Arvind Panagariya on Fixing India’s Economy
The Wall Street Jounal India - July 26, 2013
‘Arvind Panagariya, professor of economics at New York’s Columbia University, talks about the Indian economy, the food security bill, Gujarat Chief Minister Narendra Modi, the debate between economists Jagdish Baghwati and Amartya Sen, and the prospects of India’s economic growth rate overtaking China’s.
The Wall Street Journal: The Indian economy seems to be in a downward spiral with an increasing fiscal deficit, a depreciating rupee and high inflation. What is your assessment of the economy?
Arvind Panagariya: I think the next year is crucial and we have to wait and see how it unfolds. I am optimistic in the medium to long run. A lot of the current uncertainty will be resolved once elections are over. My overall assessment is that we will grow at around 6% this [fiscal] year. After the election I predict it will be better as the current policy paralysis will end under the new government.
WSJ: Prime Minister Manmohan Singh has liberalized foreign direct investment in more than 12 sectors. Considering that FDI constitutes not even 5% of India’s gross domestic product, don’t you think it is important to push through domestic structural reforms and clear pending projects?
Mr. Panagariya: We need both domestic structural reforms and FDI, it’s not an either or choice. I endorse what the PM has done with FDI. If a political opportunity occurs to open the door to FDI wider, we should make use of it. However, clearance of a large number of projects is crucial; the absence of those clearances accounts for the big slowdown. The government seems to be trying but without great success. One big factor at work is the caution exercised by bureaucrats following a number of corruption cases that landed a few in jail. Hyperactive environment ministers in the current government have also added to the paralysis.
WSJ: Could you list three things that the Indian government needs to do to get the economy back on track and boost investor confidence?
Mr. Panagariya: 1.Rapid clearance of projects to keep the economic recovery going. 2. Build infrastructure at a much faster pace. 3. Reforms need to take place with a long term perspective. These include reforms relating to land and labor markets and replacement of myriad welfare programs.
WSJ: The Food Security Bill has been tipped as a game-changer for the poor in India according to economists such as Amartya Sen. Do you think the contents of the bill justify its hype? If not, what alternatives should India pursue?
Mr. Panagariya: The [FSB] will have zero impact on boosting cereal consumption. The equivalent of the FSB is already operating in Chhattisgarh in an efficient manner. The average consumption in Chhattisgarh is no different than the Indian average for both the bottom and top 30% of the population and it has been declining.
Basically you are giving five kilograms of grain nearly free, which will simply lead beneficiaries to cut their open-market purchases by an equivalent quantity. The main issue regarding nutrition that we face doesn’t relate to carbohydrates but protein and micronutrients. The real deficiency among the poor is in consumption of milk, eggs, fruits and vegetables. For example, milk consumption by the bottom 30% of the population is between one and two kilograms, compared with 7-8 kg by the top 30%.
I would scale back the public distribution system rather than expand it. I would also give cash transfers to the poor, this would benefit them.
WSJ: You have often been an admirer of the Gujarat economic model, which has a focus on high growth and robust investment in infrastructure. Is this model sustainable? What about other states such as Kerala, which tend to follow a socialist model?
Mr. Panagariya: I endorse the Gujarat model with some modifications to create an environment conducive to the growth of labor-intensive manufacturing. The Gujarat model builds on growth, efficiency and governance, which are very important for a rapidly expanding country like India. Kerala has done well because it has embraced globalization, not because it has been effective at equitable distribution of income. One out of three households in Kerala reports a member living abroad. Contrary to popular belief, people are also moving out of agriculture in the state. At 30%, Kerala has the lowest share of the workforce in agriculture among all states. An important lacuna in the policy is the generally hostile environment for industry in Kerala.
WSJ: There has been an intriguing debate between your co-author Jagdish Baghwati and Amartya Sen on the growth models that India should pursue. Mr. Sen has suggested that he doesn’t want to see Gujarat Chief Minister Narendra Modi as prime minister Do you want him to be the next PM?
Mr. Panagariya: Let’s wait and see. Gradually the platforms of both major national parties have to be announced and I would like to see a debate between Mr. Modi and the other parties’ prime ministerial candidates. You will have to assess the alternatives and then take a call on who you want to be prime minister of India. In any case, it is the voters who must decide since they are the ones who must live with the consequences. While I remain an Indian citizen, given my non-resident status, I am not a voter in the elections.
WSJ: Could you elaborate on why you think India’s nutrition scenario is not as bad as the World Health Organization says? What is your estimate of malnutrition levels in the country?
Mr. Panagariya: I do not have an estimate. It is probably substantial, though I expect India to look better than most countries in Sub-Saharan Africa. We need to get the best nutritionists and pediatricians to advise us on the right India-specific metric. India is a very large and diverse country. There is something fundamentally wrong with WHO metrics since they assume all populations have the same potential in terms of height and weight. That is wrong. In a recent study, the nutritional conditions of children of Japanese and American mothers in the U.S. were measured. It showed that the children of the Japanese mothers were smaller and had lower weight on average than those of the American mothers. These findings fundamentally challenge the assumption underlying the WHO approach that we have embraced.
WSJ: How do you see the economic growth of India and China evolving over the next 15 years?
Mr. Panagariya: India will surely surpass China in terms of growth rate. It will increase to 8%-9% if we estimate conservatively and China will slow to 5%-6%. India could go beyond 9% if some of the reforms we recommend in the recent Bhagwati and Panagariya book are adopted. (Mr. Panagariya and Mr. Bhagwati’s latest book, “India’s Tryst with Destiny,” was published by Harper Collins in 2012.)
This interview can also be viewed at http://blogs.wsj.com/indiarealtime/2013/07/26/arvind-panagariya-on-fixing-indias-economy/