“A couple of big bang reform moves like allowing Foreign Direct Investment in multi brand retail could lift the mood of investors even if the economy is showing signs of slowing down,” said the Chief Economic Advisor to the Union Finance Ministry Kaushik Basu. “It (FDI in retail) may not be the last word on reforms, but an announcement like that can cause the mood to shift,” said Dr. Basu in an exclusive interaction with The Hindu.

Dr. Basu explained that announcements like these could address “negative investor sentiment,” as opposed to specific policy instruments such as interest rate cuts, which could be used to address macroeconomic variables such as inflation or overall economic or industrial growth.

Addressing sentiments

“Since a large part of the problem (of economic slowdown) is not because of the economic fundamentals but because of the negative mood, an announcement such as allowing FDI in retail could play a big role,” argued Dr. Basu.

Citing data on economic growth, Dr. Basu pointed out India “has not lost its position in the pecking order among the BRICS countries.” India is still ranked second among the 41 big countries in the world, according to the Economist magazine, he said. “It is just that India has slowed down with the whole world,” he argued. “I am not denying that we may have taken a few missteps, but by and large it is a global problem,” he remarked.

Euro-zone crisis

Referring to the crisis in Europe, Dr. Basu said Europe would face its next big test in 2014-15 when the $1.3 trillion that was extended to more than 800 banks comes up for redemption. Risk averse investors are averse to investing in anything other than U.S. treasury Bills, German Bunds (Federal bonds) or in gold, even though they offer low rates of return, he observed.

“Of course, we need to do some fire fighting, but we also need to do some rethinking and (design) big strategies,” Dr. Basu said. India, he said, needs to “reposition” itself.

“When the world comes down in two years as a result of the crisis in the Euro Zone, can India come out on top?” “This can be done by investing in the fundamentals such as education and human capital.” “China has realised this. Every day you hear of stories about Chinese universities raiding American universities and taking talent back to China,” he said.