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'India's income distribution is going to get worse'

Aug 03, 2009

India’s high growth rate does not mean that it will readjust quickly to the economic crisis, says Columbia University economist Guillermo A Calvo. He thinks that pervasive poverty in the country is because the growth has been limited to only a few sectors.

Guillermo A Calvo, an expert in the macroeconomics of emerging markets, was formerly the Chief Economist at the Inter-American Development Bank and a Senior Advisor in the International Monetary Fund’s Research Department. He spoke to Carole Dietrich while in New Delhi to give a guest lecture.

Here are the excerpts:

Carole Dietrich: The financial mess across the world is old news. Is India’s case different because it still has an eight-plus percent GDP growth rate?

Guillermo A Calvo: It depends. Latin America is doing quite well too. Other countries are not doing as well as they did in the past but are still keeping up a reasonable growth rate, and that is also the case in India. Developing economies such as India will continue to grow at a large rate in order to catch up with the world’s developed economies. However, everybody is suffering and India is no exception.

CD: How do you explain India’s GDP growth?

GAC: I would not only look at the growth level because it can be very misleading. Other economies are more mature, so if you only look at the growth rate without adjusting for that, India is a complete miracle. However, if you look at the collapse in growth rate you can see that while India is developing faster it has suffered as much as those countries with fully developed economies.

CD: So it does not mean that India will recover faster from this crisis than the rest of the world?

GAC: No. India will continue growing faster, but at a slower rate than before the crisis.

CD: Few people have found real solutions to poverty and India’s new wealth has not effectively changed the lives of the poor. Why is this?

GAC: This is partly because the growth in India has been based on only a few sectors, so it is unavoidable to have some sectors that are booming while many others are suffering. This is certainly a problem. The multiplier effect should lead to high-growth sectors carrying the rest of the economy and the production of a better balance, but there is no assurance of that.

CD: Would India still need developed nations to overcome this crisis?

GAC: Well, there is high growth in India, which is very much associated with its opening of trade with the rest of the world. However, despite this sudden increase in the rate of growth after liberalisation, you find a correlation between the growth in India and the growth in the USA.

I personally don’t think that India needs any help because it is in this process of catching up. But certainly the growth will be much slower if the rest of the world does not grow. Something that more developed countries can do for a country like India is to help the country in getting enough liquidity and short-term finance. However, India is in a very strong position because it has a high stock of international reserve.

CD: India is heavily invested in the agricultural sector, but it is still not growing enough food. Why not?

GAC: I don’t know about India but in China, agricultural growth is very much related to foreign direct investment and the ability to export food to the rest of the world. This requires taking human labour away from agriculture. Developing agriculture is very difficult because you need strong local institutions. The advantage of exporting à la China is that you don’t need a very developed domestic structure. The other industries making the Indian economy grow were not previously successful. I think liberalisation will help, but it is a process that takes a lot of time and there is no miracle pill.

CD: What are the consequences of setting aside agriculture to foster IT?

GAC: India’s income distribution is going to get worse, but one hopes that by developing a national group of experienced entrepreneurs, India will develop good businesses in agriculture eventually. The only way to make countries grow in the long run is by increasing their productivity or factors of production. There is no miracle.

You have to improve education and increase the culture of entrepreneurship, which is probably missing in this country. So, even without knowing India in any depth, I won’t put a lot of hope in the development of agriculture. It is very hard to find a country that has been able to activate its growth from agriculture. They see agriculture more as respondent to other, more dynamic sectors.

CD: Infrastructure growth is needed, but will investments in it come easily?

GAC: It is a matter of investment efficiency. One of the problems is that the private sector saves a lot. Fiscal deficits are increasing and that’s probably not very productive. I don’t think it is a matter of increasing the savings but rather of improving the quality of the investment. This could be done by improving transportation to the ports and other infrastructures that are quite bad in this country. Without that you cannot take advantage of opening up to trade because you can’t transport the goods.

If there is no support from the public, then the investors won’t risk making a big investment in long-term projects. The good news is that in India there is a government that has been reelected. To create a good business climate you must have popular support for policies that are market friendly. That is what has been missing in this country.

CD: Does the G14 symbolise a shift in world economics from rich countries to developing ones?

GAC: Today it does not make any sense to leave India, China and other developing nations out of such discussions, as without them any bloc is ineffective. The question is whether these blocs are going to be good for anything.

They make many promises but nothing seems to happen. The reason is that politicians get votes from their local communities and therefore only want to satisfy them, while ignoring global issues. While the G8 is a good symbol, I am very negative about its impact and I don’t think that developing countries will improve its effectiveness.

CD: Will India, China and Japan be the main sources of future growth? Would you include Brazil and Russia in the same category?

GAC: They all have great futures because, as of yet, they have not fulfilled their potential. However, without the USA, can these countries continue to grow? I have my doubts. All these countries are still in the early stages of development and have yet to show whether they can be self-sustaining.

CD: Is Indian government spending being done in such a way that it will stimulate the economy?

GAC: I am not positive about the use of fiscal policies in emerging markets. Especially when a negative shock like a very sharp fall in exports is hitting you. The idea behind a government stimulus is that it will create a higher economic capacity. By increasing demand, you simply bring back output to its previous levels. Momentarily it is not a problem, but looking forward it is risky for India to bet on a strategy that will increase its level of debt.

Source : Tehelka
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