Just when most economic analysts were beginning to question the utility of wasting so much paper on an annual official Economic Survey, when so much of the data is now regularly published and comprehensively analysed by so many from quarter to quarter, the Union government’s chief economic advisor (CEA) Kaushik Basu has injected new life into an otherwise dull document.
Last year, when Dr Basu returned from a two-decade hibernation in the groves of an American ivy league institution, to take up his very first assignment in the government, many of New Delhi’s number-crunching policy wonks poked fun, asking the game theorist and developmental economist whether he could reel off numbers like fiscal deficit and tax/GDP ratio from memory! A chief economic advisor must not only be au fait with numbers, was their point, but must have his feet on the ground with a grasp of the real world, and forget the cerebral world of theorems and theories.
More than an year into his job, economist Kaushik Basu has had the last laugh. Not only has he demonstrated his fine grasp of the new India that he has returned to analyse and shape, but he has converted a dull book full of numbers and boring facts into an intellectually provocative and exciting document. The finance ministry may not be a master of all that it surveys, but Dr Basu has proved to be a master of his survey of India.
The Survey’s first two chapters and the several boxes, reporting results of research both within the ministry and outside, offer a glimpse of the kind of ideas that are shaping policy within the Union finance ministry and, indeed, the higher echelons of the Union government.
Last year, Dr Basu offered us a new way of looking at the problem of subsidies and showed how the strategy of “inclusive growth” can be made fiscally sustainable. This year, Dr Basu offers us a new perspective on inflation and a new index of India’s global standing. These two ideas apart, there are several boxes that offer new perspectives on how policy makers may be looking at issues like subsidies, infrastructure policy, management of the balance of payments and social sector programmes.
In his highly readable style, Dr Basu puts forward a credible argument in support of the Survey’s view that the economy is back on the “pre-crisis track” of 9.0 per cent growth. It is not just the savings and investment rate, but the learning-by-doing effects of human development and human capital formation, and their impact on labour and capital productivity, along with the underlying favourable demographic transition underway that are driving the India growth story.
The Survey lists three facts that are setting in motion a ‘virtuous cycle of growth’, and three problems challenging it. On the positive side, first, the new momentum in services sector growth; second, the recovery of savings and investment rates; third, signs of fiscal consolidation. On the downside, first inflation, second, deceleration in industrial growth and, third, rising oil prices.
As ideas go the explanation of the ‘learning-by-doing’ effects of growth in general, and services sector growth in particular, provide a new perspective on India’s growth potential. Reassuringly, Dr Basu tells us, “fortunately, there is awareness of this in India and efforts are afoot in terms of budgetary allocation and actual initiatives to boost the development of skill and human capital.”
Two new ideas that stand out are the one on globally induced inflation and the other on India’s global standing. Building on existing theories of externally induced inflation, Dr Basu shows the limits of monetary policy in an increasingly globally integrated world where central banks are unable to prevent imported inflation. While India’s long term inflation rate in the period 1950 to 1990 was 8.0 per cent, in the decade 1995-2005 it had come down to around 4.0 per cent. For a variety of both domestic and external reasons, that the Survey lists, India may have entered a phase of marginally higher inflation, with the average likely to be around 5.0 per cent in the medium term.
Finally, given my own interests in geo-economics and strategy, I found the Survey’s new index of, what it calls, government economic power (IGEP) appealing. It is not clear if the authors of the working paper are familiar with the early work of historian Niall Ferguson (The Cash Nexus: Money and Power in the Modern World, 1700-2000), on defining government power, or of Chinese estimates of comprehensive national power (CNP) and its Indian variant (Index of National Security), but the Survey’s new index implicitly draws on all these ideas, and provides a valuable framework for policymaking in the finance ministry.
The core of the argument underlying this index of economic power will be found in the chapter on “Economic Security” in the first ever Strategic Defence Review (SDR) prepared for the Indian government in 2000 by the then National Security Advisory Board. As members of the NSAB, Rakesh Mohan and I wrote that chapter outlining the logic of using economic indicators such as fiscal and external balances, human development indicators, energy and food balances and defence expenditure as indicators of national power.
It is, therefore, heartening to see the finance ministry take the initiative to construct this new index, which is in fact not just an index of ‘government’ economic power, but of ‘national economic power’ and, therefore, ought to be renamed as INEP, rather than IGEP.
Every member of Parliament and government must understand the policy implications of this and why India needs a sustainable model of inclusive growth and a globally competitive economy to facilitate its re-emergence as the world’s second largest economy. If the finance minister has read his CEA’s Survey, we should expect a forward looking budgetary strategy.
