1. India stands out amid protracted deterioration of global economy: Kaushik Basu

India stands out amid protracted deterioration of global economy: Kaushik Basu

Worried about the global economy being in a "protracted deterioration", noted economist Kaushik Basu has warned against low interest regimes and the rich countries following "foolish policies" like protectionism even as he asserted India stands out with a growth rate of over 7 per cent.

By: | Washington | Updated: October 2, 2016 1:44 PM
"The global economy is going through a difficult phase. There is no sharp downturn but a protracted deterioration. This year’s global growth will be less than last year’s. In addition, there are individual countries that are struggling. (Reuters) “The global economy is going through a difficult phase. There is no sharp downturn but a protracted deterioration. This year’s global growth will be less than last year’s. In addition, there are individual countries that are struggling. (Reuters)

Worried about the global economy being in a “protracted deterioration”, noted economist Kaushik Basu has warned against low interest regimes and the rich countries following “foolish policies” like protectionism even as he asserted India stands out with a growth rate of over 7 per cent.

“The global economy is going through a difficult phase. There is no sharp downturn but a protracted deterioration. This year’s global growth will be less than last year’s. In addition, there are individual countries that are struggling.

“Among relatively well-off countries, the Russian economy is shrinking. Among emerging economies, Brazil and Argentina have negative growth. In addition, several advanced economies, such as the Eurozone and Japan, are battling lukewarm growth,” he said.

In an interview to PTI before demitting his office as Chief Economist at World Bank, Basu however complemented Bank of Japan for its “attempt at creativity”, as against the tradition of central banks tending to be non-experimental in their temperament.

“It is good to see this changing. The last week we saw both the Bank of Japan and the US Fed take stock of their policies and make announcements. Both are being creative. The problem however lies elsewhere.

“They are trying to go in orthogonal directions. And in today’s globalized world that will not work. That is why the big challenge for central banks is not what they do individually but for more coordinated action. It is a bit like a nuclear non-proliferation treaty. A single country can’t do it,” Basu told PTI.

Talking about the major concerns in the global economy, he said among advanced economies, the US is in reasonable good shape, with unemployment below 5 per cent, and, among emerging economies, India stands out for its steady growth of over 7 per cent.

“What worries me is that the global slowdown has continued for so long, and given that there are some vulnerable points to do with debt and banking, one small crisis can spark a bigger fire, pulling the entire world economy down for another dip.

“There are two specific matters of some concern. The first is the very low interest rate regime that we are in. I am talking about industrialized economies and their central banks. Six of them now have at least one policy rate in negative territory. It began with the ECB in June 2014. Now we have Sweden, Denmark, Switzerland, Japan and, most recently, Hungary, join the band.”

Basu, who had earlier served as Chief Economic Advisor in India, said the the negative interest rate experiment was worth trying but, but one must be prepared to accept that it may not work like any other experiment.

“What is happening is that with such low interest rates in so many countries, far from saving less, people are saving more to stock up for their old age. Pension funds around the world are under strain.

“Despite this, no central bank can do much unilaterally. The economies are caught in what is best described as a negative-interest trap. This is affecting other economies as well. The reason that the US Fed is not moving up rates is not any weakness in the US but if it does so unilaterally, with so many other central banks using negative rates, it will cause the dollar to strengthen, exports to stagnate and even the stock-market to be adversely impacted.”

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