The changing face of development policy in India: A conversation with Kaushik Basu


Published 21.06.17

Kaushik Basu discusses India-specific issues including the use of economic knowledge in policymaking and the role of values in public service delivery

In the second of this two-part interview, which first appeared on Ideas for India in 2016, Parikshit Ghosh speaks with Kaushik Basu on issues ranging from the use of economic knowledge in policy decisions, role of values in public service delivery, to the need for pluralism and tolerance for economic growth, and the importance of communicating good ideas effectively to policymakers and the general public.

Parikshit Ghosh (PG): The Planning Commission, the renamed NITI Aayog, is perhaps going through a bit of an identity crisis. It was largely a body to channel resources, to plan investments and so on. One of the new roles being talked about is maybe an advisory or consultancy role. Is it right to infer that the World Bank is also moving in the same direction?

Kaushik Basu (KB): The World Bank has been doing that for a long time. We combine lending with knowledge and advisory activity. I feel that is going to be even more prominent once the New Development Bank and Asian Infrastructure Investment Bank (AIIB) come into existence. They will very easily cut into the lending activity, but the World Bank will continue to have its strength in knowledge and advisory capability. When I was Chief Economic Adviser in India, I wanted to know the details about the conditional cash transfers in Brazil and other Latin American countries where there has been a lot of success. The easiest way to do this was to call up the World Bank office and ask for it because it had ready research material on this.

People who are not in the knowledge business very often do not realise the importance of this kind of information. I would like the government to understand that the economy is extremely complex. Economists do not understand masses of it, but they understand little bits, and you must make use of that. One very good example from India is the 3G spectrum auction. In the Ministry of Finance, with others, we estimated that the spectrum is going to be worth a certain number of billion dollars. But I kept arguing that we should get an auction going to discover its value more effectively. Luckily, the Government of India did a very good auction and what was earned was three times what we had, sitting in the Ministry, estimated. So if we had sold it on the market, we would have given it up at a throwaway price, because we did not understand the value. Auction in economics is a bit like an engineering skill. It is very difficult for a politician to understand that a well-designed auction is like a well-designed bridge. Yes, this is the sort of thing the World Bank tries to be more and more engaged with.

PG: You talked about the importance of good ideas and policy design. In the last election, governance was a big word. The Prime Minister has at some points made statements to imply that it is not so important what exactly government does but that it’s done well. What do you think of this philosophy that instead of novel ideas or policy innovations, what is important is to have an energetic government that actually goes out and does things? Is this stress on governance a bit excessive and is policy being undermined in the current thinking?

KB: I feel there is a lot to be said in favour of the point that the present government is making. Just being more effective is extremely important. You want to carry out things as efficiently as possible, as quickly as possible, with as little corruption as possible.

But you can do things better if you do it imaginatively, if you innovate. The next World Development Report is on governance and the law, precisely because we believe that there is more to governance than just doing things energetically. How effective is the law for controlling corruption? How do decisions go through the government - through a pyramidical structure or through a flat structure? I will give you one little example of how research matters for governance. This is the work done by Raghab Chattopadhyay and Esther Duflo, which found that bringing women leaders in actually makes a difference to the provision of public goods (water, services), at least in Bengal and Rajasthan. There is a lot of knowledge on governance which we need to bring into our discourse.

PG: Let me come to cash transfers. As the Chief Economic Adviser, you were advocating cash transfers in food subsidy. The current government has done it for the liquefied petroleum gas (LPG) subsidy. Would you support a very strong, across-the-board case for cash transfer - converting subsidies, price support, everything into cash transfer? Or would you say that in the current Indian condition we have to be selective and cautious? The critics talk about things like people not having bank accounts, large exclusion errors, lack of inflation indexing and so on.

KB: My view is that we have to use a combination. We tend to err on the side of trying to deliver too many things to the doorstep. The correction that has to take place is more cash transfers in India. There are lots of people who are capable of making good decisions once they have the cash in hand. I would not have minded everything being done as in-kind transfer if we had a system for doing that or if people already had the values so that they don’t cheat on the way. But we do not have those values. Maybe one day we will, but that is a 10-year agenda. Meanwhile, you have to use cash transfers to get rid of a lot of very cumbersome government bureaucracy, corruption and leakage.

Food is one area where I think we can change over vastly more to cash transfers. There would be some regions, some very poor pockets where you need to take the food to the doorstep. Elsewhere give people the cash for them to buy food. Over 40% of the food is leaking out under the PDS. It is too big a wastage and by using cash transfers we will be able to plug quite a bit of this, I believe.

On the other hand this does not mean everything should be given over to cash transfers. Take health services for instance. Government should provide healthcare - you have to have doctors and nurses in the payroll of the government. In India what happens is that this debate is very ideologically split. Some people would go the old Chicago School route - give cash and stay out of government altogether. I do not buy that. Some people would try to take everything up to the doorstep, where the leakage would be huge. I do not buy that either. You have to use a combination, intelligently.

PG: One problem with public health and education in India is that we do not invest enough as a percentage of GDP. But another thing, which has emerged of late, is the problem of quality. Even given what we spend, the quality of public service delivery is abysmal. The Annual Status of Education Report (ASER), for example, shows that enrolment is high but learning outcomes are terrible. You want the government to play a big role in health and education, but there is this chronic, persistent problem that the government is not doing its job well. What is the solution?

KB: It is a deep, difficult problem. It has something to do with values. That will also take some time but we will have to try to understand this and convey this. At the Delhi School of Economics, where you teach and I taught for many years, there is no monitoring of whether you teach, whether you take off for a holiday, play truant. But virtually everyone teaches because this is the honourable thing to do. Human beings are perfectly capable of carrying out their tasks if they take pride in their work even if there are no rewards or penalties.

I feel for instance that much more than shoring up incomes of the police, shoring up their pride in the task that they do is important so that they feel good and honourable when they walk up to break up a fight, instead of going there in a predatory manner. It sounds a bit preachy but right from the top if you teach people to take honour and pride in the work that they are doing, they do it much better. Fortunately, in India you can see this in the military. I do not have an easy solution, but thinking entirely in economistic terms, giving more incentives and more money alone, will not be able to solve this problem. You have to, in the long run, work on giving people the right values and this is possible.

PG: Since you left as the Chief Economic Adviser, there was a big political change; the new Bharatiya Janta Party (BJP) government has come in. I think it is fair to say that development was the chief selling point; there was a promise of economic rejuvenation. Looking at the overall direction in the last two years, do you see a major change in economic policy or is it largely the same course?

KB: I think economic policy wise it is largely the same — which is not bad at all. Because what the last government was trying to do was very reasonable, except it was not very effective in the last years. Broadly it is the same kind of agenda now. This government is pushing for a few other things such as the ease of doing business, though there are also many important things that are stalled. It is good that the government is pursuing roughly in the same direction.

PG: There has also been a lot of talk about non-economic social and cultural issues especially the controversy over ‘rising intolerance’. The Finance Minister made a statement that these controversies are hurting growth prospects for India. This brings up the question of whether economic growth needs a pluralistic and liberal society, where free speech and other rights are protected. We see in history examples of societies which were illiberal in a lot of ways - Germany in the 1930s, modern China, Pinochet’s Chile – but still achieved economic success.

KB: I strongly believe in the importance of pluralism and the tolerance of ideas. So we must be inclusive, embracing diverse castes, religions, races and also sexual orientation. Yes, there are authoritarian societies which have done very well. China and North Korea both had authoritarian control in the 1960s, but one did very good economically and the other did disastrously. With authoritarian control, it can go either way. If you are lucky to have in power a person or a small group that is far sighted, you can do phenomenally well like China or Singapore. But the world is also replete with disasters created by authoritarian control with no system of replacing those in power when things go wrong. So the divergence of performance for authoritarian regimes is bigger; the spread for democratic regimes and pluralistic societies is narrower and generally good - and I would go for that.

But society also ought to be tolerant because it is too small a world that we share. We all have common genetic roots; we all came out of Africa 80,000 years ago. To be a tolerant society is important and an end in itself. As I praise this government for some moves it has made on the economic front, at the grassroots level there seems to be a rise of intolerance. You see this reflected in the social media, in the way people are writing or trolling.

I would urge the leaders of the government to speak out against this. It goes against the ideals of Gandhi, Nehru and Tagore and is bad for the economy as well. A pluralistic society where people feel they are a part of society develops better because people take pride in what they do. In the United States, though there is still discrimination, on the whole, people who come in begin to very quickly feel that they are a part of society. This has contributed to its success. I would ask the leaders to speak up more for these basic human values.

PG: Your new book has come out – “An Economist in the Real World”. As an academic economist, what are the major lessons that you have learnt going into the policy world?

KB: For me, the six years spent in the policy world have been full of learning. When you come to this job you realise that having a very good idea is pointless unless you are able to convey it and have people understand it. There are two levels of understanding. One is that you have to have the ministers and members of parliament understand and I tried to do some of that. Number two is the communication with the larger world. A lot of policy resistance has to do with people’s misunderstanding of things. If you propose taxing large incomes in agriculture, it will be dressed up as an attack on agriculture itself, not realising that only 1% of the agricultural sector is going to be taxed. Likewise, you cannot move on the environmental challenges that we face today unless you get people to realise that it is being done in their collective interest.

Vested interests are important but ideas are also important. Earlier, when I read Keynes stressing this, I would feel that it is the perspective of a professor who dealt in ideas. But when I stopped being a professor and went into government, I realised the biggest stumbling block is that people have set ideas - this is the way an auction should be done, this is the way you should give out a road contract to a private sector entity. If people are set in their ways, it is very difficult to break this status quo. All these things are discussed at length in my book.

Editors' note: This interview first appeared on Ideas for India in 2016. Reproduced with permission.

Photo credit: Asian Development Bank.