News Hour- Yes, decision-making has stalled: Kaushik Basu

NEW DELHI: A month after he was forced to backtrack on his comment about gridlock slowing down economic reforms, the government's chief economist, Kaushik Basu, acknowledged on Friday that coalition compulsions and an excessively cautious bureaucracy have snagged decision making. 

Asked about the perception of policy logjam, Basu told TOI in an interview, "I agree with this criticism; in my view there has been a slowdown in decision-making because of over-caution on the part of bureaucrats and slowdown in reforms because of the strains of coalition democracy . I expect - or should I say hope - this will change sooner rather than later." 

In a lecture in Washington on April 18, Basu had said reforms were unlikely before the elections in 2014. He had also pointed to slowing of decision-making due to a risk-averse bureaucracy following the exposure of scams and due to the government's coalition constraints. 

The remarks triggered a volley of protests from ministers , though he merely appeared to be echoing a deeply felt view. The reaction forced Basu to issue a clarification on April 20, saying his reference to 2014 was regarding the unfolding economic crisis in Europe wherein banks would have to begin repaying $1.3 trillion dollars worth of loans received from the European Central Bank. It was wrongly juxtaposed with the general elections, he said. 

However, speaking to TOI on Friday, the chief economic adviser in the finance ministry minced few words as he confirmed the pervasive experience about the delay in critical decisions. 
Kaushik Basu, chief economic advisor in the finance ministry, has acquired a reputation of being candid in his views. In an e-mailed interview, he discusses the rupee fall and the slowdown in decision-making . Excerpts: 

Do you think RBI has done enough to stem the rupee's fall? Is RBI being too predictable in its approach to tackle the rupee's woes? 

RBI's response to the recent rupee depreciation has been, in my view, balanced and aptly measured. The bulk of the recent exchange rate depreciation is not an India-specific problem but has global roots. You have to take my views on these seriously because I have in the past criticized RBI. And, I have also refused to put all the blame for all our troubles on the global economy; in fact, some of my own troubles stem from this refusal. 

It is easy to over-react to exchange rate movements, because whether it is an appreciation or depreciation, some people get hurt, and going by the human nature, that group will be the most vocal. RBI's aim should be to curb volatility and not to try to buck the market trend. While excessive depreciation is indeed worrisome, it has to be recognized that this is a global phenomenon. 

Several emerging economy currencies have been depreciating since August 2011 and sharply over the last two months. The South African rand, the Brazilian real, for instance, have moved in step with rupee and, over the last six weeks, the Korean won and the Mexican peso have also sharply depreciated. 

This is a response to the Eurozone uncertainty and flight of capital to the safety of US treasuries and a few other havens; and we will have to live with this until at least June 17 - the time of the Greek election. I believe the depreciation is an overreaction - a global bubble that will partly correct itself eventually. 

Has the government done its bit to tackle the rupee? What has the government done to attract inflows? Are more steps needed? 

Appreciation and depreciation offer different magnitudes of difficulty because the former needs access to rupee or, as some would say, a printing press, and the latter to forex reserves, which are limited. There are basically two ways to tackle a depreciation : RBI releases forex reserves in the market and opens the doors to more capital inflows. Both these are being done. 

But, we have to realize that given the fact that India has had higher inflation than the US, the nominal exchange rate depreciating over the last two years is only to be expected. The impression given at times that we expect the rate to be at the same level as in January 2011 is unrealistic and markets can call the bluff. When we intervene it should be limited , conditional intervention without trying to hold the rupee value artificially high. 

Having said this, I must point out that what is getting overlooked is that depreciation is also an opportunity -the opportunity to export more. Till recently, everybody used to envy China flooding the world with its goods using the leverage of its depreciated currency. Canada gained massively in the global market when the Canadian dollar used to be weaker by over 25% vis-a-vis the US dollar. And Iceland is climbing back to normalcy on the shoulders of a weaker krona . So, while taking steps against excessive depreciation , what we must do and are not doing enough is to get our exports booming. We need to remove hurdles, bureaucratic and otherwise, to achieve this. 

There is a perception that the government has been lethargic in its policy responses. Some commentators say that "the gloom and doom in the economy" is linked to the policy paralysis in government? Your views on the whole issue of policy paralysis... 

I agree with this criticism ; there has been a slowdown in decision-making because of over-caution on the part of bureaucrats and slowdown in reforms because of the strains of coalition . I expect - or should I say hope -- this will change sooner rather than later.
(Source- http://economictimes.indiatimes.com)