‘Long-term big subsidies in energy prices are well worth getting rid of’

• Well, that is one of the charges, but also because of high inflation right now — so, often the debate is growth versus inflation.

That’s understandable. In fact, high growth in the developing world has increased demand pressure on commodity prices, oil, gas, minerals and food. In addition, in a high growth mode, there are a lot of jobs that are created and a lot of other jobs that are destroyed and this creates anxiety.

• I read your report, you talk about the need for inclusiveness, good governance, good leadership. But how do you define inclusive growth?

Well, it’s in an inter-temporal context. I mean, what people fundamentally have to believe is that the sacrifices they are going to make now are going to make their children and grandchildren better off and that means that no group is excluded just by the virtue of who they are, whether it is religion or ethnicity or anything else. It means that people are going to be protected through these economic transitions, and finally, it means that the government is not going to let the income distribution get too unequal.

• But we have that … it is the phenomenon of what I call the ‘pink paper triumphalism’ where we have some financial papers which every third day have lists of how many billionaires India has produced, how many more Bentleys have been sold and that unleashes, sort of, counterforces of greed and envy.

Yes, and it happens in many places. It’s a problem in China; it’s a problem in the United States, where most of the increased income has gone to the upper end of the income distribution and if you don’t find any way of rearranging the benefits, either through income or through the delivery of services, then people will say, ‘why should I support this?’. It’s perfectly reasonable as an important part of the growth strategy that people share the benefits.

• People also get a sense at a popular level that a lot of this money is being made by people who are not working very hard for it, like on stock markets.

There are two parts to this. In many countries, the successful entrepreneurs might be envied, but people really thought that they took the risk and earned it in some sense. But there are other people who are getting paid large bonuses in corporations or speculating in the stock markets and getting wealthy, and people have less understanding and support for that kind of accumulated wealth. Still, markets don’t produce perfectly equal outcomes and you have to put up with a certain amount of ex post inequality to run a modern economy or an economy that is growing. But you don’t have to stand back and let the market outcome be the final answer.

• You’ve mentioned 13 countries that have done well in terms of growth around the world. Give us your take on India.

India is about to join that group. India is growing at 9 per cent now. Unless something goes wrong, India and Vietnam are going to be among the sustained high growth cases, even with the standard of 7 per cent a year average growth.

•Two different countries and societies — and two very different political systems…

Very different. It just illustrates that that you can’t map the form of government on to the results. If the government is well intentioned in a democratic context, it will work, and it will, by the way, survive changes in the government and political party. And once the momentum starts, it is pretty hard to reverse.

•There are two things in your report — one where you talk about the need for good governance and politics, but at another, you talk about how growth has been good in several countries which have one party rule and rule by a party which is sure of being in power for a long time. That’s not happened here for a long time and it’ll not happen in the next 30 years.

That’s not a problem for growth in India. India is going to be the world’s largest democracy that has achieved and sustained high growth and that’s going to be an important example to many other countries. But the other important thing is that many countries that have a dominant political party structure, during the period of the growth, have evolved into multi-party democracies. Korea would be an example; Japan would be an example; Taiwan has multi-party democracy. The tendency is to evolve towards a structure that India already has.

•The reason I am coming back to this question is that we have elections coming up and growth has become an election issue in a way, partly because of the ruling formulation’s inability to sell the idea of growth and partly because its opponents have seized on it as the factor underlying inflation. As a matter of fact, the Left, which supports this government, says this is a GDP-obsessed government and has ignored inflation.

That’s interesting. I would’ve thought the core cause of inflation is in global economy and not a domestic phenomenon. It’s very difficult to deal with it for a central bank, because the relative prices are changing fast as a result of the commodity price increases. Naturally, there’s a kind of an inflationary pressure everywhere.

•So, what are the good things a government like India could do to fight inflation while sustaining growth?

Sometimes to fight inflation you have to pay a price in the short run with respect to growth. Many examples to that…

• Is that an acceptable price?

Yes. Inflation is lethal with respect to growth, if it gets out of hand. So, it has to be high priority, even if dealing with it requires a certain amount of negative pressure on the growth engine in the economy. You just can’t have your cake and eat it too all the time.

•What do you do in India to control inflation, which is a priority now? Because there is food inflation, there could be fuel inflation, there is commodity prices…

Basically, the formula that has been worked out over time is that the central bank, using money supply and interest rate instruments, prevents inflation from spreading. The governor of the European Central Bank was asked the other day at a meeting I was at, ‘well, then how do you accommodate the relative price change?’ and he said, you have to do it over time. So, what happens is that those prices go up and the other prices have to go down.

•There’s a suggestion in India that the interest rates are already quite high, so why not let the rupee strengthen?

You could, but…

•Because we are big net importers…

Yes, you are, but if you let it strengthen too much, these are hard problems. These are the things where there is no formula and people have difference of opinion. But if you let the rupee exchange rate appreciate too much — to the extent that the new arrivals in the export and manufacturing segments become uncompetitive — you can unnecessarily slow the growth. So, you have to maintain a balance.

•But central bankers have to play a role?

They have to play an important role.

•More than politicians?

No, not more than politicians.

•The reason why I am asking you this is that there has been a lot of pressure in the political system to take administrative measures to control prices. But now there are more radical ideas, like cement and steel being put under price controls, using really tough laws.

Yes, except as temporary emergency measures, as in the case of food, where you have poor people who are threatened with malnutrition, if nothing else, it’s a bad idea to intervene in the price system and start making a habit of it. There’s a very wide pattern of energy subsidisation in the developing world, it’s a bad idea. It’s a regressive subsidy. It affects the well to do more than the poor.

• It’s a subsidy to the rich.

Yes. It doesn’t provide incentives for energy efficiency, it prevents the economy from lining up behind the climate change agenda in the future — just everything about it is a bad idea.

•If you spend any time in India, you can’t escape the debate about fuel prices.

Right. Nobody’s naïve. If you’ve had subsidies for a long time, the proposal is not to take them away overnight. Things have to be done gradually and it’s politically difficult. One has to restore the benefits in another form with respect to the less well to do members of the society. So, it’s not just a one-off thing. But long-term big subsidies in energy prices or other things are well worth getting rid of.

•But you don’t mind a selective application of this — as you said, if you let the prices of fuel rise, you find a way of compensating the poor?

Yes, absolutely. In fact, Indonesia just announced a plan to remove the energy subsidies and give the resources that were formerly being spent on the subsidies to the poor to help them afford food.

•And how would they do it?

Well, when you subsidise energy, you’re basically giving up a government tax that could either be invested in education or infrastructure or used for income redistribution and that’s basically what’s going on. It’s as if what is being given up is government revenues.

•One of the things that your report talks at length about is global warming. And if you look at the hard facts, India and China are contributing hugely to global warming by keeping their oil prices low.

Not hugely. India’s output of carbon dioxide per person is 1.3 tonnes. It’s well below the safe level, according to the inter-governmental panel. China’s higher because it’s a little ahead. It’s at 4.8 tonnes, which is the global average now. The only reason why India and China are contributing a large amount is that because there are a lot of people and that is where the external pressures are coming from.

•If we let oil prices come to the real level, our emissions will come down too.

But it will go up because of growth. It’s almost for sure that India’s consumption of energy of all kinds is going to rise rapidly.

•Can you give us a formula for Dr Manmohan Singh to handle his fuel price issue, because his subsidies on fuel prices are bankrupting his government? In fact, we started this conversation by you saying that the way to convince this population about growth and reform is to say that it will be good for your children, good for your grandchildren. What’s happening in India is, we’ve bankrupted our children. We’re borrowing from our grandchildren to give us cheap fuel because the government is issuing these things called oil bonds.

Look, no outsider can give a prime minister, especially an effective one like yours, advice that’s competently based on fact. But in general, it seems to me that what we’re going to see as a sensible policy in a world of rapidly rising energy prices is a thoughtful attempt to scale back subsidies, which are very widespread and to use the resources to restore benefits in some form or the other. I prefer, as a person who’s interested in growth and investment in the future, that restoration to go through things like education in the next generation and their ability to succeed and contribute productively. But some of that may just have to go to income distribution to take care of the poor sections of the society. That’s a judgment that rightfully belongs to politicians in specific countries rather than people like me from outside.

•In your report, some phrases stand out, and maybe I speak as a journalist. One is that the world looks very different from the treetop of macro economics as compared to the shrubbery of micro economics. Would you translate that?

From the macro economic treetops in a growing environment, it looks like everything’s getting better; it looks like water rising in a bathtub, where all the ducks are rising with the level. At the micro economic level, it’s much more turbulent and chaotic. There are new companies being created and new sectors that are growing, and eventually, as the process continues, some of those sectors get killed off, essentially by competitive pressures and shifting prices in the global economy. So, it feels, to an individual, because we all live at a micro economic level, much more chaotic than from the macro economic treetop.

•And who balances it? The politicians?

The government has the responsibility to address market turbulence, which is an important engine of growth. You can’t grow by having everybody doing what they were doing yesterday.

•Without the risks of the marketplace, there is no market.

Yes. It is the government’s job to protect the people from these transitions. If they protect them by protecting companies and specific jobs, they will stop the engine from running and slow the growth process.

•That’s distortion…

That’s distortion and slows growth.

•You won your Nobel in 2001 and so did Joseph Stiglitz. There are many things common between you and Stiglitz and one of them is that both of you have been on Walk the Talk.

Ah, we have, interesting.

•If I know your economics, it is an intellectual argument between you two that has gone on now. Where does that stand with the current global crisis — is Stiglitz smiling? Does he deserve to smile?

Oh, I am sure he is not smiling. I think we share more than what we disagree on and I agree with most of what he says, but he’s surely not smiling about a crisis that so adversely affects so many people.

•You say in your report, one problem with financial integration is that countries whose financial markets have been integrated, may not be able to integrate their regulatory systems. Those may be uneven.

That’s right. There’s clearly an imbalance between financial and other kinds of interdependence in the global economy and our ability to collectively regulate it, I think everyone agrees on that. And furthermore, I don’t think that’s a problem that can get solved overnight. Nobody that I know has a blueprint to, sort of, restore the kind of global governance system to match the extensiveness of market interactions. And what it means is that in the meantime, and I think it is a long meantime, we are going to have risk and volatility.

•How does a government like India’s, which is at one level intellectually committed to reform and growth, but at another, has to go back to elections and a very questioning electorate, which routinely defeats 80 per cent of sitting legislatives… (MS: I understand, it’s a healthy democracy). How do you manage that?

If you are in a risky environment, you think hard about the risk and find a way to ensure yourself or mitigate the risk. So, in case of food, we would need buffer stock bigger than what we had before. In the case of financial turbulence — that can have an effect on the exchange rate — we need reserve accumulation. Some of it needs to be done at the multinational level, because it is more efficient. But there’s some distress to the multinational institutions, so it can’t all be done that way. People are used to mitigating risk in the world of investment as, I think, a growing important part of policy in developing and advanced countries, including the rapidly growing ones, is anticipating and taking risk mitigating activities. In the global sense right now, we’re just in the active mode. We need a bit more proactive policy.

•One thing that Stiglitz said on this show was that he’s happy with the way India is globalised. He’s referring to India as, what we know as, homoeopathic approach to things — in small doses.

I agree with that.

•Now there’s a big debate in India about full convertibility of the rupee — capital account convertibility. So, the school that is more conservative and wants to take time is really right now?

No, I think within the Growth Commission, you have difference of opinion even between 20-21 people. These are really hard things and there are no fixed answers.

•I am fascinated that you mentioned Deng Xiaoping somewhere in your report that you cross the river by feeling the pebbles with your feet. So step by step, instead of taking one leap of faith.

That’s right, yes. That’s a lesson from the Chinese experience and a lesson from other places as well. That is probably one of the best Deng Xiaoping sayings in China and characterises their approach. Part of the problem is that we don’t have fully developed models or ways of predicting the impact of policies in developing countries just because that’s the state of research. And what it means is that successful governments are experimental. They try things, see how they work and if they don’t work, they reverse them. So, this tends to turn into a step-by-step approach towards policy implementation.

•So governments have asymmetric information as well.

They do. That’s exactly right.

• That’s why they need brilliant economists like you. Michael Spence, wonderful to chat with you in India and I hope you keep coming back and that we maintain our growth and make it more inclusive and reduce the pain.

Thank you Shekhar.