Fiscal deficit likely to be bigger than what Budget says: Kaushik Basu

He says if a full-scale tariff war breaks out, there will be a global economic slowdown and growth in the United States will be slower than in China

Kaushik Basu, Cornell professor, president of the International Economic Association, and former chief economist at the World Bank, tells Advait Rao Palepu that in the event of US-China currency war there will be a sideline effect on India and a depreciation of the rupee, which, if managed well by policymakers, will be good for the country. He was delivering a speech in Mumbai at the Independence lecture organised by JSW and Literature Live. Edited excerpts:
 
What are your thoughts on the beginnings of global tariff war and the possibility of a currency war?
Globally the scenario is worrying, but I believe that the tariff war will be a short-term one. If a full-scale tariff war breaks out, there will be a global economic slowdown and growth in the United States will be slower than in China. There will be an effect of a global slowdown on India on the sidelines. The trade animosity which the United States has built up with Canada, Europe and Mexico will bring China closer to these clusters, which, in the long run, will be a bonus handed over to China. My only reason for being optimistic in the long run is that US President Donald Trump does not have a strong base for these policies in his country.

 
Are we well-placed to address the effects of a global currency war on the rupee?

India will do better with a slightly weaker currency. Ideally, you would want that under the management of Indian policymakers and not as a by-product. The rupee has stood strong for a long time, it’s only in the past few months that there has been some correction. If there is a little bit of nominal value depreciation in the rupee it will be good for the country. Ideally we would want the Reserve Bank of India and Ministry of Finance to have a “managed depreciation”. I hope the RBI has the space and autonomy to implement their strategy on the rupee, because at times the government’s fiscal interests are different from the country’s monetary interests.

 
The general elections are less than a year away and there is a possibility of populist policies being announced by both the central and state governments. Is there a possibility of slippage in the fiscal deficit?
The fiscal deficit, in all likelihood, will be bigger than what was anticipated in the Budget. In the late 1980s the deficit kept rising and when the correction came it ended in a crash. Election time is very risky because the government’s attention span becomes short-term so they do things that look good for a few months, while at the same time piling up problems for the future. I hope policymakers are sensible and that the Indian population is sensible to realise a sop handed to me today, which is not done smartly, is something that future the will pay the price for.

 
How do we read the effects of demonetisation, nearly two years later, when inflation today reflects growing consumerism and that GDP growth for 2017-18 is at 6.7 per cent?
Demonetisation was poor economic policy by any standards and it did cost India a lot. I feel India by now would have been at much higher growth. But the worst of it, I would like to believe, is mostly over. All the indicators suggest that growth is hobbling back again, nearly two years after demonetisation, but the informal sector is doing very badly and farmers are continuing to suffer. One can say demonetisation had a very big effect on small producers and the informal sector.

 
Why aren’t governments take growing income and wealth inequality seriously?
Even in India we know from Thomas Piketty that the top 1 per cent of the 1 per cent is gaining the most from economic growth. From the 1990s the situation has been deteriorating, which means for the top 1 per cent their share of national income is rising. My feeling is that if we don’t realise that this is going to cause social and political trouble, like in other countries when it erupted. There was a lot of radical thinking that went into policies during the Industrial Revolution in terms of tax or labour laws, which avoided a crisis. We are at that juncture today. If we don’t do it, we will learn the hard way through social turmoil.

 
What are your thoughts on the government’s jibe of appointing “foreign imported” economists?
If you shun any group because they are based somewhere else, it will be a mistake. I taught for 17 years in India and unlike other emerging economies, we have a pretty sizeable force of professionals but you need to give them the space to speak freely. The real risk is not whether you use international economists or domestic economists, but if the space for voicing concerns gets cramped.