New Delhi: As the world battles to recover from the worst economic crisis since the Great Depression, Pronab Sen, economist and chief statistician of India, looks back to find out what went wrong. In an interview, Sen cautions against moving towards a universal banking system without putting social safety measures in place. He says the pace of work on big infrastructure projects will largely depend on the revival of global investor risk appetite. Edited excerpts:
What are your thoughts when you look back at what India and the world went through in the last 12 months?
Changing view: Pronab Sen says that the past year’s developments have punctured a lot of assumptions about the financial sector. Ramesh Pathania / Mint
What this year has shown is what is feasible, not just in terms of the financial sector, but in terms of growth and so on, so forth. A lot of the hugely inflated expectations have been moderated. All kinds of new benchmarks were thrown at us. One benchmark was that the world economy should be growing at least by 3.5%. The financial sector is capable of meeting all these demands whether or not the fundamentals of the old world macroeconomics justified that. So, savings rates are no longer the determinants of investments. What the last year has done is it has punctured a lot of those assumptions. Although, my fear is that many of us have not scaled back our expectations.
The second part of it is really a fundamental question regarding the nature of the financial sector. About the expectations of people who make deposits in various financial instruments and, therefore, the counterparty obligation of the financial sector to make sure that those expectations are given due respect. The whole notion of too-big-to-collapse would not have been a real consideration at all if the Glass-Steagall Act (The US Act, designed to curb financial market speculation, which was repealed in 1999) was still there. That is if the small depositor, the risk-averse person was not putting his money into risky, high-return investments, but just wanted to have his savings secure. I think he was let down seriously. One has to really rethink the nature of regulation fundamentally, based upon the reasons underlying the saver’s behaviour. And the regulatory system should mimic that as it is really the protector of the depositors. I think this is really the issue. And the talk about the demise of capitalism is pretty much rubbish.
In a developing country context, particularly India, what does this sober realization mean? You have one side of the argument, which says if you grow at 10%, poverty gets tackled. And on the other hand, you are saying one needs to be pragmatic and not overreach. How does a developing country such as India manage this tradeoff?