Ex-World Bank chief economist doubts spurt in India’s ease of doing business rank

By Rajiv Shah

This is in continuation of my previous blog where I had quoted from a commentary which top economist Prof Kaushik Basu had written in the New York Times (NYT) a little less than a month ago, on November 6, to be exact. He recalled this article through a tweet on November 29, soon after it was made known that India’s growth rate had slumped (officially!) to 4.5%.

In this article Prof Basu warns, “Countries with strong governments often end up with weak economies, and India, after years of impressive growth, risks becoming one of them.” The heading is more direct: It terms India a “mistrust economy”, noting that the blame for the slowdown in growth should go to Indian rulers’ “illiberalism”, which is “hurting investors’ confidence.”

Interestingly, it is within this overall framework that Prof Basu seeks to target the World Bank, whom he served as chief economist from 2012 to 2016. Professor of international studies and economics at Cornell, and chief economic adviser to the Indian government from 2009 to 2012, he puts in question the World Bank’s recently released annual ease of doing business, according to which India’s ranking improved to 63rd, up from 77th last year.

Noting that India — along with Saudi Arabia, Pakistan and China — “was among the 10 states that made the most progress” in the World Bank’s perception, Prof Basu appears to wonder how could the top banker, whom it had advised, reach such a drastic conclusion, especially when “major indicators show that its economy is slowing down sharply.”

Pointing out how Prime Minister Narendra Modi on coming to power in 2014 had promised to make of India an economic powerhouse that would rival China, and on being reelected this year, he pledged to turn India into a $5 trillion economy, nearly twice its current size, by 2024, Prof Basu says, ground realities already suggest a totally different picture.

Thus, the International Monetary Fund’s World Economic Outlook “cut India’s growth forecast for 2019 to 6.1 percent, down from the 7.3 percent that the organization had predicted in April”, Prof Basu says, adding, “Between 2003 and 2011, growth averaged nearly 8.5 percent, well exceeding 9 percent every year between 2005 and 2008.” However, the most recent “turnaround”, he believes, is “sudden and unexpected”, and is a “cause for concern.”

He says, “The decline is visible in the details, big and small. Passenger car sales, which had been falling for a while, dropped by more than 23 percent in the period between April and September, compared with the same period in 2018… Export growth has been lethargic… Standard & Poor’s recently warned of rising risks in India’s financial sector. The unemployment rate is at a 45-year high.”

Prof Basu continues, “It’s not just that economic growth is slowing down overall; inequality is rising as well. According to Oxfam, 73 percent of the wealth generated in India in 2017 went to the richest 1 percent. Inequality was worsening before the present administration took office, but with growth slowing down and unemployment rising, the effects are more painful.”

The current slowdown is mostly collateral damage, the result of an erosion of trust caused by the country’s drift toward illiberalism

Wonders the top economist, “So how can it be getting easier to do business in India, apparently, even as by some measures, economic growth is decelerating?” According to him, “These simultaneous developments, far from being conflicting, actually explain each other.”

He asserts, “The World Bank’s ease-of-doing-business rankings are primarily an assessment of how good a country’s laws look on paper rather than how they operate in practice.”

Thus, he says, “By the report’s own account, ‘approximately two-thirds of the data embedded in the doing business indicators are based on a reading of the law’. In other words, a government can adjust its regulations in a way that ensures it will make progress along the index, even if the changes have minimal effect on the ground.”
Underlining that real growth “depends on how well the laws are actually carried out”, Prof Basu argues, “These days in India, divisiveness is increasing throughout society, while trust in the government is declining, at least among major economic actors. Consider this indirect indicator of waning confidence, which is often overlooked.”

Pointing out that “India was a low-investment country for many years after independence in 1947”, and “investment did not exceed 20 percent of gross domestic product until the late 1970s”, Prof Basu says, ” It crossed the 30 percent mark for the first time in 2004-05 and climbed to 39 percent in 2011-12. India had begun to look like, and grow like, an East Asian economy in the 1980s.”

How can it be getting easier to do business in India, apparently, even as by some measures, economic growth is decelerating?

Suggesting that this confidence “started to decline”, with investment again reaching 30 percent of GDP, by 2016-17, Prof Basu underlines, “A drop in investment is usually connected to a lack of trust in the present and the near future. When businesses worry about a country’s policy environment, they hesitate to sink money into it.”
Especially referring to the Modi government’s demonetization misadventure in 2017 in this context, Prof Basu emphasizes, “A government’s heavy-handed interference in the market — such as the Modi administration’s decision to ban some paper currency in late 2016 — or general fractiousness, in politics or within a bureaucracy, can hurt confidence in the economy.”
According to him, “Economists don’t much like to admit this, but a country’s economic performance depends as much on its politics as on its economic policies. Starting at independence, India invested in political institutions first — establishing democracy, free speech, independent media, secularism and protections for minority rights.”
Suggesting that this helped lay foundation for building confidence in India, Prof Basu says, while “India’s growth in the early decades after independence was sluggish”, it would be a “colossal mistake now to squander the political capital that choice generated — especially after the economy finally did take off, first in early 1990s and spectacularly so after 2003.”
Concludes Prof Basu, while even now “the fundamentals of India’s economy remain strong”, thanks to the post-Independence political legacy, “The current slowdown is mostly collateral damage, the result of an erosion of trust caused by the country’s drift toward illiberalism.”
He believes, “India can boost its economy again by reclaiming and building on its progressive heritage.”

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