Skip to main content

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."

Comments

Uma said…
It seems to me that the common man is not so enamoured of Modi now but then who is there to replace him?
Sharad Shah said…
It is apperant that China is doing something right. We may not agree with their politics but there must be - and there is - a way to adopt their economic approach without embracing their politics.

Briefly keep an eye on jobs and employment. Become the factory of the world.

TRENDING

Mystery around Gujarat PSU 'transfer' of Rs 250 crore to Canadian firm Karnalyte

By AK Luke, IAS (Retd)*
While returning from a Board meeting of the Oil India Limited (OIL) in Ahmedabad some time in 2012, two officers of the Gujarat State Fertilizers and Chemicals Ltd (GSFC), Nanavaty and Patel,  saw me off at the airport. They said they were proceeding to Canada in connection with a project GSFC had entered into with a company there. As we were running late, I hastily wished them the best.

Savarkar in Ahmedabad 'declared' two-nation theory in 1937, Jinnah followed 3 years later

By Our Representative
One of the top freedom fighters whom BJP and Prime Minister Narendra Modi revere the most, Vinayak Damodar Savarkar, was also a great supporter of the two nation theory for India, one for Hindus another for Muslims, claims a new expose on the man who is also known to be the original proponent of the concept of Hindutva.

J&K continues to be haunted, as parts of India 'degenerate' into quasi-Kashmir situation

By Rajendran Narayanan*, Sandeep Pandey**
“Jab har saans mein bandook dikhe toh baccha kaise bekhauf rahe?” (How can a child be fearless when she sees a gun in every breath?) remarked Anwar, a gardener from Srinagar, when asked about the situation in Kashmir. On November 30, 2019, a walk through an iron gate in a quiet neighbourhood of Srinagar took us inside a public school. It was 11 am when typically every school is abuzz with activity. Not here though.

Indians have made 119 nations their ‘karma bhumi’: US-based Hindu NGO tells Rupani

Counterview Desk
In a stinging letter to Gujarat chief minister Vijay Rupani, the US-based Hindus for Human Rights (HfHR), referring to the report citing his justification for the Citizenship Amendment Act (CAA) – that “while Muslims can choose any one of the 150 Islamic countries in the world (for residence), India is the only country for Hindus" – has said, he should remember, Hindus have made several countries, including USA, their home.

What about religious persecution of Dalits, Adivasis, asks anti-CAA meet off Ahmedabad

By Rajiv Shah
A well-attended Dalit rights meet under the banner “14 Pe Charcha” (discussion on Article 14 of the Indian Constitution), alluding to Prime Minister Narendra Modi well-known campaign phrase of the 2014 Parliamentary elections, “chai pe charcha” (discussion over cup of tea), organized off Ahmedabad, has resolved on Wednesday to hold a 14 kilometres-long rally on April 14 to oppose the controversial Citizenship Amendment Act (CAA), enacted on December 10-11.

Tata Mundra's possible closure? Power ministry's 'pressure tactic' on consumer states

By Bharat Patel*
Tata power has announced to the Union Ministry of Power that Tata Power may be forced to stop operating  its imported coal-based Mundra Ultra-Mega Power Project (UMPP) after February, 2020. It is not only unfortunate but also criminal that irreversible damage has been caused to the fragile ecosystem of Mundra coast for a project that will have a running life of only seven years.

Upendra Baxi on foolish excellence, Indian judges and Consitutional cockroaches

By Rajiv Shah
In a controversial assertion, top legal expert Upendra Baxi has sought to question India's Constitution makers for neglecting human rights and social justice. Addressing an elite audience in Ahmedabad, Prof Baxi said, the constitutional idea of India enunciated by the Constituent Assembly tried to resolve four key conflicting concepts: governance, development, rights and justice.

Population control? 10% Indian couples want to delay next pregnancy, but fail

Counterview Desk
Shireen Jejeebhoy, director at Aksha Centre for Equity and Wellbeing, previously senior associate at the Population Council, India, argues that the debate on the country's population was fuelled by Prime Minister Narendra Modi’s Independence Day address to the nation, where he drew attention to “concern” about the challenges posed by this ‘exploding’ population growth, needs to centre around the promotion of rights and education, instead of the language of explosion and the threat of coercion that this term implies.

Kerala governor turned History Congress into political arena, 'insulted' Prof Irfan Habib

Counterview Desk
In a signed statement, office bearers of the Aligarh Society of History and Archaeology (ASHA), Prof Syed Ali Nadeem Rezavi (president), Prof Jabir Raza (vice-president), Prof Manvendra Kumar Pundhir (secretary) and Prof Farhat Hasan (joint secretary), have said that Kerala governor Arif Mohammad Khan had sought to insult veteran historian Prof Irfan Habib, 88, at the 80th session of the Indian History Congress, even as turning it into his “political arena”.