Q&A Jagdish Bhagwati, 78, Economist
Edited Excerpts From An Interview
According to you, what will be the five key economic moves for India in 2013?
I like to divide reforms into two sets. First are what I call Track 1 reforms, which relate, as the 1991 reforms did, to removing the counterproductive policies that had undermined our growth — a phenomenon that Amartya Sen has astonishingly deplored and Prime Minister Manmohan Singh has correctly applauded. This acceleration in growth has reduced poverty and produced (as I have recently documented along with Professor Arvind Panagariya in India’s Tryst with Destiny) improvements in the welfare of the marginalised groups. Our growth has indeed been “inclusive”.
Then, there are what I call Track 2 policies, which relate to directly spending the revenues generated by the enhanced growth, on health and education of the poor and on employment generating transfers to them. Track 2 policies rest on the success of the Track 1 reforms. Today we need more Track 1 reforms to accelerate both growth and its inclusive character. The recent determination of the UPA government to make a departure from the stagnation of the past several years is a welcome change. We can now spend more on Track 2 policies, which involve what economists call “social engineering”; they need constant experimentation and a lack of ideological blinkers to succeed. My list of five immediate measures on which we must make progress in 2013 includes three from Track 1 and two from Track 2.
Retail sector liberalisation is extremely important and promises the greatest reward for the least political disruption, since there is no evidence that small retailers will be hurt. The government is right to dismiss the witless admonitions against it by Joseph Stiglitz, whose track record on policy advice is dismal everywhere.
Trade liberalisation offers scope for further gains. Our industrial tariffs have come down hugely since 1991, and slowly enough not to cause any disruptions such as those that result from shock therapy, which Jeffrey Sachs is notorious for. Contrary to popular belief, there is evidence that trade liberalisation brings substantial prosperity.
There is growing consensus that labour market reforms cannot be put off till much longer. While the post-1991 changes such as abolition of industrial licencing have been substantial on “product market” reforms, we have neglected “factor market reforms” in labour and land markets.
On Track 2 policies, Professor Panagariya has shown how conversion of benefits into cash transfer, now easier since the Nandan Nilekani ID innovation, is the way to go. The government needs to stick to this “game-changer” programme.
The knee-jerk assumption among many NGO activists and populist economists that spending more on health and education must be through expansion of public sector programmes is inappropriate. In many cases, support for private sector programmes in education (as would occur partly with school voucher programmes) and healthcare can be more effective. A nonideological exploration of the most effective way to spend the money on healthcare and education is a must.
Can India deliver a GDP growth of more than 6 percent?
The decline in the growth rate in the last few quarters is to be attributed to special short-run factors such as excessive tightening of monetary policy and freezing up of clearances for projects as the furore over scams gathered strength. Moreover, none of the policy reforms that led to accelerated growth are in place anymore. Neither is there any evidence that suggests a political intervention reversing those reforms.
In fact, unlike the Occupy Wall Street movement, which has no defining agenda except decrying capitalism, the Hazare movement was for more reforms, not less, since the scams it was denouncing occurred because the reforms had not been extended effectively to new sectors like telecom spectrums and old sectors like mining. The new reforms that the UPA government seems to want to pursue will lead India to a higher growth trajectory.
Given the dubious history of land acquisition, do you think just because the law has been passed, India will suddenly have a smooth transition?
The government will have to bring different stakeholders on board to get a consensus on how “social purpose” is to be defined, and who needs to be compensated and how. Simply passing legislation is never enough. We also need to ensure that land is not taken over at low prices and transferred to industrialists at subsidised rates. To assuage occasional opposition to “taking” land from agriculture for non-agricultural use, it is also necessary for the government to assure the public that this is an absurd objection as there is plenty of land available for agricultural uses. The problem about agricultural development today is more about surmounting the agitation against GM and BT seeds, based on pseudo-scientific objections.
You have been pro-reform in retail. How do you see it playing out over the next 12 months?
Politically, retail sector reform has already cleared the hurdles. The small retail stores enjoy special advantages of location, low running costs, etc, which enable them to survive the entry of the large retailers. I believe that the issue will play out well as long as the UPA government goes into the public policy space and keeps stressing that the legislation also provides for safeguards if some disruption occurs. Objections by populists like Stiglitz need to be refuted, not by ministers, but by economists who can effectively expose their rubbish in economic argumentation.
How do you see the Centre-state relationship playing out, given that it caused slowdown in several areas of reforms?
In the end, the competition will be among states rather than between the Centre and the states. We have seen how Gujarat, Bihar and Odisha have set high standards of integrity and success; and in each case, the voters have responded by re-electing the chief ministers. That lesson cannot have been lost on the laggard states.
Terms like “crony capitalism” are making themselves heard once again. How will this effect the relationship between the government and India Inc?
Crony capitalism was first used in Washington to blame East Asia for the 2008 crisis rather than the IMF-Treasury insistence on freeing up capital flows. The symbiotic relationship between governments and industrialists is less now than before the reforms simply because industrial licencing has largely disappeared and there is also more entry of imports and, hence, more competition from abroad.
With the Lok Sabha election less than a year away, will the UPA 2 fall into the trap of populist governance measures in 2013?
I doubt it as that strategy is less effective now that the voters seem to be interested in enduring results rather than electionrelated handouts.
Do you expect to see the current leadership taking tough decisions to put India back on the growth track?
The UPA government has no alternative to making the tough decisions. If it does not, the cascading criticism on many fronts will likely prove fatal. The Congress’ survival and the economy’s prosperity are both tied together. I am optimistic that if the reforms are taken into a yet higher gear, they will find the reasons to do so.
The use of technology has led to greater transparency and better governance in certain areas. Can it become a turning point for India’s corruption issue?
Technology certainly helps reduce corruption. If you do not have to bribe a lower division clerk to get your file out, and can get everything done at one window with a machine (now that we will also be having the Nilekani UID), you are going to reduce hugely the corruption where you have to bribe the clerk. As for the corruption of a higher-up bureaucrat, that is really a function of the licence raj; and here the solution has to be the continued reduction of the scope of licencing.
Is the approach towards welfare schemes — cash transfers, etc — flawed in India?
I am in favour of cash transfers. But I will also add that merely providing additional income to the poor by pulling them up into gainful employment need not translate into better nutrition, for example. We need to “nudge” people into better choices. A good example comes from the US where poor immigrants coming from Mexico, where children were suffering from malnutrition because they had little to eat, were fed fast food at McDonalds, Kentucky Fried Chicken and Burger King and became malnourished from eating too much and the wrong kind of food. The Mexican mothers obviously were happy to see fat children, taking this as a sign of improving health!
Can a young and new leadership at the Centre really change India’s fortunes? Should Manmohan Singh, who is also your friend, give way to a new PM?
Even though I am almost as old as the prime minister (we were together in Cambridge, in the same college, in 1955), and neither of us has slowed down, let me endorse the idea that young people have to increasingly take over. They can bring new ideas, new energies, and can enthuse the nation more than older folks. When I see dynamic young politicians like Jay Panda from Orissa and others in the Lok Sabha, I see a promising future for India.
Does Narendra Modi deserve a go at the PM’s post?
That Gujarat has done extremely well on growth and, more important, on changes in social indicators, is undoubtedly true. Narendra Modi is known for his integrity. Now, whether he can overcome the handicap of the 2002 massacre of Muslims — even though his complicity has not been proven — is an open question. The increasing attention to the greater massacre of the Sikhs in 1984, now in the news again, will perhaps put 2002 into perspective. It is too early to tell.