ARVIND PANAGARIYA'S MENTOR AND RENOWNED ECONOMIST JAGDISH BHAGWATI DELIVERED THE MADHAVRAO SCINDIA MEMORIAL LECTURE INFRONT OF THE ENTIRE CONGRESS TOP BRASS WHICH INCLUDED FORMER PRIME MINISTER MANMOHAN SINGH AND FORMER FINANCE MINISTER P CHIDAMBARAM. Later in an intervew to CNBC=TV18, he PRAISED PRIME MINISTER MODI AND THE FIRST STEPS TAKEN BY HIS GOVERNMENT. BHAGWATi SAID INDIA IS ON THE CUSP OF A SECOND ECONOMIC REVOLUTION. Among other things, he EXPECTS THE MODI GOVERNMENT TO SOFTEN ITS STANCE ON RETAIL FDI.
Edited transcript of the interview with Jagdish Bhagwati, Professor of Economics, Columbia University
Q: Previously you have said India is on the cusp of a revolution of perceived possibilities. You have the prime minister who you believe is responsible for transformative change in Gujarat. You have Arvind Subramanian the Chief Economic Advisor in North Block, Arvind Panagariya, your in the Niti Aayog or the former planning commission. Do you believe that these men are going to be able to get rid of the "Mother Teresa" brand of economics that you have attributed Amartya Sen?
A: When we talk of revolution of rising expectations, I call it the revolution of perceived possibilities. In the old days when we were fatalistic, certainly in the villages and said what is the point of voting for P Chidambaram as against Arun Jaitley or something? The old prime minister was a new one because they are not going to be able to offer anything anyways. So, it is sort of nothing is happening, so why go and undertake the effort to change governments. However once they begin to see an impact on the lines as a result of the reforms which actually in 1991 we carried out under the leadership of Prime Minister Narasimha Rao and Manmohan Singh then their expectations are aroused. Once their expectations are aroused we have what we call in political science a liberal democracy not just elections. Once people's aspirations are aroused, they have NGOs, they have opposition parties, they have an independent press, there are all these problems which generally speaking are true and a relatively independent judiciary.
So, the four elements of a liberal democracy in different combinations depending on which part of the country you are talking about enable people to translate their aspirations into politically effective demand. You go to a country like China, what do they do? They have social disruptions, they go out onto the street and bang pots and pans. Next thing is they probably disappear into outer Mongolia for all you know. So, they have no wave translating their desires into effective action and it gets diverted. In that sense I mean that now finally we are in different situation largely because in 1991 we carried out these reforms which really pulled people into gainful employment and really affected poverty finally through high growth rate that we now have the possibility of politicians having to compete for these things and that leads to rewarding politicians who deliver more rather than less. In that sense I feel that the first revolution was critical. We are standing on the shoulders of the first revolutionaries and now we are going to the next phase in my opinion. There we have got a different leadership but that leadership again is something which could not have been thought of outside of the first one.
Q: You have criticised the UPA government for what you called was near paralysis on track I reform. You said revenue growth slowed down making it more difficult for the government to finance track II which are things like health, education, PDS expansion and so on and so forth. You have criticised NREGS, you have criticised the Food Security Bill. At this point in time do you get the sense that this government is perhaps going to pullback from the kind of expenditure that was prevalent under the UPA? So, far when you talk about the NREGS or you talk about the Food Security Bill this government has not made it clear whether it intends to rollback or go to parliament seeking a change as far as any of these social expenditure schemes are concerned. Do you get the sense that the prime minister – perhaps not now but some time during the 5 year tenure is going to break away from the kind of economics that you believe the UPA was responsible for?
A: I am reasonably convinced that the new government reflects again what I call the Gujarat model. Gujarat model is not just creating prosperity and pulling people into gainful employment. The second part of it is that you accumulate money and wealth but you spend it on social spending. That goes back not just to the current pope who is talking about it but way back to Narsi Mehta etc and to Swami Vivekananda. Swami Vivekananda departed from the "bhakti marg". "Bhakti marg" is me and god basically. He was into karma yoga which means me and mankind and I think this is one of the reasons why the new prime minister finds him fascinating though I haven't talked with him about that. However that is something where that aspect is completely lost sight of. So, if you really take that into account there is no reason why he will goof up and just relax with expansion of prosperity and so on. However he will go into doing something further using that money for the poor. That is the question you are asking, will he just goof up, will he just forget about spending? No I do not think he will. He is going to use it to develop.
Q: It would be untenable to expect that any government will say that they are not pro-growth and pro-poor which is what the Prime Minister as well as the finance minister in this government as well as the previous governments have articulated. So it comes down to an issue of reprioritisation. If I were to ask you about the priorities because going back to your arguments with Amartya Sen on redistribution ahead of growth or growth ahead of redistribution what do you think is going to be reprioritisation as far as this government is concerned when it comes to public spending, when it comes to expenditure?
A: I don't like the word redistribution. If you are earn revenues and then you spend them on schools or on healthcare to call it redistribution and suggest from a given pie you are redistributing. So that is exactly the wrong word to use in my opinion from political and economic and psychological point of view. What we are saying is we are interested, growth is important in two ways. It first pulls people up in to gain full employment which we demonstrated under the congress party. So, it was a direct impact because a growing economy will generally enable more people to be employed to rise above the poverty line. But it was to generate revenues usually and when you get those revenues then you can afford to spend money because if you spend money which you don't have and that there was a little bit in UPA-2 because we had wound up turning lot of expenditures into rights. The trouble about rights is that rights mean you got to spend the money and if the government doesn't spend the money the Supreme Court will order you, so you are caught in a bind.
So, you better keep getting revenues and if this growth rate slows down you are in trouble and that is my amateur diagnosis of what went wrong with UPA-2 but I don't think the new Prime Minister will be making that mistake.
Q: But if I were to give you one example of taking the rights based approach forward and we are seeing that happen even as far as this government is concerned they have guaranteed health as a right, the national health assurance mission will be rolled out from April 2015, it will be done in phases. Expenditure on part of the government on healthcare is under 1.2 percent of GDP. We have attempted to take it to two percent of GDP. We failed over the last decade, it still is 1.2 percent. China is three percent, Brazil at over four percent. So, India is woefully short in terms of healthcare spending and then you promise universal health coverage to all which will cost you about USD 11.4 billion annually over and above what you are already spending and this is the right that the Government of India has now promised. So, don't you believe that this government continues to be in the bind that the previous government found itself in?
A: Not really because the real issue now is whatever money which you are spending which you have got into the Budget from the growth, the real issue today is, you used the terminology of track one and track two reforms. Track one reforms are those which increase growth and track two reforms are those which relate to spending the money and creating additional effect on for the poor. Now, those track two reforms the real issues there are because it is government money does it mean that it must be spent through the public sector, schools or you take private schools. Many of them are on the streets, in our books we had those pictures where they took them out, it is an English publisher, they don't know how to do Razzle-dazzle in selling a book. It is sold anyway.
So those guys are literally on the street and there are several of them even in Kerala and so on. And there why can't you give them better books, improve their facilities, just add value to that because the better schools are under the public school system where the teachers don't even turn up frequently. It is the same thing about healthcare. In my view the real issue is not quarrelling about numbers are targets and so on but the policy part and this is why I am in favour of the Planning Commission which is very target oriented.
So, that as sort of gone by the board and now they are into policy discussion and I am glad you mentioned because this is where we really need to know how do you get the maximum amount of and one of the problems with redistribution, I don't like the word but Professor Sen just assumes at least in what he writes or what he says or maybe you are misquoting him. He doesn't write as much as I do and I can be hung by my own petard because my words are there. So he really assumes that because it is public money it must be spent through public sector and that is fundamentally a mistake.
Q: Before this government actually came to office, you were very confident that if Narendra Modi took office, he would move as far as FDI is concerned, allow FDI to come in across sectors. In fact let me quote you. You said, "it was a half-hearted weak kneed opening under the previous government. The Prime Minister Narendra Modi can break that model as he did in Gujarat and declare that all FDI is welcome." Are you disappointed with the fact that they haven't yet opened up FDI in retail or even in e-commerce which is really the start-up sunrise sector in this country and without doing that, will they be able to deliver on the manufacturing dream and this make in India dream that they are holding out?
A: I am not disappointed for one very simple reason and that was true when the first change or the first revolution was being carried out because being a Guajarati I am a realistic guy. I am making an ethnic remark, probably applies to Chennai as well and some certainly to Punjab and one of the jokes is that the reason why Rahul Gandhi couldn't make it was because he was only one-eighth Gujarati. These are just ethnic jokes, not to be taken seriously but essentially what you have is a situation where politics cannot proceed in a straight arrow, in a straight line and in maximum speed. You have to negotiate minefields in politics.
So what I look for as an observer of change is whether these things are moving in the right direction. I shouldn't have the luxury of saying ignore all the problems that you have and as I pointed out the problem with the retail sector things is that the traditional base was the petty bourgeoisie, the small shopkeepers and that was part of the BJP problem in terms of making change. Now that he has got a wider constituency and therefore he may be able to move, and whatever little conversation that I had with him when he was chief minister I never found any anti-retail sector liberalisation sentiment expressed by him. So this is a matter of my forecasting whether he will move on this, my guess and I can give you a case of Indian wine, not foreign wine if I lose.
Q: When do you think he will open it up?
A: I would give it a year because he will have to consolidate himself to some extent and he is doing a variety of things. You see, the first one was very hard to push through because it was like cleaning up after a tsunami. I didn't expect, particularly a minority government to proceed fast because how do you clean up everything because it's been almost a quarter of a century of difficult decisions which they had to reverse and change so on and so forth. So, I was happy that the Prime Minister here was actually moving in the right direction. The fact that he was taking his time was something which I approved of and I blame us economists also because we say there are three I's in making change; ideas, institutions and interest, meaning lobbies, so these are three I's.
So under the old idea that we must have intervened in everything, we must have licensing and so on, we economists were the ones which pushed those ideas. Then lobbies grew up around them interest and the institutions also like licensing system. Now we go to ram the Prime Minister or the finance minister and say look you have got to move fast. I mean we are the guys who built up all this stuff and they can't just suddenly turn around. So, I am really a wishy-washy guy as far as this is concerned according to people who want rapid change, I say no. It is something we have to be more considerate and my view about Modi is, maybe it is a little rosy some times, but is that he is going to exactly like the first revolution but faster because he is determined to get ahead and get going for the reasons that I mentioned.
Q: You spoke about the Budget that Arun Jaitley presented under this government his maiden Budget, you said it was a disappointment. The Finance Minister of course said that he did not have the luxury of time plus he had fiscal constraints. The fiscal constraints continue. The World Bank projects growth rate to be at about 6.5 percent for this fiscal. What is the sense that you are getting in terms of being able to get back to the 8 percent kind of growth rate and what would you advise the Finance Minister to do in this Budget in terms if revenue mobilization and ideas to kick start the economy?
A: I would like to outsource the answer to P Chidambaram. Indian economists are generally what we call real economist, we are not financial economist and if anyone offered me the Finance Ministers job, I would immediately leave the country. I will not venture into that but I would say looking at the different changes which are going to be made, there I would say that they provide the mechanism for moving faster. I think if Arun Jaitley does manage to get moving on the budgetary front that will help, but it is not the main thing in my opinion. I do not think any foreign investment is going to be held up just because that one Budget does not do for you because people are now trying to get in on the ground floor. They are realizing, India is opening up because of the foreign direct investment (FDI) and trade and that message is being conveyed very strongly. So they are all going to come in aggressively. I think that is the key part of our expansion programme.
I think there are just two minor points out there, we have got the advantage now because of the fall in the oil prices. We can actually use some of that to take it in as revenue and some can be given to the consumers. However the other thing of course is that you also have people like Russia now in real trouble. So if we can pick up things like those twelve nuclear plants at low marginal cost because he is keen to sell something to somebody or the other because he is being sanctioned and so on. We are in a position to get influx of resources no matter what the Budget deficit looks like, people will not pay attention to it and therefore no one will ask me any questions like that.
