Book Summary: "An Economist in the Real World: The Art of Policymaking in India" - Kaushik Basu

Brief about the Book:

An economist's perspective on the nuts and bolts of economic policymaking, based on his experience as the Chief Economic Adviser in India.

In December 2009, the economist Kaushik Basu left the rarefied world of academic research for the nuts and bolts of policymaking. Appointed by the then Prime Minister of India, Manmohan Singh, to be chief economic adviser (CEA) to the Government of India, Basu—a theorist, with a special interest in development economics, and a professor of economics at Cornell University—discovered the complexity of applying economic models to the real world. Basu learned that effective policymaking integrates technical knowledge with political awareness. In this book, Basu describes the art of economic policymaking, viewed through the lens of his two and a half years as a CEA.

Basu writes from a unique perspective—neither that of the career bureaucrat nor that of the traditional researcher. Plunged into the deal-making, non-hypothetical world of policymaking, Basu suffers from a kind of culture shock and views himself at first as an anthropologist or scientist, gathering observations of unfamiliar phenomena. He addresses topics ranging from the macroeconomic—fiscal and monetary policies—to the granular—designing grain auctions and policies to ensure everyone has access to basic food. Basu writes about globalization and India's period of unprecedented growth, and he reports that at a dinner hosted by Prime Minister Manmohan Singh, President Obama joked to him, “You should give this guy some tips”—“this guy” being Timothy Geithner. Basu describes the mixed success of India's anti-poverty programs and the problems of corruption and considers the social norms and institutions necessary for economic development. India is, Basu argues, at a financial crossroads. As CEA from 2009 to 2012, he was present at the creation of a potential economic powerhouse.

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Book publication date: February 2016.

Brief about the Author:

Kaushik Basu is the former Chief Economist and Senior Vice President of the World Bank.?Before joining the World Bank, he served as Chief Economic Adviser to the Government of India and is currently on leave from Cornell University where he is Professor of Economics and the C. Marks Professor of International Studies.?

Mr. Basu is a Fellow of the Econometric Society and received the title Padma Bhushan which is one of the highest civilian awards given by the President of India.

Mr. Basu’s contributions span development economics, welfare economics, industrial organization and game theory.?In addition to Cornell, he has taught at the Delhi School of Economics, Harvard, Princeton and MIT.?

He has published widely in academic journals and has contributed articles to many widely-read magazines and newspapers.

He has written several books including ‘Beyond the Invisible Hand: Groundwork for a New Economics’ (Princeton University Press and Penguin); and ‘An Economist in the Real World: the Art of Policymaking in India’ (MIT Press).?

Mr Basu holds a PhD in economics from the London School of Economics. He has received honorary doctorates from several institutes, including IIT, Mumbai, and Fordham University, New York.

Mr. Basu is currently President-Elect of the International Economic Association and will take over as President from 2017.

An Economist in the Real World:- Book Review

Exordium:

The book, ‘An Economist in the Real World: The Art of Policymaking in India’ provides a useful insight on the aspect of economic policymaking. Authored by Kaushik Basu, this book reveals his two-and-a-half-year tenure as the Chief Economic Advisor.

This is not a mere personal perspective of Basu’s work but is a reflection on the art of policy-making in the world’s largest democracy, India. It includes some interesting personal experiences, engaging discussions and bundles of information citing India’s governing structure. This book has been published by Viking Publishers in 2016.

Kaushik Basu, an acclaimed academician and noted economist left the comfortable world of academics and joined the rigorous domain of policy-making, back when the former Indian Prime Minister Dr. Manmohan Singh appointed him as the chief economic adviser (CEA) to the Government of India.

Basu worked in that position from 2009 to 2012. These three years saw a substantial transformation in the world economy and similarly in our nation's economic policies as well.

Basu, in this book, talks about some of the pressing issues faced by a developing economy like growth and equality, globalization and sovereignty, laws and corruption, policy-making and politics.

Discussing various notions ranging from macroeconomic to fiscal and monetary policies; and from the granular of designing grain auctions to the dream of ensuring every citizen has access to basic food, this book is full of economic wisdom. It also sheds light on the dinner hosted by Dr Manmohan Singh, where President Obama joked to him, “You should give this guy some tips” and “this guy” was Timothy Geithner. Thus, this is a vital document on the features of effective economic policy-making and the myriad of obstacles advisors face.

Chapter 1: Arriving in Lutyens's Delhi:-

August 9, 2009: Kaushik Basu’s meeting with the Prime Minister indicates the importance attached in Government to the selection process of the Chief Economic Advisor. It is evident that the Prime Minister recognized Kaushik Basu as a man of high meritocracy and requested him to join the Government. Basu took up the offer and joined the post on December 8, 2009.

It is interesting to note the advice Basu received from Amartya Sen, to make sure that no sentence conveyed some unwarranted message but also that no consecutive set of words within the sentence conveyed a wrongful message. The Sen Rule is very good advice to any policy maker and Kaushik Basu adopted it well.

Chapter 2: India's Growth Story: Stagnation, Crisis and Takeoff:-

The Chapter commences with the coffee house discussions at the Delhi School of Economics. The emphasis of Indian policymakers in the initial years was openness in books, films and ideas but closed in economic policies. Sky-high tariffs blocked the import of goods and foreign direct investment was blocked as India set up an economy strung up in rules, regulations and permits.

The rising fiscal deficits and internal/ external borrowing could be sustained when the going was good, but in 1990-91 in the aftermath of the Gulf War, India was teetering on the verge of default on international borrowings with a mere USD 5 billion in foreign exchange reserves. Kaushik Basu examines India’s growth trajectory from 1950-51 to 2013-14 and says that the first growth surge was seen in 1975-76 because the Emergency created fears contributing to efficiency.

The adoption of economic reforms under the International Monetary Fund’s Stand-By arrangement, reduction in tariff rates for imports, and easing up of foreign exchange controls represented a clear policy break from the economic policies that resulted in the Hindu Rate of Growth. The momentum of the reforms of 1991-93 resulted in a growth surge from 2003 onward and more markedly after 2005. Fiscal consolidation and increase in investment and savings rates took growth rates to over 9 per cent for 3 consecutive years from 2005 to 2008.

The Indian Growth Story was noticed by several leading economists of the world and recognized as one of the most important of our age. The slowdown in the US economy following the financial crisis of 2008, caused global contagion adversely affecting India. There were other factors like policy inertia and monetary tightening by the Reserve Bank of India as also a slowdown in the European Union economies due to a debt crisis. For India to return to an 8.5 per cent growth rate, the fundamentals remain sound – democracy, economic liberalism, high savings and investment rates.

Chapter 3: Inflation: The Emperor of Economic Maladies:-

In the Chapter on Inflation, Kaushik Basu says that starting from 2009, India had 5 consecutive years of inflation ranging from 7 to 11 per cent per annum where commodity price spikes frustrated people, adversely impacting the poor.

High inflation rates were seen in many countries like Russia, and Germany, in the 1940s and Brazil from 1962 to 97 where lengthy periods of double-digit inflation have impacted growth rates, setting growth rates back significantly. Tighter monetary and fiscal policies brought down inflationary spurts. In India, the wage hikes of bureaucrats and industrial workers are directly indexed to the consumer price inflation Index.

There was also a distinct difference between food and non-food inflation with stubbornly high food prices caused by hoarding. The financial inclusion program with lacs of people putting money out from under their pillows and putting them into bank accounts contributed to inflation.

The RBI and the Government used several instruments to manage inflation including the repo, reverse repo and cash reserve ratio. In a global context, in 2011-12, there was stagnation in the industrialized countries including the United States, European Union and Japan while there was inflation in almost all the Emerging Market Economies including India, Argentina, Brazil, Vietnam and China. The world witnessed a “Salad Bowl of Stagflation”. This is likely to last for some time and an imperative need for coordination of macro-economic management policies across Nations.

Chapter 4: Fiscal and Other Macroeconomic Policies for an Emerging Economy:-

The chapter starts with the grandmother’s advice “Don’t live beyond your means”, be responsible spenders and keep the gap between what you spend and what you earn as low as possible. The global financial crisis of 2008 saw a virtual policy revolution, with Nations using fiscal policy as a weapon to restore growth.

The Keynesian approach of Governments overspending by running larger fiscal deficits to compensate for lack of spending by private firms/ ordinary individuals was effectively adopted in India restoring growth from 6.7 per cent in 2008-09 to 9 per cent in the succeeding 2 years.

Kaushik Basu argues for caution in the issue of Government guarantees to large projects, which may not affect the fiscal arithmetic but amounts to undertaking future fiscal expenditure, and reiterates the advice of international standard bearers not to give guarantees to investors, especially for private sector initiatives.

Strategic government assurance is a powerful instrument to be used with care and Governments cannot rush into providing reckless guarantees.

On the issue of Exchange rate management, Kaushik Basu does not support the policy of export promotion through strategic central bank interventions, differing from the Chinese policy of fixed exchange rates and large foreign exchange reserves to boost exports. He supports India’s commitment to a floating exchange rate, curbing exchange rate volatility to keep the real economy stable and current account deficit within certain limits.

The author refers to the conundrums in managing and predicting macro-parameters saying that political leaders have to restrict themselves to making fatuously positive statements which should never be taken as forecasts as what they have to say about the economy affects the outcome. It is a conundrum faced by most of the Chief Economic Advisors too.

Chapter 5: Globalization and the Challenge of Development:-

The Chapter was published in October 2010, with President Obama asking Kaushik Basu to give some tips to the United States Treasury Secretary Tim Geithner.

The author highlights the globalization challenges that exist in development, mentioning the impact of the downgrading of the sovereign credit rating of the United States by Standard & Poors on the cost of hilsa fish in the Chittaranjan Park fish market in Delhi.

The downgrading of the US economy hurt China badly as it held a lot of foreign exchange reserves in dollars. Any substantial decline in the value of the dollar will be resisted by the 2 largest economies of the world.

The developments in the eurozone have an important impact on the rest of the world.

The quantitative easing by injecting liquidity into the economy of the United States has resulted in the salad bowl stagflation with inflation and growth in some countries and no inflation and no growth in others.

When the US interest rates rose, money started to flow out to emerging market economies resulting in sharp depreciation in currencies. In the Indian context, it led to an increase in exports. The author does make a pitch to address global inequalities particularly the challenge of addressing food deprivation and the poor.

Chapter 6: Food and Poverty:-

The chapter indicates that even after 2 decades of steady growth 240 million Indians live below the poverty line.

India has run a slew of anti-poverty programs since its Independence, including cheap food for the needy, employment for the poor, cheap loans for people wanting to start a business, interest subsidies for farmers etc. which did not have the intended results.

The author questions India’s food policy saying that the quantum of food stocks that the Indian government continued to hold during the period of high prices did not enable it to successfully even out the fluctuations in food production.

The strategy for releasing food grains in India has scope for improvement. The food grain policy needs to be redesigned to fulfil the Right to Food conferred upon the citizens. The author’s ideal food grain policy has two components namely

• The government should maintain the buffer to use it to hold down prices during times of food shortage
• The government must make sure that the poor and the vulnerable have access to food grains. The right to a certain minimal amount of basic food is achievable.

Chapter 7: The Nuts and Bolts of the Economy:-

The chapter refers to the chapter on “Micro-Foundations for Inclusive Growth” in the 2009 Economic Survey of India highlighting the need for to focus on nuts and bolts matters in the rough and tumble world of macroeconomics. India has scope for improvement in the formal enforcement of contracts.

India is low on contract enforcement which is a pivot for growth and enterprise.

Chapter 8: Law and Economics:-

The chapter focuses on India’s anti-bribery laws –The Prevention of Corruption Act, 1988, bribe-taking and bribe-giving are equally wrong. In the event of conviction, both the taker and giver are equally punishable. This is important in the context of harassment bribes in which large corporations are asked to pay a bribe for something to which they have a legal entitlement. The issues of harassment and bribery have been dealt with extensively and need to be drastically cut down. The author opines that improvement in growth rates is possible if legal enforcement is strong, and cites the case of Bihar’s growth spurt from 2006-12.

Chapter 9: The Social and Organizational Foundations of Economics Development:-

The chapter says it is important for developing countries to emphasize the social and institutional drivers for economic growth.

Economic policy can be run effectively if the social cultures are supportive., for example, adherence to time, teacher absenteeism etc.

India’s low rank in the Doing Business rankings is not surprising given the need for multiplicity of clearances which slows down the decision-making process significantly.

The administrative system needs to be reformed to give the Nation a burst of life and growth not seen in recent history.

Chapter 10: The Road Ahead:-

In the concluding chapter, the author says that India is at a crossroads. The prospects of a major take-off are real in a way never seen before.

India has invested in an open, secular, democratic society with a progressive foreign policy with a natural alignment of interests with the United States.

India has nurtured higher education research and creativity and this emphasis has enabled it greatly. India has the potential to become a global hub for education.

There are large national gains from the investments made in higher education. The author concludes by saying that the Nationalism of the day must make way for a global agenda that all peoples, irrespective of their narrow identities, can shape and cherish.

Conclusion:

As Kaushik Basu says it a book on the Indian Economy and the art of policy making, blending economic theory with personal experience. The man is an academic first and a reluctant policymaker later.

The policy analysis on India’s growth rates, inflation management etc are set in a global and local context in a longer-term perspective indicating institutional positions and responses developing over some time.

The book is lucid reading. I was quite impressed with the simplicity of the writing and how the narration covers India’s complex economic story in a manner that engrosses the reader.

Learning:

What stands out in the book is a theory Basu had infamously detailed on the Ministry of Finance website to tackle corruption, using Gary S. Becker’s concept and game theory.

The majority of bribes in India are ‘harassment bribes’ and they can be tackled using this model, where only the person receiving the bribe is punished, not the giver.

That way, those requesting the bribes are more cautious as those who are forced to give the bribe are more likely to report them.

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