Govt lacks imagination, common sense: Jayati Ghosh

Ghosh, who is one of the world's leading economists, and the executive secretary of International Development Economics Associates (Ideas), says the policies are all designed to increase inflation.

The present government wants to commit political hara-kiri, she tells Faisal Kidwai in a phone interview.

Here are the excerpts:

What's your view on government allowing foreign direct investment in retail and aviation?

First, it's pointless because it's not going to achieve the kind of results that the government is hoping in terms of putting the economy on a rapid growth path. Second, it's also stupid because it's bound to result in a loss of employment in the medium term and that is one thing that the Indian economy can hardly afford.

It's designed to restore investor confidence, at least that's what's usually said. And certainly there's a good press for this, the financial press, here in India and abroad, but that doesn't mean it's going to achieve what it's hoping for.

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What's the solution?

The problem is that the government doesn't seem to have a plan B. That is, if the growth rate dips, then what are you going to do? Offer more incentives, give more concessions and try to keep domestic and international capitalists happy as much as possible in other ways.

It's a bit of a game because the more concessions you offer the more capital expects that same rate of concessions rather the same level of concessions. So, if there isn't continuously increasing incentivising then it is called policy paralysis. In the process of doing this incentivising, you are bound to actually do things that are subsequently considered corrupt or illegal.

In any case, all these incentives, which are being offered to somehow persuade capital to come and invest, don't necessarily work in terms of achieving higher rates of investment and the failure with respect to public-private partnership is evident already in a lot of infrastructure plans of the 11th plan.

The public-private partnerships have failed because the private investors have demanded more concessions to the point where it would cost maybe three times what it would have cost if the government went out there and invest itself.

The government should actually go out there and do something about the nature and pattern of growth directly, which is to say we need infrastructure investment, but no country has done it without significant public intervention and public investment, including China.

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The private sector will come when the public sector has already done the hard work, we know that. It's not going to come and do the hard work itself. Or, it will demand so much that it will actually break the fiscal back. For instance, take the electricity sector. If the private sector has to be persuaded and then coaxed into investing, as we now know, then it's going to cost so much that we simply can't afford it.

And then we will say well we can't afford it because we have to give concessions to private capital, so let's tax the ordinary people more, let's raise indirect taxes, let's raise the price of diesel, which will add to all the other prices in the economy, especially food prices.

You have said these measures will increase unemployment.

Yes, absolutely. These measures will further increase the already high unemployment. Look, I'm a great believer in the importance of infrastructure, but it has to be infrastructure that will help people enter market on decent terms.

For instance, all-weather roads to every village are an absolute must. The private sector is not going to invest in providing roads to villages. It cannot be done without public investment, even Bangladesh has shown this to us but we are still to accept it.

So, what key reforms would you like to see?

First, it's wrong to call these reforms; these are no reforms at all. They show no imagination and they are going exactly along the same path.

I would like to see a significant increase in tax revenue by implementing the existing laws. Not necessarily by lowering tax rates, but by actually implementing the existing laws, showing a political purpose behind this.

Using this money for basic infrastructure, for provision of essential food to people in the form of a correct food security bill, through the expansion of public health and education services - good quality services that not only improve the welfare of the people, but actually has strong multiplier effect, which generates demand for the economies.

If you do all of this, then the private sector will look after itself and it will generate growth because you will create the conditions for dynamism.

Why is Prime Minister Manmohan Singh finding it so difficult to put the economy back on rails?

You can't keep using the same strategy in all conditions at all times and in all contexts, especially not keep pushing the same idea when you know it hasn't worked.

Public-private partnership in infrastructure hasn't worked. You can't say you want more PPP with more incentives. Financial liberalisation we know from global experience, and from our own experiences, is extremely problematic; you can't simply say we need to have more of the same. You can't be a one-trick pony.

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The government is also finding it impossible to bring down the inflation rate.

Is it surprising? Everything we do - the policies are all designed to increase inflation. If you increase diesel prices what do you expect? And six months down the line, we will have a chief economic advisor who will say we have no idea why prices are going up.

It is a big mess that is entirely driven by poor management of the economy and that is driven by an inability to think beyond their own comfort zones. And by continuously incentivising the large corporate sector. They have no imagination, but they certainly don't even have the common sense to recognise that you must have another alternative route.

Some say the government should focus on income inequality and poverty instead of just focusing on growth rate.

Absolutely, that's true. Put a critical focus on let's say employment and basic needs of the people. Let's say you want your economic policies to generate more employment of a good quality and that people's basic needs, such as food, health, nutrition, are ensured then you would have different strategies.

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Here you are expecting GDP growth to deliver when we know it doesn't. We know we have had 15 years of GDP growth with poor employment generation, we know our health and other indicators remain abysmal and our nutrition indicators are worsening, so it's about time we devote some attention to dealing directly with these issues.

How hopeful are you of seeing a change in government's focus?

Not in the current political setup. I'm at a loss to understand that. The present government wants to commit political hara-kiri. They are almost begging to lose in the next elections. It's extraordinary. Quite likely that people in their disgust will vote in an alternative that might even be worst.

So, we are unlikely to see improvement in economy any time soon?

Let me once again emphasise it's not about five per cent growth rate - it's about stagnation of employment, it's about rising food prices, it's the worsening nutrition, the terrible health condition - these are the things that matter.