‘India Has Potential For
High Economic Growth’: The Princeton professor
sees a fresh start to US-India relations with Narendra Modi getting elected as
prime minister Shailesh Menon
The proud
American in Alan Krueger, former chairman of President Barack Obama’s Council
of Economic Advisers, comes to the fore when he speaks about US’s
contributions to the world. Answering a question — why America was at the
centre of every global controversy? — he conceitedly shrugs and says: “You certainly bear a lot of
responsibility when you are the only superpower in the world.” He is
also unequivocal in his praise for the economic recovery made by India after
the financial crisis, saying, “Your country is in a much stronger position today.” In a
wide-ranging interview to BW|Businessworld, on the sidelines of Zee Leadership
Summit, the Princeton professor validates the sightings of ‘green-shoots’ in the
US economy, declutters the enormous possibilities of the Indo-US trade and blames
former US president George W. Bush for the West Asian muddle. Edited excerpts:
The world
is worried as to how the US Federal Reserve would exit its quantitative easing
(QE) programme. Could it be a painless affair?
The
Federal is not going to move in an unpredictable manner… the
moves will be in small steps — especially in terms of interest rate changes. I don’t expect
them to raise rates until the middle of next year. It will end its
bond-purchasing programme towards October. The big question now is what the Fed
will do with the portfolio it holds. It is not elaborating on that point. The
QE has helped the real economy in theUS. It has not helped as much as better
fiscal policy would have helped, but given that the Congress gridlocked last
year, the actions of the Fed have helped to strengthen the markets —
especially the housing and automobile markets. The effect of it all is
reflecting in home prices, which have gone up considerably since last one year.
Without QE, the housing sector could have been weaker. The central bank is
trying to understand the slackness in the job market. The unemployment rate
dipped from 10 to 6.1 per cent. We are seeing stronger job growth now —
averaging about 2 lakh jobs every month. We are also closer to the point where
we’d start to see some strong wage growth and inflation. The Fed is
wise to wait until they see stronger evidence that wages are growing and there
is a pick-up in inflation. I think, we are near that point where the economy
can stand on its feet.
The
programme had a spill-over effect on the world economy, in terms of capital
flows. Now with the exiting QE, do you expect liquidity crunch?
The
mission of the Fed is to create stable prices and maximum employment. It has de-facto added a third mission to its
list of tasks — that is ensuring financial stability. Now, Europe will have to do
its bit. Europe will have to address its economy-related problems. Mario Draghi
(European Central Bank president) moved a bit slow to form QE. Its form of QE
will help the European economy and other markets immensely. In terms of the
impact of QE in emerging markets, it has resulted in greater investments,
particularly India. India has also done well during this period. Exchange rates
have stabilized, current account deficit declined, reserves built up, inflation
has moderated a bit. What matters most for the Indian economy are structural
reforms that it has undertaken now. Removing labour market distortions,
promoting more competition in product market et al will have greater impact on India’s economy
than the US monetary policy. Some of our industries are reposing faith in the
US recovery. We’re hoping outsourcing contracts, research mandates and exports to
pick pace in the next few months.
Are we
reading the trend right?
The
election of Prime Minister Narendra Modi offers a fresh start for US-India
relations. India moved slowly to address concerns in terms of tax policy,
localisation and compulsory licensing requirements; this has made the US
businesses more cautiously optimistic. In general, America has benefitted from
its trade relations with India. Lot of services provided by the US firms are
done cost effectively in India. Quality of services has improved. At the same
time, the US businesses are now finding advantages in on-shoring (taking back
more work to the US) as a result of lower wages back home. This is happening
more in the manufacturing sector. Also, the US firms now understand risks in
having far-off supply chains. We’re going to see, over the next decade, are balancing where more manufacturing
activity will move back to the US. Automobile production, advanced
manufacturing, plastic and special chemical industries will benefit from lower
natural gas prices. With regards to more IT and pharma mandates, it depends on
the investment climate in India. The US businesses can count on stable
investment climate, if they are assured of no retrospective taxes and
prohibitive licensing rules, India will continue to see more business flowing.
What can
bring the best in the Indo-US trade?
India’s retail
and agriculture sectors are very inefficient. This is causing problems of food
inflation. In a city like Kolkata, vegetable prices soared as infrastructure is
not good for its delivery as they spoil
on the way. Companies like Walmart are incredibly efficient in purchasing and
delivering perishable wares. If we have better relations, that even has the
potential to lower prices of consumer goods. Look, India needs to have more
clarity on what it wants to be in the world trade. I consider it unfortunate;
India has put up roadblocks at the WTO. I hope India reconsiders its position. But
our concerns are legitimate. Without adequate farm subsidies, India’s food
security initiatives could fail. We’ll not be able to provide food to our people at low prices...India’s
agriculture sector can be more productive and efficient. It can yield a lot
more at lower cost. It can be more efficient in terms of delivering subsidies
to its large low-income population. It can re-allocate by reducing subsidies in
fuel, etc. It has tremendous potential for high economic growth. It should
invest more in education, healthcare, transportation infrastructure, and to
improve the efficiency in governance. It will be able to sustain high growth
rates. If these are done properly, it will bring down poverty.
You are
emphasising on reducing fuel subsidies against the backdrop of falling crude
prices. Do you expect America’s resurgence in oil and gas production to have significant effect
on global petroleum prices?
Yes,
there has been resurgence in the US energy production. We have shale gas
deposits in abundant; this may have geo-political impact, too. Oil production
in the US is also breaking new records. We are producing more than our imports
from the Arab and African countries. Oil is a commodity and is sold on the
world markets. Therefore, we’ll never be totally independent in that trade. But what is going
on in the Middle East will affect oil prices in the US. There’s still
be some downward pressure on oil prices — as we are seeing now. With the US production hitting the market,
oil prices have fallen by a great measure over the past few months. Lower
prices will help India a lot. India will have a current account surplus, if you
take out oil.
The US
always had a big role in shaping West Asia. Were there miscalculations on your
part?
The
administration of George W. Bush (former US president) made a terrible
miscalculation when it came to invading Iraq. The miscalculations were in a
number of aspects: Firstly, the Bush administration grossly miscalculated how
much it would cost the US treasury. Secondly, it over-estimated as to how the
US would be welcomed in the region. The war against Iraq and Saddam Hussein was
a tragic error, and we are still paying the price for it. The US had imposed
sanctions on Iraq… Had we not invaded Iraq, the sanctions could have continued and
we would have left the region more stable than it is now.(This story was
published in BW | Businessworld Issue Dated 12-01-2015)
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