Refracted views

Print edition : April 01, 2016

Chennai: 23/02/2016: The Hindu: oeb: Book Review Column: Title: An Economist in the Real World. The Art of Policymaking in India. Author: Kaushik Basu. Publisher: Penquin Viking Books Publications release.

Kaushik Basu, Chief Economic Adviser, with Finance Minister Pranab Mukherjee in New Delhi on December 14, 2011. Photo: Ramesh Sharma

The book does not give priority to fundamental and critical issues relevant to policymaking in India.

The blurb of the book carries appreciation and commendation from four Nobel laureates in Economics. Amartya Sen says: “One of the important lessons of this wonderfully interesting book is that sophisticated economic reasoning can be very fruitfully used to tackle extremely complex practical problems. Since that powerful lesson comes here accompanied by the wit and humour—typical of Basu’s writings—the reader is at once entertained and amused as well as illuminated.” Joseph Stiglitz says: “This is a beautifully written and engaging book…. A must-read for anyone who is interested in the development of India—or who simply wants to learn about the adventures of an academic entering the terrain of high stakes politics.” The other two, George Ackerlof and Roger Myerson, also enthusiastically commend the book.

Kaushik Basu is indeed one of India’s leading economists, astute, articulate and witty. He has been a professor of economics in the Delhi School of Economics and Cornell University, Chief Economic Adviser to the Government of India (2009-12), and is currently Senior Vice-President and Chief Economist at the World Bank. He says: “From an existence totally immersed in the world of research, and with little forewarning, I was transported or, more aptly, hurled to the post of Chief Economic Adviser to the Government of India at the Ministry of Finance, in December 2009, in response to an invitation from the then Prime Minister Manmohan Singh.”

About the book, Basu says: “It is a book on the Indian economy and the art of policymaking, blending economic theory with personal experience.” His knowledge of the logic of economic theory helped him question some long-standing policy decisions, and his involvement in policymaking led him to see that “economics is a strange discipline because it has one foot in science and one in intuition and common sense”.

Since policymaking is contextual, it will be useful to recall the context in which Basu was involved in critiquing and shaping policy. The years immediately preceding the period he worked from North Block, where the Finance Ministry is located, were the years of the “growth surge” as he puts it, the three years (2005-06 to 2008-09) when the growth rate of the gross domestic product (GDP) was well over 9 per cent, the highest achieved so far. So, the essential task was to sustain and exceed that high growth rate on the assumption, of course, that if “growth” is sustained, everything will be added onto it, particularly reduction in mass poverty. “The consequences of this boom were visible even to the naked eye,” says Basu. “India’s infrastructure, ramshackle in the best of times, was palpably improving, the bazaars of the middle class were booming, and… overall poverty in the nation, while still unconscionably high, was now declining faster than ever before since the nation’s independence.”

What, then, were (or are as well) the policy imperatives? Certainly not market fundamentalism or even its more sophisticated Washington Consensus. Appropriate institutional mechanisms to set the right monetary targets, to keep fiscal deficits under control, to set trade deficits right, to enforce effective regulatory systems for banks, are indeed required. And if there is one agency or institution whose responsibility it is to ensure these various functions, and it is designated as “the state”, so be it. And if that state is a democratic one, as in India, and unlike in some of the other Asian countries that have already achieved development, so much the better. A crucial function of this authority, the state, is to create an ethos where “people are incentivised to deliver what needs to be delivered”. The state, especially a democratic one, must also “provide public goods for its citizens, help build infrastructure, and also carry out redistributive functions in favour of the poor and the disadvantaged”.

In terms of policy, what are the specific requirements in India? Formal enforcement of contracts is one of the most critical requirements for India’s development. At the most elementary level, a contract is a commitment to honour a promise, Basu reminds the reader, and any monetised economy functions on the basis of the recognised authority’s “I promise to pay the bearer…”. He points out, too, that according to the World Bank’s report Doing Business 2015, which is a study of 189 countries, in terms of efficiency of formal contract fulfilment, India’s rank is 186. It takes 1,420 days in India to enforce a contract on a reneging party, compared with 731 in Brazil, 230 in South Korea and 150 in Singapore. Contracts assume significance as a great deal of doing business required for development these days consists of trade within the country, trade with other countries, investments that take a long time to yield results, agreements between and among different agents, and participation by different agencies, private and public. And India has a long way to go in this area. Enforcement of contracts is part of the larger issue of the rule of law, and to ensure that it prevails, it is necessary to have mechanisms, including courts, to achieve this objective.

The bureaucracy also has a critical role in the context of development. “India has one of the most talented and most obstructive bureaucracies in the world,” says Basu, and goes on to say that “if the nation is to grow at rates it is innately capable of, it is important to have administrative reforms to change this individually talented bureaucracy into a collective-supportive force instead of the obstructive body it currently is”. Bureaucrats at the top level become a “gated community”, primarily interested in protecting their own interests. “It is critical for India to disrupt the comforts of the elite if the nation is to achieve inclusive growth,” Basu asserts.

Foodgrains policy

Basu also deals with a couple of specific issues where his position differed from policies that have held ground for a long time. One of them is the foodgrains policy, whose pronounced objective is to be fair to farmers and to be of help to the poor. The former is attempted by the minimum support price (MSP) policy whereby the government guarantees to purchase foodgrains, mainly wheat and rice, from farmers who find the market price too low. The idea behind the activity is not only to make sure that the farmers get a fair price but also to ensure that food production does not suffer for want of incentive. The purchased grain is held by the government to be sold at subsidised rates to the poor. If foodgrain production comes down because of adverse weather conditions, the buffer stock can be used to increase the market availability of grain and to reduce price fluctuations. In view of these considerations, the government always maintains a substantial quantity of grain in reserve partly because relying on imports during times of internal scarcity would not be a wise policy. However, over time, purchasing grain from farmers became a matter of routine and increased the fiscal burden. Basu recommends purchasing more when the grain output is large (and, consequently, market prices are low) with the MSP above the market price and less (may be even nothing) when output is low and hence the market price is high. Of course, a minimum buffer is necessary, but the reality has been that the government usually holds stock way above what is required.

On the question of public distribution of foodgrains for the weaker sections, Basu differs from the policy of making available a specified quantum of grain at a subsidised price to the target group, usually identified as those below the poverty line (BPL) through fair price shops. In effect, he points out that this means that the government delivers subsidised grain to the owner of the shop, and the owner is then instructed to hand it over to the target group. However, this is providing the owner an incentive to divert some of the grain to the open market at a higher price and to turn away under some pretext or the other some of those for whom it is meant. It is well known that this happens frequently. To overcome this problem, Basu suggests providing a direct cash subsidy to BPL households, leaving it to them to decide how they will spend it. It is possible that they may not spend the subsidy to buy foodgrains, but as Basu sees it, that decision is for them to make.

Another aspect that Basu deals with is corruption, which is ubiquitous. “In India ordinary citizens and, at times, even large corporations are asked to pay a bribe for something to which they have legal entitlement.” Designating this as a “harassment bribe”, Basu points out that it is important to distinguish between the perpetrator and the victim of such acts and not to penalise the victim. He claims that such a change will bring down corruption because the perpetrator will have to take note that the victim may reveal the fact to law-enforcing agencies. Many may feel that this cannot be defended on moral grounds, but Basu takes the view that such acts must be evaluated on the basis of what they are likely to achieve.

The interested reader will find many more instances of this kind and also those that call for deeper analytical skills, where the author argues that policymaking should be evaluated in terms of whether or not it is likely to achieve the intended objective rather than on a priori considerations of morality. However, it may be noted that Basu elides instances of corruption where the giver and the taker both benefit at the expense of the state and the public at large. Are these not the mega instances of corruption that usually accompany accelerated “growth” for which corporations, whether national or multinational, usually claim credit?

Play of finance

This is not the only instance of the author’s refracted presentation. It is seen most glaringly in his treatment of finance, including the meltdown that happened in the United States in 2008 and soon became a global phenomenon. There have been many writings on the subject subsequently, and even non-experts know by this time that it was caused by the speculative activities of the so-called “investment banks” that specialised in transactions in claims.

The procedure was to repackage mortgages of different loans from different banks and convert them into “derivatives” (that soon came to be known as collateralised debt obligations, or CDOs, and soon CDO2, CDO3, and so on). Trading in these paper assets was the “investment” that these so-called banks were doing, and in the initial stages, for a decade or so from the mid-1980s, the going was good and some made big fortunes, individuals as well as corporations. But soon there were failures, which had a domino effect —some big players collapsed, resulting in the meltdown and forcing the state to step in. This is the unavoidable consequence of the play of finance where “investment” is no longer physical capital formation but trading to make quick profits, augmenting wealth by and for a few within countries and across nations.

Basu, however, essentially treats “The Global Financial Crisis and its Fallout” as originating from and confined to the conventional banking system and directly related to the excessive non-recourse loans granted by banks to those interested in buying loans, non-recourse loan being one where the lender cannot lay claims, in the event of a default, to anything beyond what has been explicitly mortgaged. Even granting that reckless lending of home loans by banks had a role in the financial crisis in the initial stages, it is surprising that an explanation for a continuing global crisis is offered solely in terms of the activities of the conventional banking system.

This narrow and faulty approach to the role of finance capital in the rapidly spreading global economy and its impact on individual countries like India leads to an uncritical treatment of the very concept of “growth”. In statistical terms, Basu (and most other supporters of his line of thought) are right in claiming that allowing foreign “capital” into the country following the “reforms” of 1991 has led to a stepping up of “growth”. But what is growing and where is it taking place? Without going into details and resorting solely to the conventional division of the economy into three sectors, agriculture, manufacturing and services, it can be seen that the first two on which the vast majority of people depend for their livelihood have been experiencing very low growth while the third is surging ahead, now accounting for close to 55 per cent of the GDP. (Growth rates in 2012-13, 2013-14 and 2014-15: agriculture 1.2 per cent, 3.7 per cent and 1.1 per cent; industry 2.4 per cent, 4.5 per cent and 5.9 per cent; services 8.0 per cent, 9.1 per cent and 10.6 per cent..

On the basis of this information, three related questions of relevance for the real world of India may be raised. Are production and distribution two distinct actions, that is, is it possible to increase production and then distribute what has been produced, or does the very nature of productive activity determine the pattern of distribution resulting from it? Is the bulging of the service sector the cause of increasing inequality in the country, with India now becoming noted for the number of billionaires it produces every year? Without increasing the output in the agricultural sector and without stimulating economic activity in the rural areas, can “growth” benefit the vast majority of the people in our land? If these are the fundamental and critical issues for policymaking in India, one would have thought that an empathetic economist hurled into policymaking would give top priority to them. Apparently, even in his reflections of the period as the Chief Economic Adviser, these issues had not occurred to him. The portrait that Basu gives of himself is that of a scholar who is comfortable viewing the real world from the North Block where brilliant brains and the latest computers are working hard but with all the windows tightly shut.

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