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India's problems not easy to understand: Stiglitz

October 18, 2012 10:11 IST

The recent changes in foreign direct investment (FDI) rules and fuel price corrections have been touted as measures to boost investor confidence. Nobel laureate Joseph E Stiglitz says this is an overrated factor.

In an interview with Dilasha Seth & Indivjal Dhasmana, he flays US Republican candidate for presidential polls Mitt Romney for paying 14 per cent of reported income as taxes and keeping income abroad. Edited excerpts:

India undertook a slew of reforms on FDI liberalisation and fuel price corrections. What is your take?

I think a lot of people put excessive weight on investor confidence as a factor in economic activity. It can't be ignored but it isn't the only factor. In the US debate, the people who support austerity say it will work through restoration of investor confidence.

That is nonsense and has never worked. As you cut back spending, your economy gets weaker and investor confidence erodes. The benefits on the fiscal side are more than overwhelmed by the fact that the real economy is weaker.

How do you see the precarious global economic situation impacting India's growth story?

The impact on India is through both financial markets and trade. India is part of the global economy and you cannot have the kind of magnitude of weakness without some repercussions on India.

But India's problems are not easy to understand because this is not like China's export-driven economy. It has more domestic demand. Some other things are going on in India. Investor confidence, in general, in the world is weak and that spills over.

What is your assessment on the fiscal cliff in the US economy and its impact on emerging market economies?

If we go over the fiscal cliff, it will very markedly slow the US economy and in the context of the European recession, could push us into one. It is a critical issue. So far, (in the US) the Republicans have been very unwilling to compromise on it.

They say we have a fiscal problem but they also say millionaires should not pay their fair share of taxes and people like Romney (their US Presidential nominee) pay 14 per cent of their reported income as taxes and keep the money offshore.

That's a hard position for Democrats to compromise. I think in the end they would say we have to pull together and will go along with what most Americans say, that millionaires have to pay their fair share of taxes.

World economic recovery still seems fragile, particularly in the Euro zone and America. What is your assessment?

The IMF (International Monetary Fund)'s global forecast at the Tokyo meeting is accurate, reflecting the weaknesses in the US, Euro zone and the slowdown in China, India and everywhere. Basically, the IMF was perhaps a little optimistic about Europe; I think there is more significant risk of continuing turmoil in the Euro zone. I am more pessimistic than they are.


Take the unraveling of the banking system in Spain. If this money leaves Spain, weakening their banking system and the economy, it is a dynamic situation. If that happens, debts of the banking system increase. The bank gets weaker, the government gets weaker and more money leaves.

I have seen no real evidence that European leaders are yet ready to do anything other than taking temporary measures, even if at a grand scale. Even at a mass scale of $1 trillion of the long-term refinancing option, the effects would have lasted for only a few months. Even massive amounts of money don't have the effect and their diagnoses of the problems have consistently been wrong.

What is wrong with their diagnoses?

The underlying problem of Europe's diagnosis by Germany is excessive spending. But Spain and Ireland had surpluses before the crisis. In fact, austerity is weighing you down, making things worse. You need to have a common banking system and that means not just a common supervision but common deposit insurance by resolution and mutualisation of that. Those seem to be things that, if they are done, are done in a time span.

Austerity is, very clearly, a wrong measure. I think the evidence is overwhelming that it is one of the causes of recession. Spain and Greece are in depression and not recession, and that was brought by austerity.

How do you see the third quantitative easing (QE3, in the US) panning out for the emerging market economies?

QE3 is not going to cause inflation in the US as we already have such a weak economy. It is at risk of increasing the commodity prices from what they'd otherwise be. In the absence of QE3, it is likely that a lot of commodity prices might have come down.

The impact on emerging markets depends to a large extent on how these respond. If they impose capital controls and intervene in foreign exchange markets, they can offset most of these effects. So, they can to a great deal insulate themselves from most of these effects, other than those caused by commodity prices.

In your book, The Price of Inequality, you wrote in the 'recovery' of 2009-2010, the top one per cent of US income earners captured 93 per cent of the income growth. What impact does recession have on inequality?

Unemployment in Western countries like the US has a very bad effect on inequality. First, because the unemployed get hurt directly. Second, at higher unemployment, wages get driven down. Third, as tax revenues go down, fiscal pressure leads to cutbacks in public services, so they get hammered in every way.

The one per cent at the top sometimes benefit as wages are lower and interest rates get lowered, which drives up stock market prices. Stock markets being up does not mean the economy is up. The stock market is up because wages are driven down and interest rates are low.

Dilasha Seth & Indivjal Dhasmana in New Delhi