28 Dec 09 On Basu and India’s policy dilemmas to ‘arrive’

I am referring to Dr. Kaushik Basu, the Cornell University Economics professor who recently took charge as the Chief Economic Adviser to the government of India.  I am also referring to the introductory passage of a lecture essay written by Dr. Basu 2 years back (while at Cornell) on India’s growth politics that lucidly described India’s economic state and future possibilities. In his words, “The Indian economy is in an age of the present continuous. This is evident from a spate of recent titles: India Arriving (Rafiq Dossani), Propelling India (2 volumes, Arvind Virmani), India: Emerging Power (Stephen Cohen), India Globalizing (paper, K Basu). What are the chances that these same verbs will apply to India in the not too distant a future, but in the past tense?”

In his current role as an influencing voice on the country’s economic policies he will have a direct part to play in converting much of that present continuous state to simple past tense. How much needs to be done to make India arrive? Or what policy measures[1] will make how much of her emerge? Answers to these questions are difficult to comprehend and definitely more difficult to implement in a billion-plus democratic India.

Let us look at few of the broad indicators that depict the current state of India’s economy (and the distance she has to cover to ‘arrive’).

  • GNI per capita has tripled to ~US$3,000 over the last 8 years but India still ranks among the poorest lot of the economies (in the low 70s) in the global rankings. Despite being the 4th largest and the 2nd fastest growing economy globally, India suffers from large scale poverty. The economic growth has been inequitable and inequality is increasing. Dr. Basu remarks, “it is unpardonable that an economy that is doing so well overall has somewhere between 220 and 280 million people living below the poverty line“. Unemployment, regional imbalances and lack of adequate social infrastructure are other pertinent economic issues that need urgent attention. These would require some complex structural adjustments and bold policy measures.
  • Gross capital formation at 39% (aided by the impressive savings and investment behaviour) is one of the highest in the world.  This has created an enabling environment over the years for India’s high growth. But a lot is left to be done to make the growth inclusive. Taking examples from the current state of financial inclusion in India, government statistics reveal that only 5% of villages in India have access to banking facilities and that only 27% of cultivator farmers have access to any form of institutionalized credit. India’s status as a rising economic power is closely connected with how it can create opportunity and inclusion. Success of the inclusive growth initiatives will depend on the availability of credit, suitably structured to meet the financing needs of the targeted sectors. Access to credit is critical for the target segment to be able to take advantage of the opportunities and participate in the country’s growth story.
  • Ease of doing business is a key indicator of the enabling infrastructure for “enterprise and innovation”. Looking at the progress India has made in facilitating business dealings (as captured by the World Bank’s Doing Business Index and India currently ranks at a low 133 out of 183 countries covered), the required infrastructure is still inadequate. For example, it takes 31 days (although it has halved since 2000) to start a business in India, against 5 days in the USA, 3 days in Singapore or 2 days in Australia. Again, showing the relative ease of enforcing commercial contracts, it takes almost 4 years from the time the plaintiff files a lawsuit to the time he actual ly receives payment. Measure this against 300 odd days it takes in Australia or 150 days in Singapore to enforce contracts. Basu argues, “To improve these constraints requires changes in the law but also changes in institutions and the culture of governance…. All modern market economies need a huge number of laws and regulations. Successful nations are ones where, despite the large body of laws, the bureaucracy runs efficiently.”

Much of Basu’s work revolves around developing government behaviour models using Game theory. He believes that the Indian economy has in place the requisite underlying structure of social norms and set of cultures for the effective functioning of an industrialized market economy. Given these fundamental soft-enablers, Basu then argues that ‘trust games’ will provide India an edge in giving the current growth momentum an added sustainable thrust.

Basu’s job may be made easier by a wiling-to-make-the-change government at the centre. In his words, “I felt that if any government was going to be daring and allow for major progressive changes it is probably this government.” It will be interesting to see what game-theory formations this man advises the government to play to make India arrive.

[1] Most of the policy choices that India has to make now are complex – “trade-off between inequality and poverty”, further liberalization but weakening the ability to control poverty (as shown by experiences across the world), capital inflow choices etc.

Ribhu Ranjan Baruah

Ribhu was a project manager at ValueNotes, managing a team that met the research needs of a global investment management firm. He has since moved on to pursue opportunities in impact investing.

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