India’s good growth is a miracle…

A superb interview of Martin Feldstein in case you missed it.

After asssessing the global and Chinese economy, he is asked on India:

What about policy-making in India? There has been criticism about policy paralysis. 

Cash transfers to individuals, very large cash transfers – the so-called guaranteed jobs – seem to me to be very wasteful. If I were looking for things to correct, that would certainly be one of them. Various price subsidies are in the headlines now because of the increased cost of oil. But what I say to people who know that I am a big fan of India is that it is something of a miracle that India works as well as it does, and it is growing as well as it does. There are so many problems…. whether it is primary education, infrastructure or tax system. If they can fix those problems, then think how much better India would do. 

Don’t worry sir. Most of us think the same. We were told that now 9% growth is here to stay and will just happen on its own. Last few quarters, suggests sustained 9% growth was perhaps an exception, an aberration. Lot is to be done before we can achieve that. The idea behind policy should be to scale higher peaks by projecting less and achieving more. What we instead get is moving to lower peaks by projecting more and achieving less..

What are his policy prescriptions?

How would you tackle it? 

You shouldn’t have fiscal deficit of 7-8% of GDP. So that needs to be brought down, whether by reducing transfers, or other forms of government spending. I think high priority should be to bring down the deficit, so you free up the money for more investment. The inflation rate is a problem. With food prices no longer rising so much, that will help. But now you face the energy problem. Again, it won’t be perpetual, they won’t rise 20-25% a year, so you have to absorb that. 

The central bank and the government seem to be on different paths. Is the central bank right in pursuing a tight policy? 

There was a time when a couple of years ago you had a surge in energy and food prices. And I thought if that was really the source of the inflation there was no reason for the central bank to fight it by slowing domestic GDP. So what I don’t know is how much of the current 7% inflation is… 

When he is told that 7% inflation is mainly because of core, he thinks it is too high and needs to be corrected. So central bank is doing the right thing.

The manufacturing component is almost at 7%. 

That’s too high. The central bank is doing the right thing by bringing it down. Because once you force it down, then it stays down unless there is another shock. So you pay some cost in terms of economic activity for a temporary period, for a year, or whatever it takes. And then if you don’t misbehave, if you continue to have a sound monetary policy which doesn’t have to be a contractionary one, then the inflation rate can stay low. Then you pay a temporary price to get a permanent gain in inflation. So that to me is a price that is generally worth paying. Countries around the world have agreed it’s a price worth paying, that the economy operated better with inflation rate of 2-3% than 7-8%. 

So some respite for RBI from a top economist…

 

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