Global economy in protracted deterioration; India stands out: Kaushik Basu

Washington: Worried about the global economy being in a "protracted deterioration", noted economist Kaushik Basu has warned against low interest regimes and the rich countries following "foolish policies" like protectionism even as he asserted India stands out with a growth rate of over 7 per cent.

"The global economy is going through a difficult phase. There is no sharp downturn but a protracted deterioration. This year?s global growth will be less than last year?s. In addition, there are individual countries that are struggling.

"Among relatively well-off countries, the Russian economy is shrinking. Among emerging economies, Brazil and Argentina have negative growth. In addition, several advanced economies, such as the Eurozone and Japan, are battling lukewarm growth," he said.

In an interview to PTI before demitting his office as Chief Economist at World Bank, Basu however complemented Bank of Japan for its "attempt at creativity", as against the tradition of central banks tending to be non-experimental in their temperament.

"It is good to see this changing. The last week we saw both the Bank of Japan and the US Fed take stock of their policies and make announcements. Both are being creative. The problem however lies elsewhere.

"They are trying to go in orthogonal directions. And in today?s globalized world that will not work. That is why the big challenge for central banks is not what they do individually but for more coordinated action. It is a bit like a nuclear non-proliferation treaty. A single country can?t do it," Basu told PTI.

Talking about the major concerns in the global economy, he said among advanced economies, the US is in reasonable good shape, with unemployment below 5 per cent, and, among emerging economies, India stands out for its steady growth of over 7 per cent.

"What worries me is that the global slowdown has continued for so long, and given that there are some vulnerable points to do with debt and banking, one small crisis can spark a bigger fire, pulling the entire world economy down for another dip.

"There are two specific matters of some concern. The first is the very low interest rate regime that we are in. I am talking about industrialized economies and their central banks. Six of them now have at least one policy rate in negative territory. It began with the ECB in June 2014. Now we have Sweden, Denmark, Switzerland, Japan and, most recently, Hungary, join the band."

Basu, who had earlier served as Chief Economic Advisor in India, said the the negative interest rate experiment was worth trying but, but one must be prepared to accept that it may not work like any other experiment.

"What is happening is that with such low interest rates in so many countries, far from saving less, people are saving more to stock up for their old age. Pension funds around the world are under strain.

"Despite this, no central bank can do much unilaterally. The economies are caught in what is best described as a negative-interest trap. This is affecting other economies as well. The reason that the US Fed is not moving up rates is not any weakness in the US but if it does so unilaterally, with so many other central banks using negative rates, it will cause the dollar to strengthen, exports to stagnate and even the stock-market to be adversely impacted." 

Basu cautioned it would be risky to allow this situation to persist for much longer and advocated some coordination in monetary and fiscal policy among large economies so that advanced economies can collectively pull out of this trap.

Talking about other global changes, he said the new technology is making labor market much more globalized as one can have hundreds of thousands of workers sit in Bengaluru or Chennai or Nairobi and work for consumers in New York or San Francisco or Berlin.

"This creates huge new opportunities and also new tensions. Emerging economies that have basic infrastructure, such as electricity, water and broadband connectivity, and political stability, can benefit from this enormously, as India has for example.

"But this is giving rise to protectionism, ironically, in the rich countries that used to teach openness. Protectionism would be foolish policy but countries have been known to use foolish policies," he said.

On India's position in this difficult global scenario, Basu said the World Bank's view, which was also his view, is that the Indian economy is very well positioned.

"From 2015, we put India in number one place in terms of GDP growth, among all major economies of the world. This has not happened before. India is growing at roughly 7.5 percent per annum. In today?s global climate this is good performance.

"The drivers of this are India?s very good monetary and fiscal policies. These have been very well conducted. GST deserves a big tribute, as does the new bankruptcy law," he said, while adding that there were global factors too.

"India ... Is making good use of new technology that is linking up the global labor market. Secondly, the low oil price has helped India greatly. My belief is that, short of major political instability in the Middle East, the low prices will persist for three or four more years. This is a window of opportunity for India," he added.

Basu, however, quickly added that India needs to pay greater attention to inclusiveness and for a nation growing so well, it has far too many people below the poverty line.

"Not enough is being done on this front. Government must invest more on health and education and design better delivery so that these benefits reach everybody. In the long run, better nutrition, better education, better health can make a disproportionate difference to a nation?s development. But for that very reason these interventions get too often overlooked."

Noting that India has a long history of caste discrimination, Basu said the country's founding fathers made a big effort to change this and make India into a secular society.

"There has to be greater effort to build on this cohesiveness. India's diversity in terms of religion, caste and race is something we should be proud of. Also India stands out among emerging economies for being a nation where freedom of speech is valued.

"I point to these because some Indians are ashamed instead of being proud of these qualities. These political and social characteristics are important for sustained economic growth. I personally believe that inclusiveness is a moral precept. It is desirable as an end in itself. But even if you do not share this belief, you must work to promote inclusiveness for the sake of high long-run GDP growth," he added.