The erosion of India’s institutions is a worry and India’s leaders should tackle this problem on an urgent basis, said Kaushik Basu, a professor of economics at Cornell University. In an interview with The Hindu in the lead-up to Union Budget, the former chief economic advisor to the Government of India, talked about the state of the Indian economy, the Centre’s reforms track record, the erosion of India’s institutions, and his expectations from the Budget.
How is India’s economy doing at the moment? Critics of the government say that the economy is growing at just around 2% per year when measured against pre-pandemic (2019) GDP levels. Is that a fair assessment?
In terms of the aggregate economy, measured by GDP, over the last year India has done fairly well, especially in the context of the current global situation, where several advanced economies are on the brink of a recession. There are two reasons for this. First, the Reserve Bank of India deserves credit for having done a skillful job in terms of monetary policy. It has raised interest rates judiciously and that has dampened inflation. It has used the nation’s foreign exchange reserves strategically, releasing and buying dollars to hold the rupee exchange rate within a reasonable range. Second, India has conducted its foreign policy with a measure of finesse and this has had a positive fallout on the economy. As the cracks between the west and China grow deeper, global players are now looking at India as a potential investment destination.
However, this relative good performance must not lead to complacency and the urge to hide data behind slogans which mean little. India’s growth of 8.7% in 2021-22 is good in isolation but as all economists, and even many bureaucrats in government, know, this is deceptive. India was among the weakest performers in the world in 2020-21 with a growth of minus 6.6%. So, most of the growth in 2021-22 was the growth of climbing out of the well. A little calculation shows that the average annual growth from 2020 to 2023 is 2.77%, which is much below India’s performance in the past and below that of many other nations, including Bangladesh, which over the same period grew at the rate of 4.49%.
The state of the economy is not a major talking point today despite several consecutive years of slowing growth. Can you elaborate on why economic growth matters, and also on the human cost of slow economic growth?
You are right. This has happened over several years. India’s economy grew slower than in the previous year for 5 consecutive years—from 2016 to 2021.
I believe economic growth matters. I do not agree with economists who push growth to the margins. Growth is an exciting venture. The ability to harness science, data and economic strategy to put a nation on a high growth path and create hope for a better life for ourselves and our descendants is an inspiring aim. The mistake is to treat growth as an end in itself. Its importance is as an instrument to spread well-being in the entire population.
This is the reason why we must be aware of another failing of contemporary India. The growth that is occurring is disproportionately at the top end. The rich are getting richer. We do not have enough data to be sure, but all signs are that the lower middle classes are losing out. They are facing negative growth even while overall GDP growth is positive. India’s youth unemployment rate stands at 28.3%, which is almost double that of most east and south-east Asian nations and comparable to some of the troubled middle-eastern countries. Clearly, these youngsters without work are not getting a share of the nation’s overall GDP growth.
My hope is that the Union Budget that the Finance Minister, Nirmala Sitharaman, will present on 1st February will treat unemployment and the alarming increase in inequality as the big challenge for India and she will announce measures to turn the economy around to a better path. I say this aware that the Finance Minister will have to perform a difficult balancing act. The difficulty stems not just from the fact that the Indian government’s debt-to-GDP ratio is high, but a large part of the revenue receipts have to be spent on interest payments. In the case of the central government, in 2020-21, 42% of the revenue receipts were spent on paying interest, and this is expected to rise to 43% in 2022-23. This is among the highest in the world and leaves little room for productive expenditure.
How would you rate the performance of the Modi government since 2014 in implementing 1991-style structural reforms? Has the Modi government wasted the overwhelming electoral mandate given by voters in 2014 and 2019?
The Modi government has done some important reforms, for which it deserves credit. Among them I would include the Insolvency and Bankruptcy Code of 2016, and the Goods and Services Tax (GST). The GST bill was a long-standing political battle, and I am glad that Arun Jaitley was able to push it through in 2017.
On the other hand, the government made some major policy mistakes. First, the demonetisation of 2016 caused a setback to India’s economy and also to India’s reputation for professional policymaking. Second, the lockdown of 2020 was poorly done and with little attention to the well-being of workers, farmers and small businesses. Hence, the overall picture is a mixed bag.
How would you rate the quality of India’s institutions today? Have we made any progress in the last decade in establishing the proper “rules of the game” (to use American economic historian Douglass North’s phrase) that are essential for long-term economic growth?
The erosion of institutions is the big worry. What is not always appreciated is that a society’s economy does not depend solely on its monetary, fiscal and other economic policies. The economy relies as much on political, legal and social institutions, on trust and confidence among human beings. These have been seriously eroded over the last few years with increasing polarization. This erosion, unlike a bad economic policy move, does not have an immediate effect on the economy but it weakens the foundations and this can cause big long-run damage. I would urge India’s leaders to tackle this problem on a footing of urgency.
The most outstanding years of India’s growth were from 2003 to 2011, from the time of Vajpayee’s government to Manmohan Singh’s. You did not need slogans to make the case that India was growing well. That was a global story. One clear sign that the institutional foundations and trust were growing was India’s investment rate, which rose steadily and reached close to 40%. In 2011-12, investment or capital formation was at 39.0% of the national income. This has come down steadily since then and in 2019-20 was down to 32.3%. The next Economic Survey will come out any day now. Let us see if there is any improvement.
With India’s fertility rate dropping below 2.1 births per woman, the country in a few decades from now could be faced with a shrinking population that is also aging rapidly. How well can India support its aging population if economic growth fails to pick up?
India was on a strong path to take on this challenge but with its institutional foundations impaired I worry, not so much about this year or the next but the long run. One problem with electoral politics is that politicians have a short horizon—the next election. The deep and important reforms, which take 5 or 10 years to yield results, get overlooked. You are right that once the current demographic dividend is behind us, we will need these deep strengths to steer our economy. Unfortunately, those foundations are being sidelined.