Kaushik Basu warns of long term economic impact of politics of division

Politics of division is affecting India and such divisions can have an impact on the economy in the long term, said Kaushik Basu, a former Chief Economist of the World Bank.

Basu is also the Carl Marks Professor of International Studies and Professor of Economics at Cornell University.

According to him, short term issues can be dealt with policy interventions.

For instance, the National Infrastructure Pipeline (NIP) with projects worth ₹102-lakh crore has been a ‘good idea’ but a lot depends on its implementation. If not implemented properly, the NIP, announced recently to ensure timely implementation of infra-projects across 18 States and Union Territories over the next five years, can spark off inflation.

This apart, Budget 2020 should look at better fiscal and monetary policy integration so that there is a boost in demand.

The agricultural sector has been severely affected. A rate cut, Basu maintained, can boost demand in the short run.

"The political situation over here has become very very divisive. And we have to hold it together; not by force. But yes, I'm worried about what that (division) is doing to the economy. And once institutions erode, that is a long term problem," he said on the sidelines of a FICCI event organised in the city.

Basu further maintained, higher education institutions in India must encourage free thinking. There will be different ideas and the country must allow different opinions to be aired. “Hyper-nationalism” is also not good.

He, however, clarified that, hyper-nationalism in India is not linked to "economic policies" like the US where the latter is raising tariffs or blocking people from coming in and so on. Rather, here it is "a kind of divisiveness" that "erodes trust" and a "sense of belonging".

The economist's comments come at a time when Anti-Citizenship Amendment Act protests - not just by political parties but also by common people - have forced the Centre on a back-foot.

Debt wave

To top it all, India's growth has slowed down and if it is hit by a global "debt wave" that the World Bank has warned of, then “it could be a bad shock”.

“The World Bank data is quite persuasive that the global debt build-up is very large. When the debt collapses there are two ways in which the country can be hit. If the country is very integrated globally, which India is now, it will get hit. But India has another thing. It's economy is already doing poorly. And, the World Bank is giving a bit of a warning that if an economy is doing badly and a debt wave hits, then it gets sucked in. So we (India) have to be careful," Basu maintained.

The World Bank has recently put out a statement where it has warned that a wave of debt in emerging and developing economies has grown faster and larger than in any period of the last five decades. This could end with another crisis. If the wave breaks, it could be more damaging since it would engulf private companies in addition to governments, at a time when economic growth is sluggish.

Debt in emerging and developing economies climbed to a record $55 trillion in 2018, marking an eight-year surge, a new World Bank Group study said.

The analysis is contained in 'Global Waves of Debt', a comprehensive study of the four major episodes of debt accumulation that have occurred in more than 100 countries since 1970. It found that debt-to-GDP ratio of developing countries has climbed 54 percentage points to 168 per cent since the debt buildup began in 2010.

On average, that ratio has risen by about seven percentage points a year, that is three times as fast it did during the Latin America debt crisis of the 1970s. The increase, moreover, has been exceptionally broad-based—involving government as well as private debt, and observable in "virtually all regions across the world".

Slowing economy

Basu maintained that India is going through "a very difficult economic phase" and a 4.50 per cent growth is "atrocious". "If you look beyond the 4.50 per cent there are indicators that things can go even worse in the immediate-run," he added.

One of the biggest problems is unemployment, Basu said. And, there is also a slowdown in the rural sector. This could be hurting consumption" across the country. Other indicators like slowing automobile consumption and production and also reduced growth in electricity consumption show the strain.

Two primary reasons for this slowdown - demonetisation and a "poorly implemented GST".

Basu gives credit to the current political disposition for pushing through GST and the Insolvency and Bankruptcy Code. But, the haste in implementing GST saw "small businesses" take a hit.

On the other hand, demonetisation was a "bad idea" and the government should have declared that it to be a "policy mistake". Ideally the effects of demonetisation should not have lingered on for "so long". But, Basu points out that post-demonetisation, the agricultural sector went through a phase where production has taken place, but buying power has collapsed. So suddenly, the farmers are suffering and they are unable to sell.

"What could have happened is that farmers got into an indebtedness problem. They kept borrowing in a cycle and probably that has fed into the agricultural sector," he pointed out.

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