Foundations

Polarization is damaging the foundations of Indian growth: Kaushik Basu


Former World Bank chief economist Kaushik Basu said on Tuesday that while the fundamentals of India’s economy are strong, rising divisions and polarization in the country are hurting the “fundamentals” of national growth. .

Basu further said that India’s big challenge is unemployment and joblessness as youth unemployment in India is over 24% which is one of the highest in the world.



“The growth of a nation does not only depend on economic policy. It is increasingly clear that trust between people is a determining factor in the economic success of a nation,” he told PTI in an interview.

“The rise of division and polarization in Indian society is sad not only in itself, but because it damages the foundations of the nation’s growth,” added the eminent economist.

According to Basu, India has strong fundamentals – a large entrepreneurial class, highly skilled workers and, although it has been declining in recent years, a high investment-to-GDP ratio.

Responding to a question on high inflation, the eminent economist said that the inflation India is witnessing is a global phenomenon and is caused by the COVID-19 pandemic and the war in Ukraine, and the supply chain bottlenecks that have arisen because of these factors.

“Although the cause of inflation lies beyond India, what worries me is that we are not doing enough to protect the poor and the middle classes,” he said. he noted.

Explaining further, Basu, currently a professor of economics at Cornell University, said that although retail inflation hit an eight-year high of 7.8% in April this year, price inflation wholesale amounted to 15.08%.

“We haven’t seen wholesale inflation this high in the last 24 years,” he said, adding that what is happening now is reminiscent of what happened in the late 1990s when the East Asia crisis has spread to India.

While pointing out that WPI inflation has been in double digits for 13 months now, Basu said this makes the situation worse as it means the current high inflation is on top of the high inflation of a year ago.

Noting that India should not forget what it learned during the East Asian crisis, he said CPI inflation is likely to rise further, driving inflation out of the PPI.

“My calculation is that CPI inflation in India will exceed 9%. We need to do everything we can to make sure it doesn’t hit double digits,” Basu said.

When asked if the Reserve Bank of India (RBI) was behind the hike in interest rates, he said central bank policy was mainly aimed at CPI inflation.

“I don’t think RBI is behind the curve…India’s big challenge so far has been WPI inflation. What hurts India the most is unemployment and RBI has reason to be cautious not to slow growth,” Basu said.

The RBI has been mandated by the government to ensure that inflation remains at 4% with a margin of 2% on either side.

Asked whether the RBI’s policy tightening will bring inflation down, Basu said it was time to opt for policy tightening.

“But we also need political action that goes beyond the RBI. The main focus should be to intervene where supply bottlenecks occur and mitigate them as much as possible” , he suggested.

In addition, Basu stressed the need to directly help small businesses, workers and farmers who are hit hardest by rising production costs.

He was also of the opinion that the government should provide financial support to the poor, saying that the poor and the middle classes are hard hit by this inflation and by the compression between the differential inflation of wholesale prices and that of retail prices. consumption.

On the issue of unemployment, Basu said the government must work on targeting tax interventions to help small producers, the informal sector and farmers.

“Since this must be done without increasing the budget deficit, we must be ready to impose an additional burden on the rich, at least temporarily, to overcome this difficult situation,” he noted.

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