We have emerged as a dynamic country, mostly because we have a dynamic approach to policymaking, which is different from what almost every other country in the world did (during Covid disruption): Sanjeev Sanyal.
Economist Sanjeev Sanyal, who is a member of the Economic Advisory Council to the Indian Prime Minister, spoke to The Sunday Guardian on India’s G-20 presidency, on how India became an economic bright spot in spite of the Covid-induced gloom and the next generation reforms. Excerpts:
Q: The G-20 was started as a platform for economic cooperation. How successful has it been in fulfilling this goal? Also what exactly India as G-20 president is bringing to the table? How is India’s G-20 presidency different from what other countries have been doing over the years?
A: First of all, the G-20 is not the first or only multilateral platform. Since the Second World War, many multilateral platforms have emerged—the United Nations and its associated institutions, the World Bank, IMF, WTO, and so on. However, while the UN is the most broad-based body, it tends not to be able to put together a coherent response to emerging economic challenges, because it is too unwieldy. So, there was a feeling in the late 1970s and early 1980s, that a smaller group would provide a more coherent leadership. That’s how the G7 came into being. Over time, other countries’ contributions became larger. So, in the late 1990s, early 2000s, it was understood that a wider body was needed, that could be used to provide a quick, coherent response to the challenges of the world at the time. So out of that a group called the G-20 emerged, which originally was driven by the finance ministers and central bank governors, but then became a more wider platform. And this platform, at this point in time, is perhaps the most important platform in terms of providing global leadership. This came through very much during the global financial crisis, but also during the recent Covid crisis. You will remember that neither the UN nor the WHO was able to provide a clear, coherent response when the crisis emerged in March 2020 or thereabouts. There was a major breakdown of the global economy. Suddenly, flights were stopped and supply chains broke down. The response—not just the economic or the health response itself—was in a shambles, because there was a lack of clarity on exactly how governments should respond individually, as well as what the collective protocols should be for keeping the world economy running. In that context, a document called the “G-20 Action Plan” was put together very hurriedly in April-May by the Framework Working Group, which I used to co-chair at the time. That document of the global action plan became the common minimum programme for keeping the world economy going and providing a response both on the economic front and on the health front to the evolving situation. So that is one recent example of how the G-20 provided leadership under difficult circumstances and this will likely continue, at least into the foreseeable future. So, to answer your question, the G-20 is now probably the single most important international forum for providing global leadership and responses to the current problems of the world.
Now comes the question of what India’s role should be in the year of its G20 presidency. Remember that being the presidency of G-20 means that we are, in a sense, the hosts of the G20 this year. That doesn’t mean that we can reject what has been going on so far. We will carry along many of the ideas, programmes, etc., that have been inherited from the previous presidencies. But nevertheless, it will mean that we will be able to provide more direct leadership and guidance than would be the case normally. So in that sense, for the next one year, to some extent, we will be guiding the global narrative. That doesn’t mean we are president in the sense that say the president of a country is. It’s not like that. You are effectively hosting a narrative. But yes, you have an extra responsibility of curating the global conversation. And that is the case for the next one year. And it’s a particularly important year—it will, hopefully, be the first full year where the global economy will have fully opened up, post Covid. Although, given what is happening in China right now, we need to watch that as well. There are also major challenges in front of us. There is the war in Eastern Europe, recent spikes in oil prices, although they’ve come down a bit now. But nevertheless, it has been very choppy. Much of the world’s economy—not ours—but many parts of the world are maybe going into recession, or at least slowing down very sharply. So the world happens to be facing many important challenges. So this will be therefore an opportunity for India to showcase our ideas, to help curate the global conversation, and in some ways to punch our weight. As you know, India has historically been very shy of punching our weight in the global platform. So this will be an opportunity in some ways to showcase our ourselves as a country that is a responsible member of the international community and now as one of the world’s largest economies, and an important geostrategic player, we are capable of providing a responsible global leadership.
Q: When you’re talking about how India has been able to buck the trend of being slowed down by economic headwinds, how has that been possible?
A: It is true that India’s economy has come out strong from this Covid crisis. And we are now the fastest growing economy in the world and are expected to be so in the foreseeable future. This has not happened by chance. A very important part of this has been the somewhat unique set of policies that we used in dealing with that crisis. And there are some clear elements to this. First of all, unlike almost every other country in the world faced with this Covid shock, we did not see it as a demand problem, but a supply shock. So, we did not go out there and expend all our monetary and fiscal resources, simply dealing with reviving demand. Instead, we expended it first in terms of providing safety nets to the vulnerable sections of society and the business community, by whether it’s in terms of providing free food, or in terms of providing liquidity, or using the JAM trinity to provide small amounts of money to the very poor and so on. And when the economy began to recover, we then expended the resources on building up capital, infrastructure and so on. So when we did spend, we did it, firstly, when the economy began to open up, and we spent it almost exclusively in trying to build infrastructure. Why did we do this? Because we felt that it is only meaningful to bump up demand once the supply side has been opened up. We were also very clear that the multiplier effects from infrastructure spend is much higher than from consumption expenditure. And finally, we were also very clear that we wanted to leave behind assets for the debts that we would have to run, by running larger deficits. So we took a very supply side approach to demand revival, number one.
Secondly, we continued to do major supply side reforms, even through the crisis. We were doing major supply side reforms, even before Covid. We had introduced GST, had introduced the Insolvency and Bankruptcy Code, and subsequently cleaned the banks. We had introduced various other reforms. But we continued to do these reforms through the crisis. So we opened up the drone sector, the space sector, the geospatial sector, we removed telecom regulations on the BPO-OSP sector and so on and so forth. We privatised Air India. These are supply side measures and critics were asking: why are you doing the supply side measures in the middle of a crisis? This is because we effectively had a supply side view of the whole matter. And one of the consequences of that is that we kept saying that look, the post Covid world is not about reinflating the pre Covid world. Whatever this world is, and it’s difficult to predict what it is, it will have its own logic, its own geopolitics, technological backbone, its own supply chains, own consumer behaviour patterns. And all of these things will interact with each other in entirely unpredictable ways. So, the trick is not to try and just bump up demand in order to somehow go back to the pre Covid world, but to prepare for a post Covid world, with an economy that was flexible—whatever it is that will emerge from this. The result is where we are now is partly because of the sort of the benefits of pre Covid reforms that we had done—those are finally flowing through from GST, IBC etc., and the subsequent reforms that we have kept doing. So, the net result is we now have a very flexible, efficient economy. Compared to what we would have been if we hadn’t put in the supply side effort, and this is true, because of liberalisation of sectors. This is true about the infrastructure that we have built, the new laws we have put in place, our willingness to go out there and participate in global supply chains, whether in terms of PLI schemes or inviting FDI or now increasingly signing all these new trade deals and so on. So we have emerged as a dynamic country, mostly because we have a dynamic approach to policymaking, which is very different from what almost every other country in the world did. So it is not by chance that we have ended up now with having the most economy dynamic economy in the world.
Q: And what about the disruption caused by the Ukraine war?
A: Unseen shocks happen. The Ukraine war is another random shock, just like the Covid crisis was a random shock and the revival of Covid in China is also a random shock. We are not pretending that we can predict these shocks. What we are saying is that the world we live in is an uncertain world and the best response to it is not to have a grand plan, but to have flexible systems that are able to deal with uncertainties as and when they emerge. This is precisely why the old Planning Commission was shut down and replaced with more flexible bodies like Niti Aayog. And also the Prime Minister’s Economic Council and so on. The idea being that you respond with feedback loops, and you invest in economic flexibility and capacity, rather than have some grand plan. So as happened in the case, an uncertainty like the Ukraine war turned up, it is not something we could have predicted, but then we have dealt with it and protected our interests, the best we could, given the circumstances. So, you know, while we continue to try and encourage the belligerent parties to bury the hatchet and stop the war, at the same time, we have protected Indian interest by retaining optionalities for where we buy our energy supplies from.
Q: When you’re talking reforms, what reforms are you planning next, broadly?
A: If you take a broader view, a long-term view of reforms, the reforms done since 1991 onwards, had two elements. The very first stage of that reform was effectively withdrawing the Indian state from doing the things that it should not do. So that’s why when we talked about reforms in the 90s, the words liberalisation and reform were used almost interchangeably, because basically, it was about the withdrawal of the state. And that allowed a new entrepreneurship, it allowed markets to function and so on. The second phase, which began in the late 90s, into the 2000s, but really has happened over the last decade, is the creation of frameworks, whether it’s regulatory or otherwise, for allowing the new emerging entrepreneurial class, the markets etc., to function better. So, one, withdraw the state, allow markets, entrepreneurship, etc, to function. The second round is sort of creating the frameworks for this new emerging dynamics to play itself out. So this is the context in which you have to see all the reforms that were being done in the last decade. So let’s take for example, GST. What is GST? GST is effectively a free trade agreement that India signed with itself, in order to create a common market. What is the Insolvency and Bankruptcy Code? It is basically the framework to allow creative destruction to happen so that entrepreneurship and risk taking can flourish. What is inflation targeting? Inflation targeting is essentially creating a framework that allows macroeconomic anchoring. So these are all frameworks for allowing a dynamic economy… I’m not saying that these two—liberalisation and withdrawal of state and the creation of frameworks—are all done and dusted. There are still things from that perspective that need to be done. But I would argue that, to a very large extent, that phase of reforms has been more or less done. There are still bells and whistles that will need to be ironed out and will take some years to do, but by and large, two things have happened, these two principles are now fully accepted. You can always fix the GST and make it better, you can always fix the insolvency, but the framework is there.
So, the question is, what about the great reforms of the next 25 years, and I would argue that the nature of those reforms is different. The reforms of the next 25 years are about getting the Indian state to deliver the things it should do. So, it is therefore in contrast to the earlier phase, which was about stopping the Indian state from doing the things it should not do. Now, it is about creating the things that the Indian state should do.
So what should the Indian state do? Well, in this context, two major areas of reforms are needed. First of all, we need to do administrative reforms, including that of bureaucracy, so that the Indian state can deliver the services needed. This requires, for example, reform of municipal services delivery, reform of the police system. These are today not set up for the 21st century—for service delivery. Policing in India is largely not seen as a service delivery, but as some sort of a law and order control issue. We need to think about it as a service delivery. Same thing has to happen with the municipal services. All of this requires a change in the way the bureaucracy is set up and managed and how its incentive structures are, and so on… This is a very big area of reform—administration. The second big area of reform is judicial reform, and of not just the judiciary, but the whole legal framework in general. This is critical, not only the delivery of justice, which is absolutely critical in its own right, but you cannot have a market based economy unless you have quick enforcement of contracts. So enforcement of contracts, I would argue, is now the single biggest hurdle to rapid economic growth. And we need to be able to deliver enforcement of contracts. Most enforcement of contracts are not grand issues of constitutional propriety. Most of them are trivial things—your personal rent contract with your landlord, or, getting payments on time for some goods you have supplied, or, a labourer getting his wages credited on time, etc. This enforcement of contract needs to happen quickly. And that requires the legal system to be able to deliver it. At this juncture, with 40 million cases stuck in the judicial system, I’m afraid the legal system is not delivering. And this is a major area of reform that we need to do in the next big round of reforms, the next cycle of reforms.
Joyeeta Basu is the Editor of The Sunday Guardian.