whatever but we have done this like a GST or PLI and so on right but the middle right which is let's say education healthcare and those kind of things that seems to be u something which is not very politically helpful for governments because any investment you do on all of these it shows up maybe 10 years later when you may not be in power right >> so absolutely and this is the the biggest challenge for for most economies who try to cover the development from lower middle income to upper income in in a very short span of time u and especially large economies. So so to to give you numbers here India and China are trying to cover the distance from lower middle income to upper income in about 60 years give or take. and this is a distance which was covered by the developed world in about 150 to 200 years. Yes. Now which means that you have to grow at 3x the pace 2 and a half to 3x the pace. And what that does is that certain natural social shifts that would happen. So for example, till I think the year early 2000s, the Chinese didn't realize that high school enrollments were bad.
20:27 >> They were so busy on reforming the economy that they that they missed the fact. So they have a very large percentage of their adult population today which which cannot do services. So there were people who were laid off or who were because the per capita incomes went up, labor intensive manufacturing was lost to Vietnam and Bangladesh and hopefully now to India. and the people who worked in those in those factories can't run Excel sheets because they're not studied beyond 10th class.
21:05 so their upbringing at early young age so there are there is something called a Bailey test which is measure of IQ in a sub 5year-old student or a child there are provinces where nearly half the stu the children in China fail the Bailey test and it is not a reversible change in the sense that a reversible problem meaning that it is not that if they're below the the required grade on the Bailey test at age five that at age 12 or 14 they will be able to catch up. So China has a huge problem because they couldn't manage. So they have a fantastic top 20% with access to technology significant financial repression which which gives them a lot of access to financial resources u and and and of course you know they they've managed it wonderfully well u massive research institutes academic excellence and all that but they still have the bottom 50 60% which is struggles to get involved in this in this fast growing economy. Now for India the the health care and education challenges are equally extreme. So we have and an embarrassingly high proportion of stunting and malnutrition and despite the free grains and and everything else that is happening those numbers are not changing. So maybe it is it is something deeper than that.
22:50 we are I think starting to solve some of the problems. So for example having an educated mother is absolutely essential for early childhood health and early childhood IQ development. and so the fact that secondary school enrollment higher high higher education enrollment in India is for women is now going up very rapidly is some way to go though and it's now better than that for men is is a significant achievement so we are making that progress but as I was saying because you're doing it in see in in in China for example what happened was that the the both the parents because they were factory workers And there were such big opportunities. They left their children with a grandmother who of course would have given a lot of love and affection but she would not bring them up for the services economy. So for example learning language requires that you keep talking to the kid.
24:02 >> So I don't know if you've seen this. I used to find it very irritating but I've now realized it's very valuable is that you know with my kids the both the grandmothers would keep babbling out saying something they said was what what is that f of understanding right but there is now a lot of study that I've seen that they're trying to see the mouth movement they're trying to learn how to speak they're actually focusing I mean if you you'll see they're squinting and seeing how the mouth is moving and they're learning language at that If the if you're not talking like that you actually are making slowing down the intellectual development of the child. Now when or or you know giving deworming injections or basic things right you know it's a 10 cent a year kind of cost but if you don't do it the child's development slows down and once you've lost it at age five it is very hard to recover it later. Now if you tell the grandmother that why did you do this? She said, "Well, my kids grew up fine, but those kids grew up fine because they were working for factories they in factories for manual labor." And you know so if this development happens over 8 10 generations the social shift can afford to be slower meaning that slowly grandmothers and mothers start to know that look at age one you have to start babbling to the child otherwise its IQ development will slow down. but if you do it in like two generations, it is too slow because the grandmother is still used to bringing up kids the way it was when everyone used to do farming. And I think so when you when you go through this this accelerated shift, there are very new sets of challenges that emerge.
25:56 >> and and this has to be done at like you know massive scale. It is not something that governments can solve. what governments can solve and thankfully with AI we can we have some opportunity in in addressing some very hard problems for example the per capita or sorry the percentage of state government expenditure on health and education or I'd say education to start with in UP and Bihar is much higher than that in Canada. Okay. U but the per capita spending the per student spending is a fraction of that in Kerala because the per capita GSDP is so low the and there is therefore fewer resources.
26:51 the the pupil teacher ratio is much worse. The the ability to enforce teacher attendance is very low. the pedagoguy is outdated. you have to work with suboptimal teachers meaning the teacher themselves are not well trained and these are things that I think states have struggled with because how do you find skilled teachers? >> Yeah. And how do you find motivated teachers and how do you incentivize teachers and even a state like UP has struggled I mean despite yoga having you know phenomenal intent and a lot of political power even he has not been able to discipline the teacher unions in in UP because you know so when he said we have to do biome ometric attendance have to make sure that teachers attending school they just revolted. Now how do you get educational quality to improve?
27:53 It's not just about spending. So so these are very hard administrative problems u it requires a lot of effort. So, so some of the think tanks so again it's a part of development that over a period of time you have entrepreneurs who are who you know create a lot of wealth and they just say that look now I have to start giving back they set up think tanks there are people who persist with these kind of problems work with the state government start to solve some of these problems but the but that also is a somewhat slow process in the sense that there is a natural if you see compounding effect that you know you have a certain number of entrepreneurs some certain number of think tanks how many people can they go and affect how will they unlock systems what AI and those technology and these technologies do is dramatically bring down the unit cost of education they also enable adaptive education so if you're in a class of 40 and you're the only bright child but 35 of the rest are not interested or you know have not learned not worked hard you are pulled down to their levels u but in in in online learning and AI assisted learning you can solve some of those problems so I think the the opportunity we cannot give up you know you're absolutely right that there's a lot of work to be done there but u I I must say that with the advent of AI these are areas healthcare and AI and and education where I think that the the most transformative impact can be had >> and the effort should be for all state governments because finally state subject is only so much that the central government can do and I do believe that some of the more progressive states are actually working very hard on these problems.
29:51 >> Right. Yeah. I I think on the I I I really feel that we need a very very tiny fraction of folks who are at that level that you're talking about right I mean Maslo's pyramid and very very top right before we get to I mean we don't need an Elon Musk or a Jeff Bezos right but maybe like couple of orders of magnitude below >> enough of that given our our population right can make a significant difference for sure right and of course I mean AI can help us scale on capacity and and so on Yes, for sure.
30:23 >> we're trying to do all of this when we are a loud, noisy, opinionated democracy, right? Again, you know, we reference China more than a couple of times, right? things can happen, you know, at a phenomenal speed, but also massive repression and, you know, those kind of things, right? is there something that we can learn? Is there a precedence for us to learn from other you know countries that have had similar circumstance well not the same scale and complexity but something that we can learn from them to do things right >> you know there's this statement ascribed to Joe Lai again China u which apparently he didn't say but it is ascribed to him that when he was asked about the impact of the French revolution he said it's too to decide.
31:17 No, but see and I don't think even if he said it, he was joking. see, there are things that see countries and civilizations potentially live forever. And so restless as we may want to be, I think it is it is important to have these natural checks and balances. now it doesn't mean that we we we somehow surrender ourselves to a lower pace of growth than what China achieved. I think it is possible to be disciplined and still drive that level of growth. meaning that a very large part of economic growth in China in the last 20 years was driven by real estate.
32:06 the construction of buildings and you know huge townships which many of them no one lives in. there are satellite cities that were built for office complexes. So huge buildings, beautifully constructed parks, not a single person. and they could do that because it's a state-owned financial system. So you you build so that creates GDP it creates incomes and then you know it creates its own virtuous cycles. but if something does not work you can socialize the losses because the losses are distributed over all the financial systems which is the model that they've used.
32:48 >> and it's a very wasteful model. it it has so far helped them very well. I mean it has they've become very prosperous on a per capita income basis. The state the government has a lot of power. it wields enormous leverage over large parts of the world because it's of its manufacturing dominance. so clearly a lot of positives have happened. but there are structural weaknesses that are emerging and you never know where they may be in the next 5 7 10 years because the the excessive leverage the over reliance on construction is something that is starting to slow down.
33:28 So look at it on the other side in India. So we have a long period of growth because of highway construction. So national highway construction goes from 2 3,000 km to 12,000 km a year. And suddenly everyone is clamoring that oh you know we've built too much and that these are not viable and there's a natural correction. Now it is quite possible and I do think so that this correction has been premature that we are perhaps being too cautious on returns. But the fact that these checks and balances exist is a sign that we will have very few roads where we've spent billions of dollars but no one is driving on them.
34:11 Look, the construction of roads creates income, but if no one ends up driving on them, that's a waste of the country's resources. Now, there is no free lunch and at some point comes you and comes back and hits you. >> So, so so there is some some merit. So, as you said, it's a noisy democracy. Everyone has a voice and all of that. It does in the near term mean that you're you're taking much longer to solve problems than you would have if you were in an autocracy or a single party country like China. But you know it keeps you balanced. It keeps you more sustained and but at the same time I do think that our policym needs to be a lot more adventurous. Mhm.
35:00 >> meaning that this fear of going wrong that if it goes wrong u this damage will happen is something that I think been a being a been a bit of a drag on growth. So the example I give keep giving I don't know if if you heard me say this but you know it's if you drive at 20 km an hour it's very hard to have an accident. but it takes a long time to get from point A to point B. But what Chinese have been doing is on a bumpy road driving at 80 km an hour and repairing things on the fly. It's always dusty, noisy. You're you're always solving crisis, but at the end of 10 years, you realize you've covered a long distance, >> right? and and I think that that that that willingness to to experience the unknown in terms of policy and let's try and see what happens is is so far has been a bit lacking meaning so far meaning that in the last I would say 20 25 years we have maybe 20 years we have seen you know like between 2004 and 14 for sure I think the objectives of the government had shifted post 2014 we have seen in fact I used to write in 2015 16 that this is like a house under construction house under re innovation that you know yearon-year numbers are useless because sometimes GST sometime demonetization sometimes >> some real estate adjustment that is happening rare is happening >> and then of course there was co but I I I think the the time now is for us to you know experiment with a few things. For example look at what what UP has done with freeing up the FSI for hotels the that that or the permission levels for hotels. So there is from what I hear a proliferation of two and three star hotels in in UP because the land prices have reduced yeah effectively land prices have reduced and the permission requirements have become easy. So you don't have to sort of wait for years to get a permission or you bribe a lot to get permission. So you can now clearly there are people who are upset that oh the poor quality hotels are getting constructed that's how the markets work. So the hotels that are poor quality will not get business right so this is how this is how markets work. So and and frankly I mean so so long as there are no safety and law and order issues and there are other kinds of concerns that can emerge but or maybe buildings start collapsing, construction quality is bad or whatever but so long as we can control for that why should we be you know gating the supply and and this is part of the reason why tourism in India is so expensive >> that Indian tourists find going to Vietnam or Cambodia a lot cheaper.
38:03 >> Sri Lanka >> Sri Lanka. So so this is so anyway so I I think I I think at a at a broader government level I'm starting to see a lot more risk appetite come in. so for example, Andhra Pradesh giving discom license to data centers or giving land 50-year lease 1 rupee an acre land use conversion becoming free that you can buy if you want agriculture land and use it for whatever you want without seeking any sort of government clearance which was of course a form of rent seeking. so the fact that states are at least willing to go down this path is itself quite quite phenomenal. so I'm starting to see you know that that governments both at the center and the state are starting to take risk >> right reform risk >> and like you know the decriminalization that happened that Janvishwas bill 2 where 750 7 800 potential violations were decriminalized. These are all good signs that the government wants to do reform. and I think some yeah so so when we compare ourselves to China u there are many things that we shouldn't do like you know only a focus on growth targets over the next 3 months or 6 months as much as it is tempting to do so it can drive you know I would say problems or it can create problems that show up only after 5 10 years. but what we can learn from them is the the willingness to to take policy risk because u being too risk averse is means that you grow very slowly. So is the right abstraction to look at the state and maybe not the center maybe like look at this kind of competitive federalism right I mean let Andra go out and do the best for its people so on and so forth as I'm saying this I mean people will for sure say this is the union of India and your all of that but then I mean why not right I mean why not let Gujarat do the best for its own folks attract FDI and get people to invest and and have certain loss for itself that can increase productivity then is that the answer?
40:43 >> there is a lot of merit in what you say and I totally agree that that is the model that can drive I would say sustained growth on on and there are many reasons why u that that works. The first is that most factors of production are directly under the control of the state government. So land is a state subject, labor is a state subject, electricity, power distribution, the cost of electricity is a state subject.
41:18 environmental pollution related issues are state subjects. So it is unless the states start to facilitate setup of businesses the center can't do much. >> Mhm. >> and so that so first is that many of these changes need to happen at the state level. Second that from starting off paranoid that India would break apart in the first 25 30 years of after independence >> right >> we were very worried that because most people thought India wouldn't survive as a country so the leaders were very afraid that you know we shouldn't have fuparious tendencies and we should you know have a union which was which was paramount today now that we have the confidence and the the and and so the states now are starting to become the centers of a lot of action. So so states like UP, Odisha, Andhra Pradesh, Tamil Nadu are starting to appear as beacons of reform and investment growth etc. the the next level of growth needs to happen. So the districts in each of these states are bigger than provinces in many countries.
42:41 >> Yeah. >> But there is no administrative or fiscal freedom to them. And so even the process of urbanization. So there's very limited stuff that the center can do. See the fact is a large part of the infrastructure India needs in the next 20 years has to be urban infrastructure. And while the center can provide some incentives, can provide some funding, it is finally the states who need to decentralize and it shouldn't just be that the chief minister needs to control each and every city because there's so much money to be made in the real estate markets and so on so forth. If you if you want to really create a vibrant cities which is very important for India's next level of growth you need to focus on states and get the chief ministers to maybe give independence to district magistrates in say four or five you may not be able to do that in in say all 75 80 districts in UP because you may not be able to trust the bureaucracy everywhere >> but you can choose maybe 10 bureaucra zones and and and have handpicked bureaucrats driving that, >> right?
43:56 >> the third is that nothing works like competition. So the reason my market forces work is that you know if there is a pressure to compete that if you if you don't do better in productivity and efficiency than your competitor you lose out and it is that which keeps companies on their toes. The moment that pressure of competition goes growth slows down and the the there is a bit of stagnation not a bit quite a bit of stagnation in economies in in companies also. So so competition between states in terms of I mean they can it can get become too too intense also at some point but at this stage it's too little. So I think we have to move in the right direction.
44:52 >> And one very interesting comment that came from I'm not saying that we should replicate that but there's this expert Edward Latwak he said that the death of Europe happened when they stopped fighting. So his thing was when so long as the states were competing and jostling with each other >> they were innovating. I mean look at for example I'm not saying that we should start fighting with each other but but but point is look at what what Ukraine has come up with >> right >> they're now doing attacks which are which are human free right completely AIdriven drone driven they have come up with u you know paper drones which are deadly >> the kind of innovations that are starting to happen because when you have pressure you're forced to innovate Right.
45:52 >> And and all the artificial barriers in your mind just are thrown away. and so it was according to him the fact that post Second World War a peace zone was created. Now all of your energy is just going into solving problems like bureaucracy and diversity and environmental issues which are all important but >> they have taken away from the pressure of growth and because then you're not competing >> right >> and and so having healthy competition between states so for example if say say Maharashtra is is very deeply upset that data centers are you know making a beline for Andra maybe it will start offering you know cheaper land and cheaper electricity and better terms and and starting to attract them >> right >> so so so those are you know the easing of labor laws the the incentives given for industry to set up factories some of these I think these changes need to happen at the state level and what is very interesting is that there is a very vibrant I would say a very fertile ecosystem of bureaucr bureaucrats who may belong to a state carder but they also hold loyalty to their their batches. So it's it's actually it's very surprising and and how efficiently it works. So they will still be connected to their batch meds and so someone could be in Odisha, someone could be in UP, someone could be in Rajasthan and say you know what I in our state we're doing this policy. Oh very interesting. So and then you take that and try to copy paste into some other state. what we need to do is perhaps do it faster.
47:51 the from what I hear the the power distribution act reforms that Odisha has done are absolutely transformational. but of course there are political challenges in implementing it in other states as well. But but if if say five or seven big states implement that I think a large part of our problems would get solved on the power side. >> Right. So for all of these big changes do we need like a nice juicy crisis because I I was just reading about you know some of the politics and the economics around the 91 reforms right and I came across this lovely phrase which is optimal crisis something that forces a change but doesn't wipe you out right >> now we have a like a whole buffet of crisises to pick from right do you think that something like this will actually force a change and get us to do some of the hard stuff. So last April there was five six of us were meeting the Singapore president president Turman Sharmmugatnam and he made a very very cryptic remark he said you know India's tragedy is its large size and its glorious history and so we kind of all of us agreed on the large size and the glorious history but we wondered why tragic So so his point was that this is why you don't change.
49:28 People change when there is existential risk. Like you know you can keep telling someone that you should work out, you should be healthy, don't eat this, don't eat that until they get a medical scare, they don't change. societies are something like that. that they work like something like that that they so big shifts big changes happen when because see at any point of time there is vested interest in the status quo people who are used to a certain amount of income there are people who are used to a certain hierarchy >> position everything >> correct right so if you if you are seen as disrupting that u there's a natural resistance and what I've seen in government is that at at any point of time on any big decision there are 150 people who who don't formally need to sign on the document but who need to nod meaning that you know they need to agree with what is happening >> 80% of them generally don't know much about the subject >> and and I don't mean it cynically it is like you know whenever you get into a leadership position in a you'll be asked to take decisions on things you know nothing about right so you would wonder why are you asking me this but you know someone needs to take a decision and so this I think happens very often in the government also and so the consensus formation happens very easily when everyone is focused on one problem that look energy availability the fact that we import so much of dense energy the fact that only 15% of India's energy consumption is in the form of electricity. China was here 20 years back. China is now at 25 27%.
51:24 Japan is at 32%. Why aren't we electrifying faster? why is our power power pricing so distorted? Now these are questions we've been asking for 30 years. At least electrification question I've been asking for a decade. But that is a power pricing question I know has been asked for 30 years. but it was too politically difficult. But it is only when you come under pressure and you realize that oh my god if we are not doing this we are paying through our nose for oil and gas that we import change will happen. So you're absolutely right. I think the the crisis forces u consensus to be built because the people who are opposing understand that this is even if they don't understand at least they understand that they don't understand the reason behind it they understand that if they stand up and oppose no one is going to listen to them and the people who are driving that reform have a stronger voice and they try to push it True. So you need a crisis though I think there are things that can be done even without a crisis.
52:40 So the implementation of GST did not need a crisis. >> It was a huge policy risk. >> it of political consensus and so on. >> Yes. Yes. yeah it required significant consensus building. Yeah. >> it although it may not have worked you the risk was that you could have lost a lot of revenue. >> Yeah. >> and the state would have shrunk and it could have created a lot of inflation. I mean many ways could have been gone it could have gone wrong but it didn't. and that's the kind of policy risk I'm talking about. You know take more and more of those. I think the the the potential growth then starts to go up. U as of now are there other tough reforms that need to be undertaken? Absolutely. U if we like you know you know funding cities. Now the link between balance of payment crisis and urbanization may not be very clear to everyone. Meaning how are they linked? They are linked because if your cities are more productive, if your cities are more efficient, you can manufacture faster, you can get talent concentrations. Why do cities work? Because there are a lot of people, talented people, dense population se clusters come together and then they innovate faster, they solve problems faster, they can collaborate faster. And if you can't have efficient and large cities you you you miss out on that. So you'll you'll realize that and there's this pattern of that you know you you feel that when you go from say a small town like Bukaro where I grew up with five seven lakh people you come to Bombay the pace of change is that the pace of life is is so much faster >> right >> and so it is that because you are living in a larger city and you are by per force to to be able to afford to live there meaning where the cost of living is much higher you are forced to interact work harder of course and interact with a larger number of people so your interactions are also a lot more faster and transactional so people think people are selfish but that's the cost of living in a big city so there is a certain structure of life structure of interactions which which drives productivity.
55:14 and so having more cities where you know there is a the hard infrastructure the power the connectivity all of that is extremely important but and once you have that then you are you're you can be you can be innovating you can you can do more R&D you can have factories which have very differentiated products you can provide services which no one else can and that then again is a direct bearing on your balance of payment. So I would say that while there is an emergency measures there there may be some emergency measures needed in order to get you know a few tens of billion dollars of capital in so that the balance of payments at least for this year is adjusted but from a medium to long-term perspective I think we have to completely prioritize productivity u urbanization reduce regulations so yeah and all of these things happen only when there is a crisis. So going from let's say GST and PLA to something more wide sweeping like let's say land labor judicial reforms or even like reforming the bure bureaucracy and so on right I mean we won't take one at a time but then for all of these broad reforms what is even the starting point right I mean because there needs to be like massive political consensus there's going to be massive displacement in the short term right there are going to be political ical what is that consequences as well right so I I heard Prime Minister Narim Rao famously said in the 91 time that not a single worker will be fired right or will be let go of it's another thing that I mean our what is that hiring as well didn't go up in the following three four five years as it should have with all the capital that we attracted right so it seems like a very hairy complex problem to even get started on any of these axis right is there a common like antidote that or a prescription that you would have for any of these like to get started. The first is as we discussed earlier you can make it more bite-sized let the risk taking happen in smaller sectors like so you don't have to necessarily do it at the central level meaning at a national level you can let state governments drive some of the reform this is exactly how even China has done it and there's something to be learned there >> right >> that you do these experiments policy experiments in one province and if it succeeds needs then >> yeah so so copy paste it into others you can even move the people from there to drive the change everywhere like for example the Delhi metro rail corporation the has been running the metro rail projects across the country so you have one good metro rail project and then suddenly you know 20 other project 20 other cities benefit from that expertise so you have to but you have to make sure that those changes are being experimented upon somewhere and and make sure that someone is evaluating the consequences of that and amending it and then trying it again if it once it starts working then copy pasting it everywhere else. So the that's the that's I would say the most obvious way to handle the the policy risks that you attempt it in a smaller sector a smaller state >> and then copy paste it elsewhere >> u especially on things like land and labor which is finally a state subject these are state subjects there is I don't think much opportunity to to do big reforms at the central level even power distribution reform. I mean it is something that state governments have to do themselves and different states will try out different things. So so as I said Andhra Pradesh can try out you know giving data center a discom license. Maharasht can try to sort of create a separate SPV which holds all the losses from selling subsidized power to households and farmers and then have a discom which is viable and profitable and try to list it. So once you do that then it becomes very hard to then merge it back to that SPV >> right >> so so so again it for most people this is too slow a change the way I see it it at least they're moving in that direction and so so different states try out different things u and maybe Odisha which has actually done very well on the discom side the distribution power distribution company side their lessons are now being used by the central power ministry to educate the state government that look this is how things have been done. So some of the the reforms that are happening under the Dr. Somatan committee and the Rajiv Goba committee. these actually are are u designed along this this this pattern meaning that last year the the the Sumatan committee listed down 23 reforms. They they included things like allowing women to work the night shift in services sectors.
60:47 there was a requirement of 15% of land in a factory being allocated forcibly to greening. they they said this is not necessary now. Some 161 17 state accepted it which means that in those 161 17 states factories now have 20% more land than they used to. 85 became 100. Okay. So so they have listed those and 76% of the reforms were accepted 10% are under implementation already when 76% have been implemented 10% are under implementation. So 86% effectively were accepted by the states >> right >> this year they have taken a new set of reforms and for example I think partly acknowledging that government schools beyond a point actually are cause of efficiency u they are freeing up the requirements to set up private schools >> right >> so for example you know why do you need there's a mand mandate that you must have a playground to be able to start a school you know so while it is important for kids to play >> why not mandate it >> yeah why why mandate it right so let the parents and the students take a call >> right >> so so there are some certain very important things that are happening where u the states are being being advised being being counseledled and positive examples from states are being sort of made available and Some of this is very nerdy you know in the weeds kind of reform >> right >> but I think the the the 3 five year 10 year impact can be quite significant.
62:35 >> Yeah. So it may not be visible but it's under works and its impact may show up positively in bite-sized chunks let's say. So we've spoken about one of the external factors which is this whole geopolitics piece and you know there I feel like the rule-based order right we'll actually the positive thing is we'll get to renegotiate some of our relationships right and and perhaps I mean we may do a better job at this point of time considering that we are larger we're growing at a much higher pace and so on right so maybe a positive for us but then I mean when we think of AI we spoke about how it can help us bridge capacity for instance right but it also feels like you Now we have our manufacturing sector which is not completely developed right now. Our services is at this point I mean of course it it has been thriving it's it's kind of helping us out but AI might threaten services right. So how do you see the impact of AI on India as a whole? So there is there is so AI has value in generation of intelligence where India is mostly absent.
63:43 So AI u you know the trillion dollars of capeex that is being planned u the fact that we don't have GPUs we don't have semi manufacturing we don't have memory u we don't have large language models so there's a lot that we don't have and that's clearly and we don't have the venture capital to even fund that so our best models would get $50 million of funding maybe hundred million dollars of funding. the the US large language models get 30 $40 billion every six months. So you know it's like a thousand time more investment. So it while we may be better off at using that minimum dollars but and it's the same problem with China. It's not that China is much better off they better off much better off than us but compared to the US they also can't afford to have that level of risk capital >> right? because their funding also can't be of that scale whether it is needed or not time will tell but but anyway so on the generation of intelligence I think we have a lot of catch up to do but as of now it's not a big driver of economic activity so we are funding models like servat jen which I think in couple of years time will become you know quite powerful and useful for the country >> right >> we have startups which have venture funding. even some of the funds that RDIF is evaluating have invested in semiconductors. In fact, that's one of the focus areas that the RDIF is targeting. we have transformer companies because you know there's a big shortage of transformers in the US because power supply for these data centers is a huge issue. there are Indian transformer companies which are massively increasing their capacities and their revenues will rise in the next couple of years. so we are working on those but I'm not sure that you know in the next 3 five years will be very substantial >> on the deployment of AI because see it's not just the generation of AI is it's like you know setting up a highway or building a highway is is GDP but then using that highway also adds to GDP.
66:01 >> Mhm. And so we are not part of building the highway but we are definitely going to be driving on that highway >> right >> and we are already starting to drive on the highway. So, so across a range of firms and across a range of sectors the the unit cost adjustments so to explain what I mean if say banking as a sector u if you only had branch banking and it cost 100 rupees per transaction there was a certain percentage of people in the population who could who could get access to u to branch banking.
66:44 Now if you don't have a bank account, it becomes an issue. It becomes a productivity destroyer. Now it was a virtuous cycle where over a period of time you would see you know incomes growing slowly more people getting access to bank branches and banking bank accounts and therefore growing their economy. It was when you were able to bring unit cost down from 100 rupees to one rupee, >> right? >> That suddenly everyone got Jandhan Yoja then you built UPI and those were very transformative changes that happened.
67:17 AI will allow us to do many of those changes. so we discussed education and health but it could be an urban design that you know one of the reasons why city governments are not given capital because they don't have anyone other than sweepers and clarks. >> Mhm. >> so if you can't even design a small bridge why should the government give you money? But now with AI tools solving those problems or look at some of the ads that get thrown by some of these generative AI companies in India those are I don't know how helpful they really are but in in real life but the use cases they are demonstrating are actually you know very good examples of how AI can help. For example, if you're a small wall manufacturer in UP, how do you know which customer to approach in Europe, >> right? It it it mostly tended to be serendipity that you met someone and he said, "Oh, you know, you have a great product. Why don't you come and see us?"
68:21 Or you go to an exhibition or some u trade show and build some with throw your visiting cards and so seek someone out. but here you can get access to that knowledge. you also get access to what are the requirements. I mean there's this funny ad about this lady who goes to get a home loan. You must have seen that that you know and the guy who's she goes to is like packing his lunch box and very gleefully about to stand up and say that I'll just say or did you get these 15 documents or not and very often she will not have that.
68:56 So he was and then she just starts throwing. >> So but you know these are these are funny ads but but actually they are real productivity enhancers. >> Yeah. >> not about you know home loan documents but but I'm saying that you know just knowing the process. >> Yeah. >> what what certifications you need to be able to sell to Europe? how do you get access to supply chain? How do you get access to dollars to be able to import something so you can export? All of that is expertise which was missing.
69:25 M >> but now it is just like you know the the the PDF of exotic math and physics books to prepare for J is now circulated and available everywhere. You have this intelligence available everywhere. So I think when it comes to using AI deploying AI I think India will do really really well. >> You don't think it'll threaten our social mobility in some sense. I mean because right now we have we are in this weird transition phase where we don't know what skills are going to be relevant right and so the old ways of you know study get a degree get a job get married maybe a car house and so on right that ladder seems to be on very shaky ground at this point >> I'm not so sure see it it will be a turbulent time see not to say that there won't be readjustments But outside of a few sectors I don't see that big a change in the sense that >> out of 620 million workers in India there are 5 a half million workers in IT there's another 2 and a half million maybe GCC and BO and all that and there is 3 million people in banking a few million I few lacks of lawyers and >> media yeah so so that's about it I mean 20 million So no they generate a lot of income >> but the point I'm making is that so long as it's not leaking outside the country it is all going to get like you know if say banking suddenly cost to income ratios drop from 40% to 30%. because you're able to target customers better.
71:04 You're able to evaluate customers more efficiently. You're able to give more loans. You can generate more income from the same set of people. That's great for the economy. So, it may mean lower margins, >> right? >> Because some of this will get competed away, but it'll be it'll be it can be very powerful. Now, the social structure see the hierarchy formation frankly humans are very good at. You look at kids on the playground they form hierarchies on again want to use crude stuff which boys do but but you know who has how long a hair and whose hair is curly and whose hair is straight girls will do that so hierarchy formation we'll be able to manage I don't think humans are very that's that's never been a problem in >> yeah that's in our genes u those things I worry less about will there be a lot of disruption maybe Not because what you're realizing even in the software development community is that the the best users of generative AI coding tools are the star developers.
72:17 >> Yeah. >> the mediocre ones do sloppy code. >> So I think so see it's it's it's going to be a learning curve. I think what I like to say is that the or boundaries will shift meaning after Jack Welch did the outsourcing boom in GE for 30 years we've been seeing steady increase in outsourcing of it as the sprints become shorter meaning from business requirement to deployment is one week >> you would want to keep it inside the firm not outsource it so GCC's may become more more sort of bigger employment generators and IT services companies. you never know which way it's going to go. So there's going to be uncertainty and churn but >> I'm not very negative on the impact of this on the economy but at a net level I think we will be big beneficiaries. U final question which is that as societies become richer they also become sort of demographically a little more fragile right. I you know listen to some of the discussions on the female labor force participation that you mentioned right but there is also a case where you know if you look at like Korea or Japan or China I mean the TFR is precarious at this point of time right so how do we avoid that like how do we make sure that our society as well is >> find an enemy so so so the the the economy where so you know that impossible ease three E of of of of demography ego, economy and ethnicity, >> right?
73:56 >> So if you have high ego, you'll have fewer kids. But if you I mean you take give yourself too much importance, you'll have fewer kids. but if you want a stronger economy, you want to have more kids. So you can buy balance either economy or ego. If you want to balance both, so you want to do well in the economy but have fewer kids, you have to let go of ethnicity. So you let immigration happen, which is what the Americans do. but if you don't allow ethnicity dilution, then you get stuck in the Japan and Korea and and China model problems. The the other issue that exists in these societies versus say US, in the US 50% of kids are born out of wedlock.
74:43 >> Mhm. in >> which is a crazy number right I mean unthinkable in some sense right >> it has been happening for decades yeah I know but it is it's shocking for us right most most people in Asia including North Asia >> and u so if you can't have kids out of wedlock >> and the women don't want to marry because it is too because of the the cultural norms again you know this is where if you do accelerated economic development the culture doesn't change as fast >> the women are still supposed to be doing the dishes is and you know compromise between the two husband wife someone has to compromise the wife has to do that why should I do that I've studied as much as smart as this hello why should I just give up >> so they don't want to have kids and you can't have kids out of wedlock so they don't marry >> so so they they don't marry they don't have kids so there are the Israelis have managed a fertility of over three despite very high per capita income that as you can imagine whether you're surrounded by enemies or then I guess we shouldn't be laughing about it but point point is that so socially I think if we if we learn from what the Americans see which Claudia Golden's career and family was like the reason why we wrote that report on on female labor force participation was very inspirational >> right what they went through over a 100 years, we need to go through in 30 years, right? Because as I said, we have to do two and a half time three times faster. So if they solved the the enrollment and the cultural norms and the marriage penalty going away over 40 years, we need to do that in 15 years. they're still struggling with motherhood penalty because the motherhood penalty that you know the moment of so so boy and girl graduate out of college they're earning the same amount and they keep doing the girls that don't become mothers keep earning like that but the girls who become mothers there's a wide so this is the motherhood penalty >> how do you minimize that if you can't minimize that then fertility will fall u and so this is the this is the conundrum but there are solutions to that you know you work on of course overall job creation but also create part-time work so there see if you identify that as a problem and there is a fair amount of consensus in a diverse place like India but if you have a fair degree of consensus you can start solving some of those problems also okay on that optimistic note we'll end the conversation thank you so much sir this was a fascinating fascinating Obviously one can talk to you for hours but you've taken time out of a very very busy day month year perhaps. So thank you so much.
77:38 >> I'm very lucky to get opportunity to work. So thank you. Thank you for having me.