Click to play videoKaran Thapar: Hello and welcome to Devil's Advocate. How serious is the situation facing the Indian economy, that's the key question I shall put today to the government's Chief Economic Advisor, Kaushik Basu. Dr Basu the economy today faces stubbornly high inflation, declining growth, a fiscal deficit target that many believe we won't need, an FDI which slumped last year and may not rise again. How serious is the situation?
Kaushik Basu: There is concern for the Indian economy, but it's a short run concern. However, the short run not handled correctly can spill over into the long run. I don't really think there are any serious concerns about the long run, but, there are problems in the short run, which we need to handle.
Karan Thapar: Let's go through each of these concerns one by one. Let's begin by talking about inflation and growth. Now on Tuesday you said that the RBI should reconsider its policy of tackling inflation by raising interest rates and in fact referring to Turkey and Brazil, you even said they should consider the possibility of cutting interest rates. Three days later on Friday, the RBI increased rates for the 12th time in 18 months. How do you respond to that?
Kaushik Basu: The advice that I had given just a couple of days ago was that RBI should consider thinking outside of the box and inside of the box as raising interest rates. I was urging RBI to look at the slew of policies available. That's one of the pieces of advice among the many that go out. I feel that really it is good in India that you can air different views but in the end it is RBI's decision. They've got a big research team, very responsible body. It is true that they've decided finally to raise interest rates by 25 bps.
Karan Thapar: I want very much to explore the advice you gave the RBI. But, before I do that, let me put this to you – one of the consequences if you are giving them advice publicly is that it becomes clear that there is a sharp difference between the Ministry of Finance, whose Chief Economic Advisor you are, and the RBI over how to tackle inflation falling growth. Is that difference a matter of concern?
Kaushik Basu: That difference is a matter of no concern, let me clarify. I feel in an open society, you do want interesting ideas to be brought on the plate. And, I feel India is open enough that India can take this. There are different views that you want to take on, but we are all very clear that this decision is to be taken by the Reserve Bank of India and we think it is a very, very responsible body. But, we do want to give interesting ideas to the Reserve Bank.
Karan Thapar: Except for the fact that it's now clear that the Finance Ministry thinks differently to the RBI on a subject that matters critically to people - inflation. That worries people sometimes. How do you react? Do you show them this is not a matter of concern?
Kaushik Basu: If it was the case that there was one clear opinion which was correct, then yes a difference of opinion is of concern and worry. But we know in economy policy making, unlike in an engineering policy, engineering problem, there isn't a black and a white about these things. And I actually like it, the fact that India is an open enough polity that it can take different ideas on board and then come to a decision on a particular one.
Karan Thapar: Now there in fact you touched on something that matters to people that the there's no clear cut way of tackling inflation. At the moment headline inflation is 9.78, for nine months it's been above 9 per cent and it's the highest it's been for 13 months. And yet as you say the government doesn't have a clear solution to the problem. The truth is that it's grappling and looking for solutions. Can you today accept that the government is still grappling for an answer?
Kaushik Basu: This one I agree with you that we don't have a clear answer, but, Karan, we need to be, it is important to understand that when there isn't a clear answer anywhere in the world, emerging economies are all inflating, it's a new world we are encountering. To have the pretence of a clear answer, the pretence of a clear policy where that is not there is much more damaging than being open about it and saying we are experimenting, we are trying out different policies and we have held it at a moderate level for sometime. It hasn't gone out of control. And Karan, I have to put across one more point, compared to the history of inflation, it is bad but no where near what many industrialised countries have seen and many other countries are seeing.
Karan Thapar: Except for the fact that the RBI has persisted with one policy for 18 months, 12 times its raised interest rates. Will you accept that the RBI has not only failed to reduce inflation, but in the process of raising inflation it's damaged growth?
Kaushik Basu: See the second part of this policy that it has slowed down growth is something that even RBI expected. RBI has made that statement that we are battling inflation; in the short run it will dampen growth. That does not come as a surprise. What does worry us is that this policy hasn't had enough bite on inflation. But this is again a new world we are living in. Vietnam, Argentina, China, we are all grappling with this problem.
Karan Thapar: Except for the fact that Indians turn around and say they failed to tackle inflation and in the process they've created a new problem, that didn't exist before, we now have declining growth. So we've ended up with two problems rather than one.
Kaushik Basu: You know that growth problem, we should have solely put it down on tightening of credit. The global situation, by the way the second quarter of this year as compared to the first quarter of the 10 G-20 countries on which we have data, nine of them it slowed down. So there is a global slowing down.
Karan Thapar: Except that on growth, our growth in the first quarter was the worst if you look at the last six quarters collectively. I will come to growth in a moment's time, but inflation is the first concern because it affects every Indian. You've suggested the RBI that they should think out of the box, you suggested that they should take a leaf out of Turkey and Brazil and reduce interest rates as the way of tackling inflation. Why do you believe that will work?
Kaushik Basu: I believe that, that is something that ought to be considered. Usually the standard central bank response or our government's response is you raise interest rate. And my view was, what you just pointed at too, we've done it. It's having some impact but not at the level at which we were expecting.
Karan Thapar: So try something different?
Kaushik Basu: So try something different on which we are beginning to get some evidence from other countries. So it's not plucking things out of thin air.
Karan Thapar: But once again this is a sign that we really don't know what will work and so we are trying different things in the hope that one of them will work.
Kaushik Basu: Karan in a domain of policy making where there isn't a clear cut solution to pretend and give the impression to the people that we know and we will do ‘x', that's much more dangerous than saying that look we are in a new world where many countries are facing this problem. We have to try around different policies because we don't want to damage India's growth story, which, with all its problems, I know you will come back to it, remains in terms of global comparison, phenomenal.
Karan Thapar: I will come to that in a moment's time, but in the mean time the RBI has not only not heeded your advice, they've done the opposite of what you've suggested. They've raised interest rates yet again. So as Chief Economic Advisor, what trajectory do you see for inflation over the next six months?
Kaushik Basu: First of all, I mean, the Reserve Bank of India is the authority that decides on this. We give different ideas, they take certain decisions. I am absolutely fine with that. Now inflation expectations, my expectations is that its going to remain choppy and difficult till about December. The month of December should see a distinct drop in inflation.
Karan Thapar: Isn't that only because the base-rate effect will kick in? Last year December was so high that this year in comparison will look low. That's technical rather than real.
Kaushik Basu: There are two things. Yes, the base-rate effect helps. It's technical but that's the way we compute inflation. Also, both the fiscal and monetary policy, both of them have huge lag, and our calculation is that with this lag, these policies will begin to kick in, which we have taken measures, towards the end of this year.
Karan Thapar: When will inflation come down to levels of six and five per cent where the government is comfortable and where the ordinary people don't feel the pain?
Kaushik Basu: Not till the middle of 2012 unfortunately.
Karan Thapar: Not for another eight months?
Kaushik Basu: Not for another eight months Karan, that's a bit of bad news I think, but, we should not veer from the target. I, for instance, believe that we must not settle in to saying that seven per cent is fine, We have to bring it down to less than five per cent.
Karan Thapar: But the truth is that it won't come down to five per cent till the summer of 2012?
Kaushik Basu: Not till April-May unfortunately, I don't think it will come down.
Karan Thapar: Can you ascertain it'll happen by even then because Finance Ministry officials, yourself in particular, have been predicting that inflation will come down to six per cent for about the last 18 months. It hasn't happened. Is this another such prediction?
Kaushik Basu: It's possible it'll go wrong Karan. This is economic policy into the future, again, I don't want to be foolishly confident and say it's guaranteed, but it is very very likely that it'll begin to fall from December, it'll go down, but not before April-May will it reach five per cent.
Karan Thapar: Alright we know that we don't have good news in the inflation horizon, let's now come to growth. Quarter 1 saw growth slip to 7.7 per cent, the worst in the last six quarters, I've already said that. In July, industrial output slipped to just 3.3 per cent, the worst in the last 21 months. This is not just slide in growth, people say this is slumping growth, would you accept that?
Kaushik Basu: On this, no. I don't accept that. 3.3 per cent is one month's industrial sector growth, overall the figure that you pointed to, 7.7 per cent, may be bad in comparison to what we've done in the past, but any global comparison, 7.7 per cent is just wonderful performance in this scenario.
Karan Thapar: But you're taking comfort from the fact that the others are doing worse than us. That's no reassurance that we're doing well.
Kaushik Basu: Well, 7.7 per cent is good by any standards except in our own previous couple of years.
Karan Thapar: It's very poor if your target is nine per cent and the Prime Minister keeps talking about wanting to take it up to 10 per cent, we're nowhere near there.
Kaushik Basu: No, we have missed our target. We were aiming for a bigger growth, it's down. But even with down, when you're among the world's top 10 performers, there is some consolation in that one.
Karan Thapar: You keep looking for consolation and the consolation comes from the fact that others are worse off than us. Let me put this to you. What do you expect this week will be the overall growth this year, when the Finance Minister presented his Budget he said that 8.5 per cent, since then the Prime Minister's economic advisory council and the RBI have reduced it to 8 per cent. Deutche Bank is now talking of just 7 per cent. What do you as Chief Economic Advisor believe will be the actual achievement?
Kaushik Basu: It's a very volatile situation, difficult to make a forecast, I've got some back of the envelope calculations, I expect the year to end at 8.1 per cent GDP growth.
Karan Thapar: Will you put your neck on the line for that figure?
Kaushik Basu: Not quite my neck on the line, but I think 8.1 with a small range around that is a reasonable forecast. The first two quarters will be bad; the second two quarters will be good and are expected to be roughly there.
Karan Thapar: To what extent will the continuing if not worsening crisis in the Eurozone and the uncertainty in America undermine that 8.1 prediction?
Kaushik Basu: If the Eurozone crisis becomes a recession, which is not impossible, then my 8.1 per cent will go, I'm afraid.
Karan Thapar: So there are huge question marks over 8.1?
Kaushik Basu: There is a question mark with Europe in where it is. But if Europe remains on the brink and does not go down, which is the most standard expectation on Europe, 8.1 per cent for us.
Karan Thapar: What's the bottom that it can fall to, that growth figure?
Kaushik Basu: I don't know.
Karan Thapar: Deutche Bank, I'm going to interrupt, said 7 per cent if Europe slides to recession. Would you accept that's realistic?
Kaushik Basu: I don't think so. If Europe slides to recession, next year will be worse, because these things come in with a lag. But this year we won't go anywhere near that 7 per cent.
Karan Thapar: Dr Basu, let's come to the consequences of sliding growth. Many people believe it will have a fairly important damaging effect on the government's revenue expectations. Secondly, in this climate, no one believes we're going to make your Rs 40,000 disinvestment target. Are you worried about the fiscal situation?
Kaushik Basu: The fiscal targets will be difficult, but the fiscal targets are still very achievable.
Karan Thapar: So are they really achievable because in Quarter 1, if you annualise the fiscal deficit, it was touching 7.8 per cent. Can you, therefore, at the end of the year, achieve a target of 4.5 per cent when your revenue will come down and your disinvestment is unlikely to be met?
Kaushik Basu: But the numbers that we're getting as of yesterday on Direct Taxes and a variety of other taxes, we're not actually doing too badly. The disinvestment is a source of some worry. But if we can match it with certain fiscal reforms which are on the cards, then the target's difficult, no doubt about that, but the target that we've set for ourselves, 4.6 per cent, we should get pretty close to that.
Karan Thapar: But when you say pretty close, does that mean five per cent or closer?
Kaushik Basu: No, no, it should be much closer than that. I can't give you a number, but we won't reach five per cent.
Karan Thapar: So you're saying you may miss 4.6, but you'll be under five?
Kaushik Basu: We will be under five. We are determined that we want to keep it there.
Karan Thapar: A second major concern is Foreign Direct Investment. Last year it came down by 25 per cent. UN figures suggested, came down by 30 per cent. Earlier this year you were hopeful that it might pick up. But now with the economic crisis in Europe and uncertainty in America, how confident are you that FDI will return to anything like the level you are comfortable with?
Kaushik Basu: FDI, usually these deals get struck well in advance. So, the numbers that we've already got on the deals that are struck makes me feel that the FDI scenario is actually quite rosy for this year, but could again turn bad if the European situation deteriorates. But, this year should see a very, very good rebound of the FDI scenario.
Karan Thapar: So very quickly, the 25 per cent slump of last year will be made up this year?
Kaushik Basu: I would expect that.
Karan Thapar: But next year we could see a slump again?
Kaushik Basu: You could see if Europe is in a bad situation.
Karan Thapar: Let's then come to an issue that most people say the government has lacked the conviction and courage to pursue – reforms. Many people argue that the way to boost growth, the way to curb inflation, is in fact the way for the government to go ahead with reforms they talk about but don't implement. My key question is this, given the political and economic uncertainty has this government lost the appetite for reforms?
Kaushik Basu: Karan, I would like reforms to move faster than the reforms have. But, in recent times there have been small moves, moves in the correct direction. This is a democratic polity, things slow down, but, in terms of where we want to go, I speak to policy makers at the top, I feel what heartens me is that all the key players are pretty clear about the direction in which we go. We have to carry a big polity along with us.
Karan Thapar: You know Dr Basu, everyone agrees with the direction. The problem is they don't move in that direction. Let me give you three critical tests. First, FDI in retail. In June, you chaired a committee, which you created. In July, the committee of secretaries endorsed it. In August, Anant Sharma told me that he was confident that before the end of the calendar year FDI in retail would be a reality. But now, the 'Business Standard' has front page stories saying that it may, in fact, not happen for 12 months, it may not happen for 18 months and by then you and I know that we will be into elections so it may not happen at all. Is it going to happen?
Kaushik Basu: I still think it will happen but the slow down is disappointing to me because as you pointed out, I have for a long time being pushing for it and it did appear one month ago that it's imminent, it now seems slower. I can't deny that.
Karan Thapar: So you are conceding that it doesn't look likely that it's going to happen quickly?
Kaushik Basu: Actually, quickly meaning it will not happen in months but I think the media reports today was more pessimistic than it need have been.
Karan Thapar: Alright. More pessimistic than it might have been but nonetheless, it's not happening as imminently and as quickly as you thought it would.
Kaushik Basu: Yes.
Karan Thapar: The second test case - the National Manufacturing Policy. Two weeks ago Anand Sharma told me that the Cabinet would okay it and it would become a reality in two weeks flat. On Thursday the Cabinet met, it failed to agree, ministers were in disagreement. Has politics come in the way, once again, of a major policy reform?
Kaushik Basu: You know the manufacturing policy reform even if it is agreed upon, it's going to take time. So, actually this slowing down is not really like your FDI slowing down because this is not something that is immediately going to lead to a series of action.
Karan Thapar: Except that the very initiation hasn't happened.
Kaushik Basu: Initiation has not happened, but, there are other moves which, to me, are concrete moves and as long as that takes place, if we don't have this piece of paper, okay it's unfortunate but we can.
Karan Thapar: Except for when things slip they start sliding.
Kaushik Basu: Yes, But you know there are little reforms taking place in terms of enabling the industry to borrow money, as you've seen its been around for sometime.
Karan Thapar: Very, very little reforms. I mean the other third big package of reforms like GST, DTC, pension, banking and insurance reforms, all of them are caught up in the parliamentary standing committee. Can the government deliver? Or once again is politics going to intervene?
Kaushik Basu: On DTC, my expectation is that it's going to come in from April 1.
Karan Thapar: Expectation or do you think that will actually happen?
Kaushik Basu: That's very likely. I will be really taken aback if it doesn't. But, GST is going to be a bit more delayed.
Karan Thapar: And this is, by the way, the third time it will be delayed.
Kaushik Basu: I agree. GST, it's not good news, but.
Karan Thapar: So not April 2012?
Kaushik Basu: I don't think it will happen till April 2012, but during the course of this year because it can be brought in by the middle of the year. Fingers crossed that its going to come in and that's an important one.
Karan Thapar: Fingers crossed gives it away. It's once again a hope.
Kaushik Basu: It is a hope, also an expectation Karan.
Karan Thapar: What about pension, banking, insurance? They are all locked up in the parliamentary committee. Can they be freed?
Kaushik Basu: You know, yes you saw Parliament, it slowed down. So I can't give you a very rosy picture on what's coming. But the overall story, I'm going back to what you were talking about, there are strengths in terms of investments, in terms of savings. So the overall story, and in comparison no doubt with the world where it stands, the India story does remain very good.
Karan Thapar: You insist upon seeing the silver lining, my last question, let me concentrate on the dark cloud in between. Inflation is stubbornly high, growth slumping, your fiscal deficit target, must be believed, can't be met although you think it can but people would question that, FDI down, you are hoping it would come up but we don't know and the government seems to have lost the will for reforms. It's a cloudy horizon.
Kaushik Basu: Not, it's not as bad. Inflation is high but 9-10 per cent is bad but we've seen much worse inflation in many other places, including in India. Growth is a short-term problem we are having for a couple of months, we will pick up. And yes on FDI I do think we will do much better. The fiscal is going to be a tough one, but we will make it.
Karan Thapar: Are you disappointed?
Kaushik Basu: No.
Karan Thapar: Dr Basu, a pleasure talking to you.
Kaushik Basu: Thank you very much.
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