The New Year brings a sense of anticipation on the economic policy front, especially with the Union Budget around the corner. This year is particularly critical in this regard as we have emerged from a nightmarish 2011, which saw the GDP growth slowing dramatically and new private investment grinding to a halt. All this has been made worse by a pervasive sense of policy and legislative paralysis. Revival of domestic investment is key to making 2012 a better year from an economic standpoint. What should be done to revive investments? FE decided to ask chief ministers, corporate honchos and policy wonks to share their ideas on reviving investment and growth. We kick off a series on these policymakers’ prescriptions with some forthright comments from chief economic advisor Kaushik Basu in response to FE queries. Visit this space for equally interesting perspectives for the next few days.
Moving out of the shadow of 2011, what are the elements needed to bring the economy back on to a more robust growth path?
India could get back to 7.5-8% GDP growth pretty much on its own steam some time in 2012 ? it has done enough good deeds in the past to be able to live off them for a while. But if we want it to grow beyond 9%, as indeed we ought to, then intelligent policy activism is needed. For me, the priorities are infrastructure development and governance reform. The government?s aim must be not to try to deliver everything on its own ? it will never succeed in that and will simply breed bureaucracy and corruption ? but to provide an enabling ethos for entrepreneurs, farmers and ordinary people. This means it has to provide basic infrastructure ? water, electricity, roads, fast trains ? and it has to create an administration that tries to help ordinary people instead of thwarting them. If the government can simply create this space for the citizenry, even if it does not do much else, the economy will grow at capacity, which for India is very high.
Which sectors would you think will be the key drivers of growth in 2012, especially as exports will almost certainly continue to be weak?
I think India has huge unrealised potential in the industrial sector and in manufacturing exports. Services have played a major role in bringing us where we are and they will continue to do well for some time to come.
But the potential that we have not exploited is in manufacturing. Further, given our large young population, this is not so much a matter of choice, as of necessity. To what extent has the rise in the rate of interest affected growth? You have been a major votary of the Turkish line of cutting rates. I simply drew attention to the fact that it is an unusual world economy that we inhabit. There is a salad bowl stagflation on, where emerging economies are battling inflation, whereas industrialised nations are stagnating. As a consequence, industrialised nations are following a policy of easy money and low interest rates. Only recently, the ECB gave three-year credit worth 489 billion euros to over 500 European banks at 1% interest rate. In such a world, conventional inflation control policy, which consists of raising interest, can create distortionary interest arbitrage possibilities between nations.
In such circumstances, we need to be cautious in using traditional policy. The RBI has an excellent research team and I have great admiration for its leadership. I wanted to bring my admittedly unusual thoughts on the subject to the attention of RBI and have full confidence that it would take that into account and then take the best decision in the interest of the nation.
The headline inflation rate has come down, but as the base is very high. Also, the protein goods inflation remains high. Does this give room to believe that inflation problems for the economy have been sorted out? Should we be concerned that rupee depreciation will again fuel inflation?
I believe we are seeing the end of this round of inflation. I expect overall WPI inflation in March at around 6.75%. Over the next few weeks, I expect food inflation to go into ?negative territory,? as they say in government, when they don?t want to use the word deflation. Fortunately, that won?t last for too long. It should rise to a comfortable 2-3 % by February and March. While I do not think that there is any immediate risk of rupee depreciation feeding into inflation, managing fluctuations in the exchange rate will be our big challenge in the immediate future as Europe continues to lurch from one crisis to another. I have recently completed a scientific paper on exchange rate management, which develops a novel form of central bank intervention that can strengthen or weaken the rupee while leaving our forex reserves unaltered. This has the potential for changing the way we deal with exchange rate policy. However, it is a purely mathematical idea at this stage. It will need to be empirically estimated before it can be put to actual use.
In the last Economic Survey, you had pointed out how expanding the procurement without reforming the public distribution system could become unachievable. What steps need to be taken now to ensure this does not happen?
My hope is that while extending the food security provisions we will fold back on other, wasteful subsidies that do not reach the poor and burden the exchequer. Further, I am heartened by the growing recognition in government that providing food security is not synonymous with the PDS system. We must gradually switch over to a system where the subsidy is handed over directly to the poor and the vulnerable and not to the PDS store with the plea for the store to then give it to the poor.
Does the UPA government have the time to deliver on FDI in retail, GST and bringing fiscal deficit down to less than 4.5%? (General elections are due in 2014).
If you mean before this year?s Budget, the simple answer is no. If you mean during the next fiscal year, there is every reason to expect we will deliver on all three policies you mention. It will help if ordinary Indians realise how important these kinds of measures are for India, and they make it clear to politicians that these policies will be good for the economy and will earn votes.
