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Focus on growth, beware of European headwinds: Basu

Last updated on: November 6, 2012 11:53 IST

Focus on growth, beware of European headwinds: Basu

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BS Reporter in New Delhi

World Bank Chief Economist Kaushik Basu advised India to take a slew of measures to perk investments and bring economic growth back to sustained high levels.

He also cautioned the government to be alert to late 2014 and early 2015 developments, when European banks would pay back $1.3 trillion to their debtors.

Interacting with the press for the first time after assuming the World Bank charge, the former chief economic adviser in the finance ministry also suggested to the developing world to remind the advanced world of their own prescription of not resorting to protectionism when globalisation threw up temporary shocks.

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Image: Kaushik Basu is World Bank's Chief Economist.
Photographs: B Mathur/Reuters

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Basu made these comments at a press conference on the World Development Report, 2013, which calls on India to go for labour flexibility and development of small cities to address the unemployment problem.

When asked what is more critical at this juncture, boosting growth or taming inflation, Basu said growth was important. But he refused to be drawn into a controversy over the differences between the Reserve Bank of India and the finance ministry on the central bank's monetary stance.

Basu said given the global integration of India's economy, it would face the heat of the Long-Term Refinancing Operation repayment at the end of 2014 and the beginning of 2015.

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Image: A labourer unloads sacks of onions from a supply truck at a vegetable wholesale market in Chennai.
Photographs: Babu Babu/Reuters

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LTROs are low-interest loans the European Commercial Bank gave to lenders in the continent during the heights of the Euro zone crisis. Some of the banks have to pay back the money to ECB around December 2014.

"That is a bit of European debt cliff is coming our way. There could be sudden massive repayment of debt. And, massive is $1.3 trillion. There will be European choppiness going on in 2014-15, and India is today such a globally integrated economy that we will continue to face some of the heat of that over the next couple of years," he added.

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Image: A vendor carries a basket of bananas to sell at a market in Kolkata.
Photographs: Rupak De Chowdhuri/Reuters

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The World Bank official said specially directed action by the government would be needed during this period. "Yes, there is a period during which the government of India will have to be very active on this."

Addressing the press conference, he said: "All eyes have to be on India's growth at this point of time. We have to think of a slew of measures to get growth up and for that, you want investment to increase."

The government must pay a lot of attention to the measures needed for raising investments which would push up growth, he said. This would help India to attend to the little bit of slowdown that had occurred, Basu said.

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Image: Labourers thresh paddy crop in a farm at Sanand, Gujarat.
Photographs: Amit Dave/Reuters

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Basu said given the phenomenal performance India showed between 2003 and 2008, there was a year of dip but growth picked up for two consecutive years of massive growth. However, the growth again stood at 5.5 per cent in the first quarter of this financial year.

"This is indeed a slowdown.... And, sometimes I agree you need special action to fortify and not just leave it to the market to act on that," Basu said.

India's economy grew just 6.7 per cent in the global financial crisis period of 2008-09, but it grew by 8.4 per cent in the following two financial years.

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Image: A woman carries bags of white brinjal at a wholesale vegetable market in Ahmedabad.
Photographs: Amit Dave/Reuters
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However, economic growth again fell to nine-year low of 6.5 per cent in 2011-12 as the last quarter of that year yielded just 5.3 per cent economic growth. In the first quarter of this financial year, economic growth rose a bit to 5.5 per cent.

When asked that a section of the society blames globalisation in the US for rising unemployment, Basu said, "Now, the risk of protectionism is bigger in industrialised countries, so this is the time that lecture needs to be reversed".

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Image: Workers spread maize crop for drying at a wholesale grain market in Chandigarh.
Photographs: Ajay Verma/Reuters
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He said industrialised countries needed to be reminded from emerging economies that did not jump to protectionism because there were momentary disruptions but in the long run the allowing for changes would be beneficial for developing world and the advanced countries both.

Making a strong case for relaxation of labour laws, he said rigid regulations were hurting India's growth.

"India's labour market is over regulated. India's rigid labour laws are hurting India's growth. Flexible labour laws will help both organised and unorganised sector," Basu said.

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Image: Workers hold iron rods at the construction site of a bridge on the river Tawi in Jammu.
Photographs: Mukesh Gupta/Reuters
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He said there was a need for flexibility in the labour market, even as the regulatory framework exists. Basu wanted a debate on labour laws as any taboo on the issue would hurt growth.

He also prescribed that the government promote smaller cities to address the problems of infrastructure in urban areas and unemployment.


Image: A worker leaps over stacked sacks of paddy at a wholesale grain market in Chandigarh.
Photographs: Ajay Verma/Reuters
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