A rosy future for India's economy?

 
Indians outside the stock exchange in Mumbai India's growth slowdown has been mild

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Two years ago, as I moved from the US to become adviser to the Indian government, in Delhi's imposing North Block, I decided to call it a day as a BBC columnist.

Yet these have been wondrous years, with much to record.

An early cue that I was in a new setting came in the very first week, as I reached for the seat belt in my office car.

My kindly government driver, knowing that I had come into "high office" from academe, turned to me: "Sir, now that you are chief economic adviser, you don't need to wear a seat belt."

'Witch-hunt'

It became soon evident that, as far as policy-making goes, India is no different from any industrialised nation.

Globalisation and India's open society has ensured that much of the same discussion that occurs in Europe and North America occurs in the North Block.

As I write this comment, the Indian economy is going through a difficult patch. Industrial growth has slowed over the past half-year and inflation has remained high.

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We must not return to the 'raid Raj' days, when the government, in search of hoarders, unleashed a hostile bureaucracy”

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Some of the factors behind this are known.

Starting with the Commonwealth Games and the 2G spectrum sales, corruption charges have vitiated India's business ethos.

There is a build-up of civil society anger about the ubiquity of corruption. While this is welcome, this has encouraged a witch-hunt, suggestive of Arthur Miller's The Crucible, in which everybody treats everybody as suspect.

The consequence is that bureaucrats are hesitant to take decisions, since doing nothing is one way to ensure that you do nothing wrong.

What is needed is to go after corruption but to do so with an intelligently-designed enforcement system, using contemporary ideas from law and economics.

We must not return to the "raid Raj" days, when the government, in search of hoarders, unleashed a hostile bureaucracy, bringing even legitimate trading and stocking activities to a halt.

Second, the eurozone crisis and the global slowdown are creating headwinds for India.

Anti-corruption protest in India "There is a build-up of civil society anger about the ubiquity of corruption"

The general slowdown among G20 nations is sharp. Only one country, Australia, grew faster in the second quarter (1.4%) than in the first quarter (1%).

However, despite these woes, once we turn our attention to the fundamentals, there is reason to be optimistic about India.

Even after the slowdown, India is growing at more than 7.5%.

Further, what often goes unremarked is that, since 2003, India has been saving and investing well over 30% of its national income.

This is reminiscent of the East Asian economies during the heydays of growth.

As India reaps a "demographic dividend" - which refers to a rising bulge in the working-age group population that will occur over the next 20 years - it is expected that the savings will rise further.

None of these changes have been brought about by an authoritarian government.

Central banking

After Independence, there were periods when India thwarted the inflow of goods and services, but, luckily, never ideas.

This openness has nurtured democracy and widespread participation, and given India a stability which many emerging economies do not enjoy.

Job seekers in India Savings will rise as India reaps a demographic dividend

As a consequence of these emergent strengths and India's arrival on the global scene, the nation can no longer look away from the challenges of money and finance that the world faces and which have a direct bearing on India.

I pick one example each from money and finance.

It was realised at least three centuries ago that a single economy should have at most one central bank.

The Riksbanken in Sweden, in 1664, and the Bank of England, in 1694, were founded with this in mind. Soon this became the norm and gradually virtually every nation had its own central bank.

This model served the world well for long, but with globalisation - money and goods flowing easily across nations - the world is beginning to look like a single economy.

Since the world has many central banks, this means that we are inadvertently going back to the arrangement we tried to shed in the 17th century.

This has weakened the power of monetary policy for each nation and has given rise to large spillover effects.

The UK has injected £75bn ($120bn) into its economy. But this does not seem to have had the impact it would once have had in boosting its growth.

On the other hand, it exerts an upward pressure on prices in India, China and Brazil.

Evidently, central banking needs co-ordination of a kind that the world does not have today.

Too Rich to be Poor

Turning to finance, a central problem is the mantra, Too Big To Fail, repeated often enough to have acquired the clumsy acronym TBTF.

The argument is simple.

Occupy Wall Street protest in New York There have been global protests over austerity and banking practices

Some banks are so large that their collapse would inflict huge collateral damage on ordinary consumers and workers. So, to protect the latter, we need to recognise that some banks are TB to be allowed TF.

The recognition of this problem gave rise to major rethinking on finance and new legislation for financial markets.

However, there is one mistake we made.

TBTF has been misread as TRTP - Too Rich to be Poor - meaning state insurance is provided not just to the big banks but their rich owners and chiefs.

What is needed is a policy that ensures that, when a big bank fails, we have enough capital to prevent the bank's collapse, but we permit the owners and chiefs, who were behind the decisions that led to the failure, to fail.

Not to do so is not just morally wrong, it encourages bad decisions and excessive risk-taking.

What the world does in terms of central banking and the rules of finance is critically important to India. That was always the case.

What is different is that India is, for the first time, in a position to influence these debates and help shape the rules of the game. It must take up the challenge and be a worthy participant at the global roundtable.

Kaushik Basu is Chief Economic Adviser to the Government of India, Ministry of Finance, and C Marks Professor and Professor of Economics, Cornell University. His most recent book, Beyond the Invisible Hand: Groundwork for a New Economics, was published earlier this year.

 

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  • rate this
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    Comment number 14.

    The Indian Rupee currently stands as one of the weakest currencies globally and the stock market as one of the worst performing year to date. Highlighting problems in the western economies diverts attention from the structural problems in India that are the root cause of high inflation. The demographic dividend is increasingly frustrated as current economic policies do not meet their ambitions

  • rate this
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    Comment number 13.

    Only disagreement I have is that no bank is too big to fail. Just look what has happened in the US & EU with their bailouts & Q.E. Banks are businesses, if they fail, they fail.However, I do believe that a bank that is willing to subject itself to a forensic audit so that officials may understand what has gone wrong, should be allowed more leeway to right the ship & work with govts to do so.

  • rate this
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    Comment number 12.

    Consumerism is an outcome of globalization. It is not something India wanted or willingly embraced. It is hypocritical to suggest that India should not develop because our planet cannot sustain while the west is making merry. The whole idea of more you consume better for the economy is an idea from the west. Look inside. That's what my religion says.

  • rate this
    -1

    Comment number 11.

    The west must drastically reduce its carbon footprint but this is not enough, if developing countries are allowed to develop, then this will unleash irreversible climate change. Fortunately in the case of India corruption, face saving & over population will kill development dead without the need for intervention by western agencies or NGO’s.

  • rate this
    -1

    Comment number 10.

    GOI has good guys like Dr. Basu, Dr. Ahluwalia, Raghuram. They need a technocratic FM, not a career politician who gives hilarious statements like "High inflation is unacceptable". Currency Traders, have an uncanny ability to dig through the gibberish to see if there is any substance at all. Indian government has lost credibility on wall street. Inflation, deficit, growth rate, stock market.

 

Comments 5 of 14

 

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