How lack of trust is translating into India’s falling growth rate

By Tamanna Inamdar

Over the last five years, each year’s growth being less than the previous is a puzzle and I cannot solve the puzzle by just looking at economic policies, says Kaushik Basu, Professor of Economics, Cornell University.

What is your take on the September recovery? Have we turned the corner and is the worst behind us?
I think India has turned the corner and thank goodness for that! We have never seen this kind of a low in independent India with a growth rate of minus 23.9% which has put us as the second slowest growing economy in that quarter. From there, fortunately the turnaround is in the right direction. You have to appreciate that we had really plummeted down and we are just beginning to pick up.

You have to keep in mind that while auto sales are up and exports are up, in the long run, there are some concerns. But the trajectory is going to be right. If India is going to grow better from here onwards, there are still some worries. Indian exports have picked up but imports did not pick up which shows that people are not buying and consumers are still stressed and that is going to cascade through our agricultural sector. The farm produce may be good but the farmers will not be able to sell adequately. There are lots of worries still and we are turning around from the absolute bottom, a kind of bottom we have not seen except in colonial times. So, thank goodness we are turning around but yes a lot will depend on how the long run goes from here.

Do you think that unlocking of the economy has aided the spurt because people can actually go out and buy things and open up businesses? Do you see some of this coming down to pent up demand?
There are two things about the lockdown. It is true that this great plunge took place because of the lockdown but we have to understand that for 95% of the population, the lockdown was among the strictest in the world but some 5% of the people -- over 20 million people -- were moving around in a way that does not happen in normal times. So, it was the absolute opposite of lockdown. So, by some dimensions, India’s was one of the weakest lockdowns and this comes out on the data.

The Covid data is fascinating. We keep comparing India with the United States and UK. India does very well but the entire Asia and the entire Africa have also done very well. In fact if you take South Asia and East Asia, India with its roughly 85 people dying per million, is the worst performer. So something about the lockdown was wrong. There was a part of the population that was not locked down at all and there were sprinklings of Covid. No wonder India’s performance is the worst, at the bottom of the chart among all these countries.

We can compare to the United States but Bangladesh can compare to the United States, Nepal can compare to the United States, Thailand can compare to the United States. The point is in a situation where for climatic reasons, for reasons of previous germs, Indians and South Asians and Africans have done better, we have done the worst among them and that is because the lockdown was very poorly managed.

A couple of good things are happening in India. I stand with a small group that believes that some of the regulations like the labour law changes are moves in the correct direction. I have some hope from some of the changes that are being put in. The growth slowdown that we saw because of the lockdown happened today but over the last five years, India has had a very strange growth experience. From 2016, every year’s growth is less than the previous year’s growth. It is true that we have reached the rock bottom because of the pandemic but over the last five years, we have been going down the stepwell.

There is a longer dimension to this from which we have to climb out. I personally believe that some right policies are needed. India has so much talent, even among ministers there are some really talented people. But we are not seeing the effect of their work and one of the reasons is India has become so divisive that people do not feel a collective togetherness about India. Look at what is happening in Uttar Pradesh. It is divisive on caste, on religion and that is taking a toll on the economic indicator.

Trust translates into investment, investment translates into growth and those indicators are doing badly in India over the last five years. That needs to be corrected. India was a country that gave space to people to have contrarian opinions. If you blanket out debate, if you cannot discuss what is going wrong, that is wrong. IMF is forecasting roughly minus 10% growth for India this year. That is the worst recorded growth in independent India. Some people are predicting even worse. Subramanian Swamy is predicting a growth of minus 15%. I personally do not think it will be that bad but growth is very low and here onwards, you need policies to pick up. The policies are partly economic and partly people must feel as a united entity and don’t get divided on the basis of caste and religion.


Do you see the divisiveness and the lack of trust hamper economic growth?
In economics, there are lots of open questions. India’s big puzzle is not what happened just now. We can see the lockdown was very badly organised and we paid the price of that but we will get out of that. Over the last five years, each year’s growth being less than the previous is a puzzle and I cannot solve the puzzle by just looking at economic policies. Nirmala Sitharaman is quite a talented person. There are people in the government who have made good decisions but we can’t see the fallout.

People have written about trust from Francis Fukuyama to contemporary writers to laboratory tests, a society does well when there is trust among one another. Then people begin to invest. There are lab tests showing the relationship between investment and trust. That is getting fractured. The connection between politics and society and economics is not something on which you can produce hard data and say this is the root. Nevertheless, we cannot blind ourselves to that because something mysterious is happening.

India was amongst the world’s three or four fastest growing economies. From that, this year, we are going to be in the bottom 10 economies of the world. That is a surprising turnaround and you have to look for causes which go beyond economic policies. Several good policies have been made, the business closures, lockdown rules are good, labour laws are moving in the right direction. The ease of business is moving in the right direction but you will not manage with that unless you attempt to solve the larger problem gnawing away at our economy.

IMF has said Bangladesh could outstrip India in per capita GDP by 2021. The response to that statement from government sources was that in 2019 India’s GDP in PPP terms was 11 times that of Bangladesh. With a population that is eight times that of Bangladesh, is it a fair comparison?
Yes, it is a completely fair comparison. We should not grudge another developing country doing well. It is very good news that Bangladesh is doing well. Comparing the total size of India’s economy with Bangladesh is meaningless and IMF was not saying that, IMF was saying that the per capita income of Bangladesh will cross India’s in the coming year. I have gone through the numbers very carefully. Bangladesh is going to be per capita income wise richer and that data has come in.

India can pick up once again and overtake Bangladesh after that but you have to remember that Bangladesh some 18 years ago for the first time overtook Pakistan in terms of growth and there was no turning around. It has been 18 years since Bangladesh started growing faster than Pakistan and now Bangladesh has a clearly higher per capita income than Pakistan.

In the case of India, this is the first year that the crossover has taken place. It is a big surprise because even three-four years ago, no one would have predicted that Bangladesh’s per capita income would cross over but it is a fact now. The future is open. India has fundamental strengths which are rare. The sectors in India which are strong are the sectors which are going to cause the global boom next round. If India can put its political house in order, it can capitalise on the strengths that India has and grow very well.

The private sector in India is extremely talented. Many of them are very worried about what is happening in India. They are not worried as much about economic policies as about the politics which is gnawing into our economy.

Do you think there is space for a big spend from the Indian government to push us faster towards a recovery?
The last round of stimulus was the set of good policies which were announced. We are moving in the right direction but even more fiscal stimulus is needed which should be directed at the poorest segments of India. When you get a growth rate of minus 24%, it is devastating for a country. We do not have enough detailed data but the data that is coming out from other countries including the United States during the pandemic shows that the bottom segment of the population is taking the hit much worse than the top end of the. The top end means not only the super rich but as long as you are in the top half of the population, you are not doing badly. but if you are in the bottom half you are doing very badly.

If that is happening in India and we do not have enough data on that, given that we have a mass of still very poor people, what is happening to India’s poor is devastating . For the migrant population, it is a very bad situation. I keep in touch with a lot of grassroots workers. I have been in contact with Ela Bhatt about migrants and it is a very painful situation for them. So the stimulus needs to be directed at the poorest segments.

You cannot keep a stimulus going for too long but right now, there is a need for a very quick stimulus bigger stimulus with a plan that within a year, we will begin to fold it back