Views | Kaushik Basu’s disappointing legacy
Views | Kaushik Basu’s disappointing legacy
Kaushik Basu’s two-and-a-half year term as the chief economic adviser to the finance ministry ended last week. Basu lacked prior experience in policymaking, and his stint in the ministry will fill that gap in his resume. But it is time to ask: How much has the nation gained from Basu’s services as a policymaker in the past 30 months?
Basu is an outstanding academic, with sterling contributions to economic theory. Still, he was an unusual choice for the post of economic adviser in 2009. He was the first adviser who had never worked in the government earlier and the first micro-economist to work in an office that usually deals with macro-economic management.
Nonetheless, expectations from Basu were high when he took charge. Many expected Basu, an outsider, to make an honest diagnosis of the ills that plague economic policymaking in Delhi, and to infuse new ideas in the stale corridors of North Block.
To be fair to Basu, circumstances were not always conducive to implement bold reforms. Basu did plant innovative ideas such as evaluating the performance of the bottom quintile as a summary statistic of inclusive growth. Also, he tried to popularize the idea of cash transfers to replace direct subsidies, which in certain circumstances can be cost-saving.
On the whole though, Basu seemed to exert greater effort in talking up the economy than in formulating hard policies that might keep the economy running in good shape, mastering the art of spin to further the interests of his minister.
Basu’s projections of growth or inflation often turned wrong but that never deterred him from making the next fantastic statement. He developed an uncanny ability of making the glass look three-quarters-full, whatever the facts. Even bullish fund managers appeared tame in comparison. No wonder, the phrase “Kaushik Basu upbeat” delivers thrice as many results on Google as “Kaushik Basu fiscal deficit”. The joke on the Street was to bet against whatever Basu said!
Basu’s attempt to provide intellectual cover to the jaded policies of the UPA government was even more galling. Like several other top economic officials in Delhi, Basu’s unwavering advice to the Reserve Bank of India (RBI), often pronounced right ahead of key policy meets, was to lower interest rates. The government needed to borrow all it could on its way to populist glory and Basu was a willing ally.
A bloated budget is a perfect recipe for inflation and India has been under an inflationary attack since Basu joined. Therefore using questionable economics and right-sounded rhetoric, Basu sought to deflect attention from fiscal policy’s role in contributing to inflation in the economic survey of 2011-12, the same year in which Pranab Mukherjee conjured a magically low fiscal deficit target of 4.6% in his budget statement. Basu famously argued that prices tend to move higher in economies where growth is higher, in his bid to justify inflation although evidence for such a simplistic relation has been hard to come by.
“In designing inflation control measures it is important to be aware that sudden, sharp policy induced contractions in demand can cause unemployment to rise,” wrote Basu. Basu downplayed the fact that high inflation may curtail both growth and employment in the long run. The RBI published research papers several months later which showed that beyond a threshold of 4-6%, inflation impedes growth.
To explain how bureaucrats often tend to side with the dominant interests of the day in his recent lecture at the US-based Carnegie Endowment, Basu cited an anecdote that used to be Lyndon Johnson’s favourite story, of a person applying for a job as a teacher in a conservative part of Middle America. The candidate is asked if the earth is flat or round. About to reply, he pauses before saying, “I can teach it flat or round.”
It seems Basu taught us a flat earth in his role as the chief economic adviser.
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First Published:8 Aug 2012, 07:50 PM IST
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