Chief economic advisor to the finance ministry Kaushik Basu says the government should step in and acquire land for development projects to protect the interests of farmers. He also explains why the government cannot tackle food inflation by distributing free foodgrain among the poor. Excerpts from interview with ET:
A large number of land-intensive project have run into opposition. Could it actually undermine our infrastructure thrust and growth?
There is no getting away from the fact that some land will, over time, have to shift from agriculture to industry. This is a concomitant of development. China has done this in a big way. We don t want to do it the same way indeed we can t, given our democratic structure. The US, which treats private property as sacrosanct, has eminent domain law to enable acquisition of land for public and socially valuable private sector projects. The way this has to be done is by compensating farmers and local inhabitants substantially above the prevailing market price. There is a huge difference in market price before and after an industry comes up; and, I would want farmers to get the benefit of this future price rise. At the same time, one cannot take the view that each farmer has the right to hold up a project. If we do grant such a right, then we will be violating the rights of those farmers who want to sell their land to industry.
One of the biggest needs for India is industrial development in small towns and the rural hinterland. This will create employment and boost development. For this to happen what government has to do is to provide power, law and order, and road connectivity and then leave it to the enterprise and creativity of the people. We should use the entire golden quadrilateral, where the road is already there, to develop industry along it. The aim should be to create an industrial diamond cutting across the length and breadth of the nation.
Do you think government should help private sector to acquire land?
Yes. The private sector, left to its own devices, could use unfair threats and force against poor farmers and tribals. We don t want that to happen. We need a legally well-designed method for acquiring land. The government has to mediate in this acquisition and after that let private industry function with minimal interference.
What about the environment issues with the resource-rich industries?
Environment is a difficult issue. All I can say is that we have to be vigilant in protecting our environment. But, at the same time, this cannot be at the cost of holding back our poor people in poverty. At some point we will have to face the troubling question of whether nations as big as India and China can prosper economically, taking along their entire population? Will the limits of global resource make that impossible? I am not foolish enough to claim I have answers to these questions.
The government seems to be confident of achieving 9% economic growth next fiscal. But independent economists are not so optimistic. Why this disconnect?
I don't think all private economists are pessimistic. Morgan Stanley has given a very optimistic forecast. And the IMF I don t know if you call it private or public has also given us a bullish forecast. I believe our forecast of 9% GDP growth next fiscal year is quite realistic. This is not to deny that there are downside risks. The biggest one is the European economy. If it goes into a recession, it will affect us. But it speaks well of India that its main worry is Europe. The other concern is the balancing act one has to perform between inflation and growth. An excessively sharp tightening of monetary and fiscal variables can rapidly bring down inflation, but this will inevitably slow down growth and increase unemployment. I expect the second quarter growth this year to be less than 8.8% achieved in the first quarter. But the third quarter should be very good. On an average, the current year should achieve an 8.5% growth.
How do you explain stubborn food inflation when we have mountains of food grain?
It is an unfortunate fact that we have overflowing stocks of grain, some of it going waste, and high food prices. There are ways of intelligently releasing these stocks; we have to use those. If we simply open the doors and sell these stocks at zero or near-zero prices, it is likely that substantial parts of this foodgrain will be resold to government at the minimum support price.
So we will end up paying subsidy multiple times for the same grain. On the other hand, if in the name of managing the fiscal deficit, we try to release it at too high a price, no one will buy it. What we need is a systemic reform of our foodgrains system both procurement and distribution. We should, for instance, have a procurement policy which is cyclical procuring more in years of plenty and procuring less in years of shortage when the market price is anyway high.
Further, if stocks are greater than what we can use, instead of letting them rot, we should be prepared to export the excess. And in case we are worried about food supply in bad years, it is now possible to sell as swap deals whereby the buyer assures us of selling back the equivalent amount in a future year. This is, in effect, no different from storing the excess and taking it out when we are short of food.
How do you see the recent moderation in industrial growth?
Our industry is still in the recovery mode after the downturn of 2008-10. Keeping that in mind, its performance is very good. In Q1 industry grew at 10.3% and manufacturing at 12.4%, which is almost back to the performance of 2005-08 when the economy grew at over 9% for three consecutive years.
Indeed, what is happening right now is rare for India industry is outperforming the services sector. Services are not doing badly, but by our own standards we are not quite there. Since our services sector is so outward looking, it is reasonable to expect that once the industrialised nations begin to do better, we should be able to climb up from the current growth of 9.7% to 11% that we earlier achieved. I should also mention that industrial growth of 12.4% means that employment is being generated in the economy. The two sectors doing particularly well within the industry are capital goods and consumer durables. The first shows optimism among firms and the second shows optimism among consumers. So not only have we done well this year but the long-term prospects look good as well.
But pick up in investments is not throwing up clear trends You are right. But usually, when an economy is given a fiscal stimulus, it does slow down savings and investment a little. This has happened in India but we are still in a comfortable zone.
There is a view that RBI should pause interest rate increases because of a moderation in industrial and exports growth, although inflation remains a concern. There are times when action is obviously needed and times when action is not needed. The current situation is in the cusp of the two. Growth is comfortable, especially so by all international standards. But inflation, though slowing, is by no means gone. Food price inflation was tapering off but there is concern about global food prices. There is a large shortfall expected in global wheat production; the estimated decline is largest in fifteen years. This is pushing up global wheat price rapidly. We have to keep a close watch on this. And it is important that we continue with our fiscal tightening.
Have capacity constraints become a major hindrance to growth?
There is some smoking gun evidence that we are reaching close to our capacity constraint. But the high growth of the capital goods sector and the government s policy of building infrastructure will keep our capacity expanding and hopefully ahead of the curve.
On labour law is there a middle ground?
There is a lot of misleading information on the issue. The impression has been created that anybody who wants to change our labour laws and introduce greater flexibility in hiring and firing is anti-labour. This is not true because I know that I want such changes and I do so only because I want to see our workers do well. What I would like to see is a contract-based system. Different kinds of workers can opt for different kind of contracts. If you allow different contractual forms then a firm that expects higher fluctuation in demand will pay higher wage with the flexibility to retrench workers at short notice. Giving firms this freedom will lead to a larger demand for labour and boost employment and wages. I am not saying that we switch over to this flexible system but that we bring this debate out into the open. My expectation is that, once the issues are properly understood, it will be workers and trade unions who will support my argument for greater flexibility in hiring and firing laws and a more contract-based system, instead of the current one where the terms are pre-specified by law and firms are pushed into labour-saving technologies.
What are the policy measures required to drive investments into rural infrastructure?
Rural investment has to have government involvement. I don t think the private sector will find this profitable on its own. So what is needed is the use of some form of PPP model. The government can use its influence and status to attract infrastructure debt fund from outside and within India. This can then be used to fund projects. It s best to leave the actual development work to private developers. We need to clean up the system of how these contracts are given out though.
Do you think opening up of multi-brand retail can pump in investments into rural infrastructure, especially back-end cold chains?
I am in favour of greater opening up of the retail sector. A lot of Indian firms will tie up with foreign firms that have the know-how. Both farmers and consumers will do better; middlemen will do worse. Large multi-brand retail has been the trend worldwide; it will be folly to resist this alone.