The former Chief Economic Adviser on India’s current slowdown in economic growth and the mix of policies needed to reignite it
In a career spanning more than four decades, economist Kaushik Basu has donned many hats. He was Chief Economic Adviser to the Government of India (2009-2012) and Chief Economist of the World Bank (2012-2016). At present, he is Professor of Economics and the C. Marks Professor of International Studies at Cornell University, U.S. He is also President of the International Economic Association for a three-year term (2017-2020). A prolific author, Mr. Basu explains why demonetisation was a bad idea and the need for the Goods and Services Tax (GST).
You have been a vocal critic of demonetisation and its intended purpose. Do you think its immediate effects are behind us? And, conversely, if there are increased digital transactions and tax scrutiny, as claimed, will that eventually lead to more growth?
I believe that demonetisation’s worst effects on the economy are behind us now. I do not think it will confer any long-run benefits in terms of digitalisation because that is a slow, natural process. There is no way that an emerging economy like India, with more than half the population still living in the informal sector, can leapfrog advanced economies and get there by a simple policy intervention. The main damage of demonetisation is to India’s reputation as a professionally run economy, since it was an uncalled-for jolt to the market.
You have been a consistent supporter of the other major reform, the GST. Is the current multi-tiered GST design optimal, considering that much of the voiced distress comes from small businesses? The textile sector, for example.
The GST was needed and I am glad that the government managed the political process to get it through. But it has been poorly implemented. For such a large policy shift, the planning and implementation design should have been much better. Also, it should not be too multi-tiered, which is both inconvenient and makes one wonder if this is a sign of sector-specific cronyism. Once we go past these teething troubles, the GST should aid efficiency and growth.
Has the Narendra Modi government leveraged the historic mandate it received, in terms of economic policy? Is there scope for further reform, which could possibly be seen in the Union Budget to be presented soon?
The broad policy continuity that we have seen in India — the GST, the effort to manage fiscal policy in ways similar to what happened before 2014 — is India’s strength. Yes, as always, a lot depends on the Budget, and we are all waiting to see what new initiatives are announced. But in fairness to the Ministry of Finance, India’s challenge is not a matter of fiscal policy alone. India’s economy is doing poorly on several fronts. Consider exports — they have dragged, with India’s trade deficit with China growing rapidly. Exports did seem to grow well from April to November last year, with an annual growth of 12.3%. But it was a time when several emerging economies did well and India’s performance fell short of many other nations, like Indonesia and Vietnam whose exports grew by 16% and 24%, respectively. I believe that India’s long-term prospects are very good, but to get out of the current morass, it needs a professionally designed combination of fiscal, monetary and international trade policy initiatives.
Considering the marked slowdown in agriculture and manufacturing, do you think there is a case for a focussed stimulus package now?
The growth slowdown is a matter of concern. India is now growing slower than not just in the last seven or 10 years. Over the last 30 years, India’s annual growth was 6.6%. During the first two quarters of this financial year, annual growth was 5.7% and 6%, respectively. Even if growth picks up in the last two quarters, it is unlikely to exceed 6.5%, which is the government’s forecast. In brief, India’s growth has dipped below average for the last 30 years. Given that over the last 30 years India experienced a fairly steady increasing growth rate, this is something that should worry all well-wishers of India. We do need a stimulus, which needs to be professionally designed and coordinated with the Reserve Bank.
For much of the current economic woes, the stated government reply often refers to the “policy paralysis” of the United Progressive Alliance-2 government. This is particularly seen in debates around non-performing assets in public sector banks. What are your views?
There were certainly policy flaws during the UPA period, including the time when I was Chief Economic Adviser to the government. One always feels in retrospect that one should have done this or that. The current slowdown in growth, however, has little to do with UPA-1 or 2. It is a consequence of demonetisation, which was the wrong policy; the GST, which was the right policy but poorly implemented; and the steady slowdown in the rate of investment.
The NPA problem that you refer to is different. It had a slow build-up over a very long time. The credit goes to (former Reserve Bank of India Governor) Raghuram Rajan for drawing our attention to it. Unfortunately, he left India before he could help banks smoothly transition out of it.
Many perceive an increase in obscurantism in science in India, and a stifling of certain ideas and debates, particularly in the social sciences.
There is indeed reason for concern about the rise in obscurantism. Historically, and thanks mainly to our founding fathers, most importantly Nehru, India stood out in the world, certainly among emerging economies, for nurturing science, openness to new ideas, and progressive thinking.
A country grows faster when you have a churn of ideas. If you want India to do well in the long run, you have to create space for that. The state will, of course, have its view. But the state must protect the space for contrarian views. I am all right with a Minister believing that evolution did not happen, and that Darwin was wrong (referring to Minister of State for Human Resource Development Satyapal Singh who said that the theory of evolution is ‘scientifically wrong’) as long as those who believe Darwin was right are not shouted down as anti-national.
Considering the allegation that pseudoscience is often propagated by those in positions of power, do you think the state is doing enough to preserve this space for debate and for science?
The state must support scientific temper. It will be a mistake if we put ancient medicine on a par with modern science. We should be proud of our intellectual heritage but it is foolish to claim that for every scientific breakthrough, we had done it first. This hurts a nation’s credibility. Second, while we should appreciate our heritage, we must not take that to be the final word. Kautilya’s Arthashastra was a major work in early economics. But it will be foolish if we give ideas in that ancient text precedence over modern economics — be it the works of (John Maynard) Keynes or (Paul) Samuelson. We should feel free to contest these later thinkers but it will ultimately hurt us to silence them. I stress this as an appeal to our leaders — political, corporate and thought — for the sake of the nation, they must reject obscurantism and promote openness and analytical thinking.
The Centre has asked many government labs to raise funds from the private sector. Is this approach a move in the right direction?
The private sector has a potentially important role to play in funding research. So it is not a bad idea to promote such engagement, but this should not be used as an excuse for the government to shake off its own responsibilities. The private sector will typically fund research that is commercially viable. But a modern society needs all kinds of research, including in fields that may not lead to profit but create a culturally vibrant society. The state has to take responsibility for this. It will be short-sighted to make profit the sole criterion for funding research.
It has been six years since you joined Infosys as the Jury Chair for the Infosys Prize in Social Science. How has the journey been and how do you assess the impact of the prize?
I joined initially as a jury member, with Amartya Sen as Chair, and later took over as Jury Chair for the Social Science Prize, while Mr. Sen chaired the Humanities Jury. The Infosys Prize has been a great journey. In the long run, a nation’s development depends much more on knowledge and creativity than on tweaking policies, though of course one must not play down the importance of right policies. Economic policy can give huge positive or negative jolts. It can do good and can also mess things up. But the long-run performance of a nation depends disproportionately on human capital and creativity. You can see this through history — be it in 4th century Greece, 19th century U.K., or 20th century U.S. In these societies, long-run economic advance moved hand in hand with education, research and overall creativity, be it in science, mathematics or philosophy. The reason I think these Infosys Prizes are so important is precisely because they try to stimulate the creative urge.