India risks stagflation, growth concentrated on ‘high end’: Kaushik Basu

India’s overall macroeconomic situation is in recovery mode, but growth is focused on the high end, which is a worrying trend, according to former World Bank chief economist Kaushik Basu.

Amid rising inflationary trends, including the sharp rise in retail price inflation last month, Basu, who also served as India’s chief economic adviser during UPA rule, said that the country was facing stagflation and that “very carefully planned policy interventions” are needed to deal with the situation.

Currently, Basu is a professor of economics at Cornell University in the United States.

While the overall economy is growing, “the bottom half of India” is in recession, he said and noted that it was sad that the country’s policy over the past few years has largely focused on large companies.

“India’s overall macroeconomic picture is in recovery mode… The concern is that this growth is concentrated at the top end,” Basu told PTI in an interview.

He also said that the youth unemployment rate in the country reached 23%, among the highest in the world, even before the start of the COVID-19 pandemic. Workers, farmers and small businesses are experiencing negative growth, he added.

While India’s GDP is expected to grow by 9.2% in 2021-22, Basu said, as this comes after a 7.3% contraction in 2019-20 due to the pandemic, the average growth rate over the past two years is 0.6% per year.

The National Statistics Office (NSO) in its first advance estimate projected GDP growth of 9.2% from April 2021 to March 2022, while the Reserve Bank of India forecast a 9.5% expansion in during the same period.

The World Bank was the most conservative, predicting growth of 8.3%, while the Organization for Economic Co-operation and Development (OECD) pegged GDP expansion at 9.7%.

On whether the government should opt for fiscal consolidation or continue stimulus measures in the next budget, Basu said the current situation in India is a big challenge for Finance Minister Nirmala Sitharaman and the whole of India. fiscal policy apparatus.

India’s economy faces stagflation, which is much more painful and requires very carefully planned policy interventions, he said, adding that 15 years ago inflation was even higher, close to 10%, but there was a big difference.

“At that time India’s real growth was close to 9%…so even with inflation the average household was improving per capita by 7 or 8%,” he pointed out.

According to Basu, what makes the current situation so grim is that inflation of nearly 5% is occurring on a decline in real per capita income over the past two years.

“Since this is a situation of stagflation, the big task is to create jobs and help small businesses…the task now is to create jobs while increasing production,” he said. -he observes.

Retail price inflation rose to 5.59% in December 2021, mainly due to higher food prices, while wholesale price-based inflation bucked the upward trend over 4 months and fell to 13.56% last month, according to the latest official data.

Stagflation is defined as a situation of persistently high inflation combined with high unemployment and stagnant demand in a country’s economy.

While the standard Keynesian policy of forcing workers to do any work, however unproductive, and paying them helps stimulate the economy during deflation, Basu said it was a mistake to do so during stagflation.

“For this reason, the ongoing work on the Central Vista project in the midst of a pandemic and with so much economic pain, with the huge expense – by some estimates it will cost the government around $2 billion – is an annoyance, ” he said. It does not increase productivity.

Basu suggested that the goal should be to direct money into the hands of the poor and even some of the middle classes, but it must be ensured that there is a simultaneous increase in production, a strengthening of infrastructure and a easing supply bottlenecks.

“I know India’s finance ministry has enough expertise to design these changes, but I don’t know if it has the policy space to make them,” he said.

Asked about the impact of the “taper tantrum” or withdrawal of monetary stimulus by the US Federal Reserve on India, Basu said he did not think US Fed policy would be so worrying for India. because “we now have enough foreign exchange reserves to be able to face this”.

On cryptocurrencies, Basu said he thinks what India is doing on cryptocurrencies is right.

“I have no doubt that eventually – and in the not too distant future – the whole world will stop using paper money,” he said, adding that blockchain technology will be used even by central banks and that cryptocurrency will become mainstream.

“This is a complex subject and to do it in haste, with politicians designing it, would be a mistake. I’m glad the government is aware of that,” he noted.

India plans to introduce a bill in parliament to address the challenges posed by unregulated cryptocurrencies.

Currently, there are no special regulations or bans on the use of cryptocurrencies in the country.

(Reporting by Bijay Kumar Singh for PTI.)

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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