An Economist in the Real World: The Art of Policymaking in India

263 Pages·2016·1.61 MB·English

by  Kaushik Basu

KAUSHIK BASU

AN ECONOMIST IN THE REAL WORLD
The art of policymaking in India
Contents
Dedication
Preface
1 Arriving in Lutyens’s Delhi
From the Slopes of Raisina Hill
Speaking in Subsequences: The Extended Sen Rule
2 India’s Growth Story: Stagnation, Crisis, and Takeoff
Delicious Bengali Dishes
The Coffee House at the Delhi School of Economics
Intellectual Roots of the Economy
The Growth Trajectory
Crisis as Opportunity
Growth Surge
Gathering Storm: The Global Financial Crisis and Its Fallout
The Tea Leaves
3 Inflation: The Emperor of Economic Maladies
Understanding Inflation, Understanding Deflation
Inflation in India and the World
Interest Rates and Liquidity
Benefits for the Poor and Inflation
Salad Bowl Stagflation
4 Fiscal and Other Macroeconomic Policies for an Emerging Economy
A “Repo” Mishap
Fiscal Policy in the Emerging Economy
Infrastructural Investment and Government Guarantees
Exchange Rate Management
Managing and Predicting Macro Parameters: A Conundrum
5 Globalization and the Challenge of Development
Tips to Industrialized Nations
Poverty, the Sharing of Prosperity, and Policy
Inequality and Taxation
Globalization and the Taxation Game
6 Food and Poverty
The Challenge of Poverty
Food Buffers
India’s Food Grain Market: Description
Theory of Food Market Intervention
Redesigning India’s Food Grains Policy: Price Stabilization
Food Security for the Vulnerable
7 The Nuts and Bolts of the Economy
O-Rings
Contracts and Pareto
Finance and Development
Ponzis
8 Law and Economics
Preamble
Corruption and the Law
Law’s Responsibility
Law as Focal Point
Postscript
9 The Social and Organizational Foundations of Economic Development
A Critical Flaw
Guarding the Jewelry and Stealing in the Bazaar
Utilizing Norms and Modifying Norms
Teacher Absenteeism in India
The Sociology of Bureaucracy
10 The Road Ahead
India’s Prospects
Striking Gold with Higher Education
The Invisible Hand, Markets, and Interventions
Development without Borders
Notes
References
Follow Penguin
Copyright
To Alaka
Preface
From an existence totally immersed in the world of research, and with little
forewarning, I was transported or, more aptly, hurled to the post of chief
economic adviser (CEA) to the Government of India, at the Ministry of Finance,
in December 2009, in response to an invitation from the then Prime Minister
Manmohan Singh. Despite the disorientation of the initial months, this turned
out to be a remarkably enriching experience, giving me a view that neither the
career bureaucrat nor the traditional researcher has. This monograph is an
account of the economy of contemporary India, ranging from the large
macroeconomic questions to the granular, microtheoretic ones, all viewed from
the perch of my office in Lutyens’s Delhi. It is a book on the Indian economy
and the art of policymaking, blending economic theory with personal experience.
My two and a half years in government convinced me, and this is the theme
that recurs throughout the pages of this book, that economic policymaking is like
an engineer’s work but with a twist. Crafting economic policy is like building an
aircraft where the onlookers take an interest. In building an airplane, for
example, onlookers typically take no interest. If they did, the task would be
vastly more complicated. If the engineer went along with the popular view,
making the wing span according to majority preference, giving the nose of the
plane the tilt that the lay majority demanded, and so on, chances are the plane
would not fly.
In making economic policy, in most areas, from setting tax rates, through
changing key interest rates, to designing how a subsidy should be given out,
people have views. This makes the task much more complex, for one has to
combine technical knowledge with attention to how people think and what they
believe in (which unfortunately also determines how they vote). Effective
economic policymaking requires awareness of the fact that economics lies at the
intersection of politics and society. This is not license to ignore the laws of
economics and hard data, but simply means that the task is more challenging
than may appear at first sight.
The transition from academe to the world of policymaking was especially
hard in my case because, unlike some others, I had not gone into economics with
the intention of helping the world. I went in for more selfish reasons, lured by
the pleasures of logic and deductive reasoning and the excitement of discovering
how much one can learn through pure reason. When I moved to policymaking in
government, it was a conscious decision to abandon hedonism and to try to make
some direct and palpable contribution to society’s economic well-being. It was
the sudden move from a life in research to the deep end of actual policymaking
and political jockeying that made me more conscious of the importance of the
broader setting of economics. Having come to government from outside, I had
the one advantage the anthropologist has over the indigenous people—an
outsider’s perspective. I could see the differences in norms and culture, both the
momentous and the trivial, which would elude the more long-term inhabitants of
this setting.
Let me begin with the trivial. It took me a while to fully appreciate that in
high offices of the Indian government not only that one did not knock to enter
someone’s office, but also that knocking was considered somewhat impolite. I
remember, early in my job, I was about to knock on the door of Pranab
Mukherjee, the finance minister at that time (now the president of India), when
one of his doormen rushed up to me, alarmed, and said, “What are you doing?” I
told him I needed to discuss some important fiscal policy matter with the
minister. He looked bewildered and queried why, in that case, was I not simply
going in?
I soon realized this was the norm, though initially I found it awkward,
especially because in the tropics doors swell up and tend to get jammed. So
when they finally yield to one’s pressure one tends to catapult some distance into
the room. Doing so without the forewarning of a knock seemed inconsiderate.
As with most norms, after some time, I got used to it. And later, I even came to
wonder if this norm was not actually superior to the Western one of knocking
before entering, because it rested on the eminently sensible axiom: Do not
disturb a person fifteen seconds before you need to disturb the person.
This is a trivial example but it draws attention to the fact that all economies
are embedded in a mesh of intricate norms, collective beliefs, and behavioral
habits. These can make or break an economy. While this book is primarily on
economic policies, I have tried to weave into it the case for paying much greater
attention to the social, behavioral, and institutional foundations of a society.
There is a second running theme that permeates the pages of this book. Over
the last two or three decades there has been a backlash against the excesses of
economic theory and there has been a chorus of demand for better empirical
work, rooted in statistics and hard data. This is a worthwhile call and,
fortunately, the profession has responded. There has been a remarkable
improvement in our collection and analysis of data. Treasuries, ministries of
finance, and central banks, in most countries, now have large research
departments that collate and analyze evidence, as do universities and research
institutes. This is as it should be; and we still have some distance to go in
collecting more and better data, and doing empirical investigation.
However, during my nearly five years in the policy world, initially in the
Government of India and now as chief economist at the World Bank, I have
come away convinced that the bigger deficiency now lies in theoretical analysis
and reasoning. We owe many of our policy mistakes to unreason and poor
deductive reasoning. When policymakers talk about the importance of making
“evidence-based policy,” the tendency too often is to wave at some evidence and
quickly jump to policy conclusions, ignoring the fact that the word “based” also
has a critical role to play. This is where analysis, theory, and deductive reasoning
come in.1 Once we recognize that economics is embedded in other social
sciences, deductive reasoning gets that much harder. But that must not be an
excuse to abandon reason. To recognize, as modern behavioral economics does,
that human beings often reason poorly must not be taken as license for the
analyst to reason poorly. Though this book is not an exercise in theory and stays
away from using mathematics, it strives to be fastidious analytically and in the
use of deduction.
The book might never have happened but for an invitation that came toward
the end of my term in New Delhi from Ashutosh Varshney of Brown University,
asking me to deliver the first of the O. P. Jindal Distinguished Lectures at his
university. These were meant to be three lectures (though I would eventually fit