From Financial Express, September 13, 2013

Getting India back on track

 In my last column (An Indian Spring? FE, August 22, http://goo.gl/hwW9cw), I raised the possibility of India descending into an Egypt-like situation. It probably will not get that bad, since India’s recent history and its societal makeup are sufficiently different. But there is one large commonality—a surplus of young people relative to decent jobs. That basic mismatch between demographics and economic opportunity can drive substantial waves of social unrest. One only has to think back to the early and mid-1970s to realise that India, for all its democratic resilience, is not immune to severe social and political instability. In an earlier column (Can India grow faster again? FE, August 19, http://goo.gl/8E9iwS) I listed some steps that India’s leaders need to take in the medium run: effective vocational training, removing constraints on electric power generation, and more devolution to the states and to cities. But before that, there is a short run crisis facing the country. Here are my thoughts on how to turn things around quickly and effectively. 

The immediate problem is a crisis of confidence. This is partly what has driven the plunge in the rupee, although the strength of the US and European economies has also contributed to the rupee depreciation. The erosion of confidence has been gradual, with multiple instances of government corruption and fiscal and monetary policy mistakes over the last couple of years. Fixing this will not be easy. The measures undertaken so far have smacked of panic: sudden promises of relaxing foreign direct investment caps, a grab bag of import controls, and derailing financial markets to curb “speculators”. All these measures, in my view, simply reaffirm the view that the government is adrift and that troubles will continue. The latter two types of measures also go against the basics of a coherent economic reform strategy, which should be built on promoting well-functioning markets in a global setting. 

With respect to the rupee, the Reserve Bank of India’s (RBI’s) initial response of trying to reduce speculation by making short-term borrowing harder simply sabotaged the working of short-term credit markets, and had no effect on offshore traders. Markets became thinner and more volatile. Instead, if RBI wants to prevent further overshooting downwards of the rupee’s value, it should follow an assertive and transparent (but feasible) intervention policy (something along the lines suggested by Kaushik Basu, announcing a schedule of intervention). Given what has happened, it may be mostly too late. One thing RBI should do is to raise its policy rate, as other emerging economies have been doing. Yes, this could further slow down growth, but the short run benefits of an interest rate hike, in terms of stabilising expectations about inflation and currency depreciation, seem to make this a worthwhile option. Reversing such rate hikes is easy and quick, and they do not have the deleterious impacts of unexpected changes in the rules governing the functioning of markets. 

With respect to the current account deficit, what the government needs to do is to use the opportunity of the rupee depreciation to push exports. The obvious areas are in information technology and related services, tourism, and possibly some kinds of consumer goods (including apparel, health and beauty items, and processed foods). Essentially, India’s products are suddenly a bargain, but some rapid and concerted marketing efforts are required to make sure that rich world consumers take advantage of these bargains. India’s embassies and missions abroad should be going into overtime, working with Indian businesses to seize the opportunity presented by the fallen rupee. Promoting exports, while more work and slower to take effect than restricting imports, will have a much larger medium term benefit. One of the easiest, most immediate opportunities is promoting foreign tourism, since the supply constraints are less problematic. 

On the domestic front, the politics of the looming national election make progress difficult, but if the government were to push harder to reach a grand bargain on the goods and services tax (GST), convincing the array of opposition parties that they will all benefit from a broader, more robust tax system, this would provide the prospect of a corrective on the fiscal front. My reading of some of the crisis of confidence is that it was driven by the government’s attempts to raise revenue through ad hoc, discretionary and retroactive measures, in turn driven by the need to reduce the fiscal deficit. But those policies hurt confidence, growth and government revenues, just the opposite of what was desired. 

The three examples I have suggested are policies that signal that the government is in charge, and is capable of providing leadership to the country. In contrast, most of the governmental responses to the crisis so far have seemed to signal desperation, weakness and lack of control. Much of the recent Indian policy debate has been reduced to finger pointing (evil speculators, heartless global capitalists, incompetent and venal politicians) and crying over spilt milk. It does not have to be so, and India’s leadership has to act as if it is worthy to lead in these challenging times.

Financial Express, August 22, 2013

An Indian Spring?

In my last column, I ended by suggesting that India can either have a true Indian Spring, with its economy and society blossoming, or instead something that veers toward what has happened in Egypt. What are the factors that will determine where the country goes? First, I want to emphasise that the current economic debate (now and perhaps forever labelled as “Sen vs Bhagwati”) has tended to miss the interaction of economics and politics. Prescriptions are sometimes offered as if by wise philosophers or technocrats, with the only issue being a sorting out of the facts of the growth process, or agreeing on the relative weighting of the welfare of different segments of society. How does politics enter into the evaluation of different policy options? 

The most obvious political process is the use of government transfers to buy votes. Empathy for the poor may matter for many of those involved in the intellectual debates, but a good first approximation to reality is that India’s politicians care most about getting re-elected. The policies that get implemented, in this case, are the ones that maximise the chance of winning the next election. India’s voters have to keep making it clear to politicians that subsidies and transfers are not going to be enough to secure their votes. There have been signs of this shift (rewarding performance over populism) in how Indians vote, and one has to hope this trend will continue.

But politics is also more complicated than that. Take Egypt, where democratic elections failed to lead to a stable, popular government, and the country is close to descending into chaos or repression. The winners of the election lost support not just, or even mainly, because they failed to deliver economic betterment. Instead, they were criticised for undermining the people’s recently-won freedoms. Basically, people want dignity and freedom as well as material improvement.

Economic reform in India has delivered an uneven mix of material and non-material benefits. For example, Dalit entrepreneurs seem to have gained on both fronts. Some of the middle classes have seen material gains, but erosion of their status and of traditional certainties. The upper crust of society has benefited disproportionately. And at the other extreme, many people in rural areas, especially in tribal regions, have seen their exploitation increase. This is a complicated story, with perhaps a couple of clear lessons. First, a majority of the population is frustrated with the corruption of, and exploitation by, those with political and economic power. Second, doling out money to win votes will not work as well as it used to, and will not stop the pot from boiling over. Social conflict in India will increase unless there is a quantum improvement in the quality of governance.

There is also another danger lurking. The growth-redistribution debate has only tangentially addressed India’s macroeconomic and financial sector policies. Here, the spectre of corruption also raises its head in the form of the government’s push to give new banking licences to powerful industrialists. But many of the problems have arisen from failure to execute the basics of macroeconomic management. The central government has not done a good job of managing its fiscal deficit, while the Reserve Bank of India (RBI) has gone backwards in managing inflation and the currency. RBI has failed to control inflation effectively, even as economic growth has not been protected. Government mismanagement of food and oil policies has contributed to the problem. Most recently, RBI’s attempts to control the exchange rate have ranged from pointless to damaging, undoing a longer-term program of creating a deeper and more robust financial system. The danger is that macroeconomic conditions will deteriorate rapidly, dealing a severe blow to the economy that will further increase social conflict.

RBI could have used earlier benign economic circumstances to push financial sector reforms that would have improved the functioning of a range of financial markets, improved financial access, and helped capital to flow to more productive uses. It did a little, but not enough, and the futile attempt to defend the rupee has undone some of the certainties of financial sector policy that should have been maintained. Confidence—a valuable commodity itself—has been eroded.

The incoming governor of RBI has a track record of speaking up for the right policies. Not long ago, he authored a vital report on financial sector reform, covering the issues from top (macroeconomic management) to bottom (financial access at the grassroots of the economy). He does not have to stand for re-election, and he does not have to rely on reappointment for his livelihood or prestige.

Raghuram Rajan has an opportunity to determine the nature of an Indian Spring, both through his immediate decisions on macroeconomic management, and through his shaping of financial sector reform over the next two or three years. What he says and does is what will matter much more for India than the shadings of the Sen-Bhagwati debate. He even has the potential to overcome the economic policy missteps of India’s politicians. Let us see what happens.

Financial Express, January 17, 2013

India in 2013: stemming the rot

The year just ended was a difficult one for India—not dismal, but close to it. The last two weeks of the year, triggered by an act of savage inhumanity, exposed many of the country’s weaknesses in a stark manner. Can the country learn the right lessons from what has happened? 

The most obvious fault that has been exposed by recent events is India’s dreadful treatment of women. As many have already written, rape is just the tip of the iceberg that represents the full scope of the problem. We have known for some time, have seen it documented, have read numerous stories, about the indignities suffered by India’s women and girls. But it took one exceptionally brutal and visible act to shake up at least a significant portion of Indian society, which took to the streets.

Perhaps this process will follow the course of events we saw in Eastern Europe, where long-suppressed fear and resentment of repressive regimes boiled over into the streets and led to astonishingly rapid change. Of course there are other examples, including India’s anti-corruption movement, where little has improved as a result of public outrage. In the current crisis, what is needed is a comprehensive examination of legislation that affects women: not just the laws and legal processes surrounding the crime of rape, but also education, marriage, inheritance and other aspects of women’s lives. Let us see if 2013 brings some real progress.

One reason to be pessimistic is the kinds of institutional responses we have seen to the crime and its aftermath. Government officials, whether civil servants or politicians, have displayed a remarkable degree of indifference, even callousness, towards the victims, their families, and most of all towards those who channelled their angst at a symbolic violation of their collective dignity and humanity into protests at the gates of power. But those in power have sought to silence those seeking justice and truth. Unfortunately, the nature of the official responses is typical of governance in India, where incompetence and malfeasance are routinely covered up or excused. The problem of government failure to deliver public goods and services is pervasive in India, and affects almost all its citizens, not just the 50% who are female. In this case, the failure to prevent such a public crime, and the incompetent response to the victims’ need, were two shocking instances of this general problem.

The year 2012 was earlier marked by multiple reminders of government failure, and it remains to be seen if India’s citizens can instigate positive change in 2013, whether through the ballot box, the media, or direct action.

The predicaments of India’s women vis-à-vis the country’ men, its citizens in relation to its rulers, its dalits vis-à-vis its privileged castes, or indeed, its minorities with respect to its majority, are all symptoms of inequalities of power that deny the fundamental equality of human beings. What happened in Delhi in December provided multiple instances of these inequities, and the violence that they breed. India’s political elites are used to distancing themselves from the violence to which their own way of life contributes—if this terrible incident had happened in the home village of one of the victims or perpetrators, it might have received a brief mention in the media and been quickly forgotten. It would have been about “them”—the other India—and not about “us”. The core of this savage attack was that it involved different shades of “them”, but happened in front of “us”. But the elites—whether by birth or position, those who are not among “them”—found that the boundary between them and us is no longer accepted, no longer neatly drawn. India in 2013 will have to confront its many inequalities and inequities directly, not keep suppressing them. This includes not just a government that does not protect its citizens, but the citizens that do not care for each other as human beings, leaving them bleeding in the street.

One kind of reaction to recent events, and the social and economic changes that underlie them, is to blame those changes, and stop or even reverse them. One (male) Indian politician has come out and said that women should stay at home and only men should work. Other commentators seem to be nostalgic for the days before economic reform and globalisation, when traditional values made each village a place of peace and harmony. This nostalgia is nonsense. Inequality and brutality have always been present in Indian society, just less visible. On the whole, the Indian elites have not been willing to invest enough in overcoming these flaws, allowing the pursuit of power and wealth to take precedence over the common good. Or they have set themselves up as guardians of that common good, perpetuating inequities of power and wealth in the process. India needs to confront its weaknesses. We need to realise, though, that these weaknesses are not the result of economic reform and globalisation, but predate them. The processes of change have helped expose these weaknesses, and there is no excuse for their persistence.  

Where Should India Reform and Why?

To start with, I want to reaffirm that India needs economic reform, and lots of it. Reforms should strengthen governance institutions as well as the working of markets. An increased role for markets and competition will, on the whole, benefit the Indian economy. If reforms are done well, they can promote inclusive growth. With all that clearly stated, I want to question some of the reform rhetoric around FDI in multi-brand retail, and argue for making a different set of reforms a priority if we want to improve the supply chain, whether farm to fork (or fingers, really, for India), or for manufactured goods.

Certainly, Western retailers such as Walmart and Tesco can bring in knowledge that comes with vast experience, as well as large dollops of capital. If we can have McDonald’s in India, bringing in new ideas, high standards of customer service and process efficiencies, why not foreign retailers too? Certainly, it will help to increase competition and innovation in retailing. But some of the arguments being made seem to have shaky foundations.

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India and the World in 2012

These are two columns reflecting on what went wrong in India in 2011, what I hope will change for the good, and what the global and domestic threats are for the continuance of India's growth story.


Making 2012 a Better Year for India

A year ago, I offered an optimistic and hopeful view of India’s possibilities in 2011. As it turned out, things were much less rosy than I had guessed they might be. I had gone with the then-popular growth forecast of 9%. Growth has been much lower. Part of the problem was the ongoing European crisis, and the US’s slow recovery. Much of the difference came from what has been happening within India.

A year ago, I remarked that the private sector in India has done well despite poor governance. This has remained true, but not to the extent that I had hoped. The general poor quality of governance was compounded in 2011 by uncertain handling of corruption, which surfaced as a major issue for India’s citizens. My view is that India’s ruling coterie is currently weak in its leadership and its vision. Too many of those who rule are focused on short-term personal advantage, rather than leading the country well. Will this improve in 2012? It is hard to say what will happen at the national level. However, one can hope for more progress in governance quality in some of the states.

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Thousand Rupee Notes on the Pavement

The past year has driven home the fact of globalization, even for countries like India that are relatively less integrated with the global economy. For example, India’s ratio of exports of goods and services to GDP is only about two-thirds of China’s (despite excluding Hong Kong and Macao). But it has still felt the wind from global storms. The European crisis, in particular, has heightened risk perceptions, slowing global growth, and leading to a flight to safety of global capital. What are the potential global threats for India in 2012?

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Thoughts on FDI in Retailing

Here are two columns I wrote late last year, reflecting on the political process and economic analysis associated with India's attempt to open up multi-brand retailing to FDI. The first column also has some thoughts on developmental objectives and social opportunity, based on some new work by Yale economist John Roemer.


Development and Opportunity

The furor over the attempt to open up FDI in multi-brand retail reminds us of several things about India. But the true lessons may not be the seemingly obvious ones. It is certainly possible that the government’s handling of the policy change was not the best it could have been. On the other hand, those with long memories will recall numerous occasions where policies have been floated, reversed, modified or even transformed. At one time, all FDI and disinvestment were controversial—now the discussions are more nuanced (even if political rhetoric remains strident).

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Retailing and Reform

In my last column, I mused on India’s economic reform process and inclusive growth, in the context of opening up multi-brand retail to FDI. I want to return to the question of political capital, and policy thinking about reform in the retail sector.

On using up political capital, I think ongoing events have proved me wrong. Opposition to opening up multi-brand retail has come from the same quarters as opposition to other reform measures, including the Pension Bill and Companies Bill. On all these, the government has openly looked for compromises that will lead to acceptance of the reforms. If that is the case, then moving on multiple fronts may give the government more chance of getting some changes through, not less. The government has also reset its approach to FDI in retail, marshaling interest groups that might benefit, and saying more to make the case for the positive consequences of the change. So even if it lost some political capital initially, it should recover it quickly.

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Getting India to Ten Percent Growth

The 10% growth target for India has had a magical allure. It is hard to say if anyone first held it out publicly as something to strive for realistically, but I do remember Vijay Kelkar as being an early believer. The current Prime Minister has also mentioned this target several times. Yet that double-digit growth rate has remained stubbornly out of reach as a short-term forecast of actual growth. Indeed, it seems that when the Indian economy nears 10% growth, inflation rears its ugly head, and fears of overheating spread. A few years ago, estimates of India’s medium-term potential growth rate tended to be in the 8-9% range. This may be about to change.

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Thoughts on Innovation, Entrepreneurship and Growth

These four pieces have a common theme of how to encourage innovation and entrepreneurship in India

India's Missing Growth Driver

India’s Union Budget has been presented, the Economic Survey has been published and attention has returned to day-to-day governance and politics as usual. Stories about big business, big sums of money and large-scale corruption are the ones that grab headlines. Ultimately, though, key policies that will shape India’s future may be suffering from neglect. Sustained inclusive growth requires innovation and job creation across a broad cross-section of the economy. This includes labour-intensive manufacturing, but, more generally, an industrial dynamism that extends beyond large incumbent firms, foreign entrants, or the relatively few recent domestic success stories.

A few years ago, prominent economist Anne Krueger labelled India’s problem that of a “missing middle” in its distribution of firms—a gap between small firms in the unorganised sector, and the large firms that grab headlines in billionaires’ lists and mega-mergers and acquisitions.

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India in 2011: What's Next?

What’s in store for India in the new year? The short-term economic outlook is good. Growth of 9% seems to be a reasonable forecast. Looking ahead, growth rates in this range seem to be sustainable for awhile, based on the assumption that investment stays at about 35% of GDP, and that the efficiency of this investment doesn’t decline compared to recent years. In one way, this is a remarkable achievement. The government has struggled to implement new structural reforms, and to do its core tasks more efficiently; yet the economy remains robust. Perhaps this is a tribute to what stability and reasonably adequate governance can achieve, when the private sector is in a position to take advantage of such an environment. The accelerating recovery in the US will presumably help India’s growth rate as well.

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Innovation and Taxes

India is continuing with major reforms of its tax system. These reforms began with liberalisation, and included cutting tax rates and rationalising enforcement and administration. Tax reform has been an important contributor to the country’s improved economic performance. The latest effort on indirect taxes is the move towards a unified national goods and services tax (GST). On the direct tax front, the new direct taxes code (DTC) Bill has just been tabled in Parliament.

A major guiding principle for tax reform is the goal of reducing distortions in economic activity that taxes can create. Tax rates that are too high, or taxes that apply to narrow groups, are more distortionary than lower rates and broader tax bases. Reforms of indirect and direct taxes are meant to cut down on distortions and improve economic efficiency. Lower rates applied more broadly and evenly, without overlapping taxes or exemptions, are part of the GST and DTC. Another principle, aligned with the first, is simplicity. Simplicity makes tax administration easier and more transparent. The GST and DTC are both simpler than their predecessors.

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Schumpeter and Three Idiots

Economic headlines in India focus on macroeconomic management. Soaring inflation, a burgeoning fiscal deficit or gyrating exchange rates all affect the economy’s health, but prudent macroeconomic policies only go so far. Long-run growth depends on factors like investment, innovation and trade (a different expansion of the initials IIT!), which do not receive as much attention. Investment is perhaps the most basic driver of growth, since capital accumulation raises labour productivity and per capita output. High rates of investment helped East Asia grow at rates never seen before. India, too, has seen higher growth associated with higher rates of investment.

International trade in goods and services has also helped India grow faster. According to economic theory, liberalising trade in goods should have just a one-time effect on output, rather than a permanent effect on growth, but the one-time effect could be spread over decades. Openness to trade also brings new capital and ideas along with products and services, and these can give boost to long-run growth.

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India's Food Future

February has finally brought some relief in the rise in India’s food prices. The government has some breathing room in this dimension—just as well when it is beset by multiple corruption scandals. It is easy to get excited about blatant corruption, or even mismanagement of a specific sporting event or allocation of spectrum. And of course it is justified. It is somewhat harder to achieve the same level of concern about governance of an entire sector, food and agriculture—especially when there are so many possible external villains.

Food price inflation can always be blamed on the weather, on globalisation, on evil speculators, and now also on faster growth in poorer countries. Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward. All of the usual suspects may not be guilty, and the others have been in plain view for some time, so policy making should have already taken them into account.

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The Great Indian Growth Debate

Here are two columns about the Sen-Bhagwati contretemps on India's growth

"It's Growth, Stupid -- Or Is Growth Stupid?"

The debate between two of India’s greatest economists, Jagdish Bhagwati and Amartya Sen, is important for India’s policymakers. Are growth targets diverting policy attention from other important development goals? Chief Economic Advisor Kaushik Basu has said the differences are less substantive than they are made out to be, but what is the common ground? Here is my take on the great growth debate.

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Fighting Malnutrition in India

Growth is good. So are health and education. Malnutrition is bad. As I noted in my last column, everyone, including those involved in India’s growth debate, agrees on these things. But differences emerge in recommendations for how to improve India’s human development status. Malnutrition is a good example. One view is that focusing on growth alone diverts attention from tackling problems like malnutrition. Another view is that accelerating growth is crucial to generate the resources for addressing such problems.

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Weighing India's Budget

The recent Union Budget elicited the usual range of responses. Various interest groups commented on the lack of what they would ideally have wanted in terms of tax or expenditure policy changes. Many commentators decried the lack of boldness, or lack of economic reforms, or questioned the realism of the Budget’s financial projections, especially given the looming dangers of high-priced oil.

I want to make three points. First, this is a reasonably good Budget, doing what it is meant to do, laying out the broad contours of tax and expenditure policy for the next year. Second, reforms are continuing, not always smoothly, not always ones that get highlighted in the Budget, and perhaps not comprehensively enough, but continuing nonetheless. Third, the fundamental character of Indian economic policymaking has changed, and for the better.

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