“India’s new GDP figures capture the value added in the manufacturing sector more comprehensively than in the past and provide better data.”
Kaushik Basu, senior vice president and chief economist of the World Bank, has first-hand experience working in North Block having served as India’s chief economic advisor from 2009 to 2012. His forthcoming book, An Economist in the Real World, is based on a ringside view of those India days. As the bank’s chief economist, Basu closely follows Indian economic policies, ET interviewed him in Washington.
What do you think of India’s new GDP figures? Do you find them believable?
Contrary to what some critics have said, India’s new GDP figures are better and more reliable. They capture the value added in the manufacturing sector more comprehensively than in the past and, as such, provide better data. This is not to deny that, as with all macroeconomic indices, there is a margin of error. But data collection and collation in India is a sufficiently transparent exercise that makes deliberate data manipulation extremely unlikely.
The Modi government is concerned about India’s ranking (142nd among 189 countries) in the World Bank’s Ease of Doing Business index. It claims the examples used by the bank are skewed against India. What is your response?
The World Bank’s Doing Business indicator uses the same yardstick to evaluate 189 countries. Using the same yardstick is the fair thing to do, but it also creates a straightjacket. This is unavoidable in multi-country studies. What is important is that it does give useful information about the business ethos of a nation. Anyone who knows India knows of the large transactions costs for doing business. Hence, there is no surprise that India does poorly on this ranking. It is good to see the Indian government wanting to change this. Cutting down bureaucratic costs is one measure that can singlehandedly boost India’s growth. I should emphasise that no modern economy can run efficiently without regulation. Hence, a good business ethos does not mean an absence of regulation but a regulatory system that is transparent and quick.
Are the rankings based on surveys of actual businessmen? Also, is the bank randomising the information?
The data for Doing Business are not collected through statistical samples or randomisation methods. This in itself is not a problem because the bulk of it pertains to the actual law. What are the de jure requirements to start a business, have a contract enforced, get electricity connection and so on? There are limitations to this method and we are trying to make improvements. We instituted several changes last year and there is more to come. The data used to be collected from one city in each country. We have now added a second city for all countries with more than 100 million population. I would love to expand this further, but data collection is a very expensive activity. In valuing the ease of getting electricity, the focus used to be entirely on the cumbersomeness of getting a connection for a small new enterprise. We now also look at the regularity and dependability of the supply.
Do you think this ranking is a powerful tool, which encourages countries to improve, or does it end up being an exercise in naming and shaming?
It is a powerful tool, with the risk that countries at times try to game the system and make changes only in the areas tracked by Doing Business. To a certain extent this is unavoidable. American universities do the same to improve their rankings. But the right thing to do is to take the spirit of this exercise and use it to improve the efficiency of government bureaucracy, whether that improves your rank.
In your opinion what are the three or four top reforms India needs most urgently?
Governments need to focus attention on providing better infrastructure and basic welfare — food, health services, education — to the poor. For both these, attention has to be paid to the details of fiscal policy. India’s tax GDP ratio is too low. Even a two or three percentage point increase in this can do wonders in terms of better roads, better toilet facilities, electricity connectivity for all and the provision of basic services to the poor. On the economic policy front, if these can be delivered, the rest will follow automatically. There is enough enterprise and creativity in India. It is good to see government taking initiatives on many of these fronts. The last Budget saw some important moves for which the finance minister deserves credit. Take the proposed Goods and Services Tax (GST). Our analysis shows that when freight moves by truck from one Indian city to another, 60% of the time is spent stationary, and the bulk of this occurs at check posts to pay various taxes and do paperwork. This is a shocking waste. The new GST can remove a lot of such wastage.
There are other initiatives which go beyond economic policy but are important. There must, for instance, be an effort to share prosperity and make India a more inclusive society, where people of different castes and religions, and minority groups and people of different orientations all feel a part of society and sense of belonging to India. This is not just the morally right thing to do; it is something that can nurture creativity and promote development.
Purely in terms of growth, India has done well over the last decade. Earlier this year, the World Bank, for the first time, predicted that India would actually be leading the growth chart among all major economies in the world, including China. The forecast, while based on large data analysis, was nevertheless made with some trepidation. In the first quarter of this year, India did actually grow faster than China, and the forecast seems headed to being right. China has done phenomenally well for three decades. With reforms and inclusive policies, India could do the same.
Which of the programmes that India is implementing to reduce poverty is the most efficient? In this context, will Aadhaar help?
It is the government’s responsibility to provide certain basic amenities, such as healthcare, education and essential food to the disadvantaged. Aadhaar can be a game-changer. It facilitates delivery of benefits to the poor directly, often by simply enhancing their buying power. It will also mean that you don’t have to remain in your village to get the benefits you are entitled to. Wherever you go you can establish your identity and be fully functional. This can empower workers and help make India a more dynamic economy.
How can India cushion itself from disruption resulting from advanced countries exiting quantitative easing?
This is a risk that all emerging economies face. It is a part of globalisation. I am not suggesting we should resist globalisation. Indeed, I believe globalisation provides huge opportunities. India should welcome it and at the same time build resilience. It is a testimony to India’s growing economic might that it has overall weathered global turbulence well. But it needs to do more. One mistake India made, in retrospect, was not to build larger foreign exchange reserves over the last few years. The reserves rose sharply from 1993 to around 2008 but then flattened out. This was a mistake. India should try to build reserves, at least as long as other countries do. This will boost exports and make the economy more resilient to global shocks. The Reserve Bank has made some deft moves along these lines in recent times and that is welcome.
How does the World Bank look at the BRICS Bank and the resultant competition in mediating global capital to developing country infrastructure?
The World Bank has grown since 1944 but global financial needs have grown much more. Hence, the arrival of the new banks is welcome. They should join us in providing more resources to where they are needed.
How should India deal with the two looming trade pacts led by the US neither of which includes India? These two pacts are both geopolitical and economic moves. India says these are protectionist.
I have studied the Trans-Pacific Partnership and believe that, on balance, it is a good initiative, even though it has recently run into heavy weather. It is not meant to be a move to build trade barriers against other countries but an attempt to remove trade barriers among the 12 or so nations involved. If this strengthens these nations and boosts their demand, that will be good for India. This is not to deny that there are some matters of detail which are of concern, such as the effort to put up barriers against generic drugs. This can hurt India, and hurt ordinary citizens of the nations in the Partnership even more. Such clauses should be resisted. But, overall, the agreement is not a matter of concern for India.
Source: Economic TImes