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World Bank chief economist Kaushik Basu, who used to advise the finance ministry on major economic issues from mid-2009 to mid-2012, says it needs to loosen a bit on the fiscal side to propel economic growth.
The Keynesian advice comes after Finance Minister P Chidambaram has said he considers the fiscal deficit at 4.8 per cent of gross domestic product in 2013-14 as a ‘red line’.
“I know these are fiscal consolidation times. But we should not compress expenditure,” Basu, also vice-president for development economics at the World Bank, said while delivering the JRD Tata Memorial Lecture, organised here on Monday by the Associated Chambers of Commerce and Industry.
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Basu wants liquidity infusion on the fiscal side to boost economic growth for nine months or so. The finance minister had resorted to a heavy cut in plan expenditure in 2012-13 to peg the Centre's fiscal deficit to 5.2 per cent in the revised estimate, against 5.1 per cent in the Budget presented a year before, while the expectations were that it would cross 5.5 per cent. At the end, the government was able to cut fiscal deficit to 4.9 per cent of GDP for 2012-13.
On the Reserve Bank’s monetary policy, Basu said liquidity infusion was a tricky issue, since the rupee had been depreciating against the dollar. However, RBI should have been a bit innovative and used its tools in a different manner. “What RBI has done is to use the standard tools, that is to sell dollars,” he said.
For example, the central bank can say that a particular amount of forex reserves is not to be used for stabilising the rupee, which could have given a signal to the markets, the former chief economic adviser said. He said the central bank’s role is to intervene strategically and the rupee value in general should be left to market forces. “We used to crib when the Chinese currency was depreciated, saying it had an advantage. We are cribbing now as well. Exchange rates should not be treated as some kind of machismo.”
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Amid differences between the RBI governor and the finance minister, Basu commended the former, D Subbarao, for upholding the dignity and autonomy of the central bank. He, however, refused to be drawn into a controversy on the debate between the two.
The former chief economic adviser said the next one-and-a-half years are difficult for the Indian economy as the euro zone will take these many years to recover. The United States is recovering and unemployment rate there now stood at 7-7.5%, he said.
However, 40% of those unemployed are out of job for the long run, which usually does not happen in the United States, he said.
Like Prime Minister Manmohan Singh, Basu believed that economic woes now is not a repeat of balance of payments crisis in 1991. "The economy is much stronger now than it was in 1991," he said while reeling out statistics to buttress his point.
Though he agreed that the economic situation is grim in India, Basu felt that Indians are overdoing gloom and doom. "India's situation was not as grim when I was in Washington. But, four days I have been in India, reading newspaper headlines, meeting people, it seems to be grimmer," he added.
He also did not subscribe to the idea of going to IMF for a loan to bail out India from the current economic mess. "I don't think that we are in a situation where there is any need for that," Basu told reporters later.
Liquidity infusion on fiscal side is Basu's recipe for the short-run to turn around the economy. However, in the long run, business environment has to be changed which means new governance structure, change in the mind-set of bureaucracy and coming out with ways to minimise corruption.
Though, the then chief economic adviser was ridiculed by certain quarters for suggesting that bribe takers and givers be treated differently for corruption in legal entitlements, he today stood firm on his position. While the bribe giver is a victim, the taker is a perpetrator, he said.
Basu said India should not resort to changing its policies retrospectively, even as it was during his tenure as the chief economic adviser that then finance minister Pranab Mukherjee proposed this move. He agreed that developed countries have also resorted to retrospective amendments.
He emphasised that certain sectors like medical tourism and higher education have a great scope in India, but India has to alter its policies like visa to get full gains from these businesses.
Amid the current debate between Nobel Laureate Amartya Sen and trade economist Jagdish Bhagwati over growth versus redistribution, Basu said growth has to be inclusive. Food has to be a legal entitlement, though the way to go about it is not through ration shops only. Ration shops should be relied on only in remote areas where markets are yet to established. Basu is a disciple of Sen.
Basu said secularism is a cherished principle in Indian democracy, but did not take any politician's name, unlike his teacher.
