 On behalf of the Australian National University, I'm delighted to welcome you all here to the 2012 Narayana Horation, the 16th in this series. We're particularly pleased to welcome his Excellency, Mr Biran Nanda, the High Commissioner for India, and Mrs Nanda. This annual lecture is organised by the Australia South Asia Research Centre, the ASARC, in the ANU College of Asian and Pacific Research, and is part of the ANU Public Lecture Series. The lecture honours his Excellency, Dr Kaya Narayanan, past President of India. Dr Narayanan inaugurated the ASARC in 1994 and maintained an active interest in his work until his passing in 2005. Our speaker today is Dr Kashik Basu, Chief Economic Advisor to the Ministry of Finance and the Government is also on the lead from Cornell University where he is Professor of Economics and the C-Marx Professor of International Studies. His past appointments include Chairman of the Department of Economics and Director of the Centre for Analytical Economics at Cornell and Professor of Economics at the Delhi School of Economics, where in 1992 he founded the Centre for Development Economics and was its first Executive Director. He is also a founding member of the Madras School of Economics. Dr Basu is currently the President of the Human Development and Capabilities Association. He has held advisory posts with the International Labor Organization, the World Bank, the Reserve Bank of India and was for several years a member of the Steering Committee of the Expert Group on Development Issues set up by the Swedish Government. He is currently a member of the Board of Directors of the Excent Bank of India, a Fellow of the Economic Society. Dr Basu has published widely in the areas of Development Economics, Industrial Organization, Game Theory and Welfare Economics. In May 2008 he was awarded one of India's highest civilian awards, the Padma Khashan by the President of India. We would like to thank the Australian India Council for supporting this lecture and welcome all members of the Council who are attending this operation today. May I now request his Excellency, Mr Biran Nanda, High Commissioner for India to read out a message from the President of India. Her Excellency, Mrs Pratibha Patil. I am happy to learn that the Australia South Asia Research Centre at the Australian National University is organising the 16th year of the Iron Fortress of India, the Indian economy rising to global challenges for Dr Basu, the Chief Economic Advisor of the Ministry of Finance Council of India. The Indian economy has emerged as the world's largest economy in Asia, a trillion dollar economy that has joined the ranks of the top ten economies of the world. A noticing feature of India's economic growth is that it is largely driven by domestic demand. While India's growth trajectory has been put in the recent past it has also been resilient. India has to maintain a high growth path for 130 years to attain the status of a developed country to fully satisfy the aspirations of our people. For this, several challenges need to be addressed. The challenges of poverty, eradication, unemployment, religion, urban and regional divides, and achieving inclusive growth that leads to sustainable development. India also needs to address critical challenges related to energy, food, water, security and climate change. I have no doubt that the oration will give insights into these issues for the audience. I wish the oration all success. But about the recent party, President of the Republic of India, I think they will be able to see how this works. Thank you, your Excellency. It's now my very great pleasure to invite Dr. Basu to deliver the 2012 KR Night Rayanan operation. This Excellency is truly brilliant under Mrs. Nanda, the Vice Chancellor, Professor Ian Young. My colleague from Delhi School of Economics here as I go, Raghavendra Jha, ladies and gentlemen, I know several people have been behind organizing this. I'll begin by saying that I'm just extremely grateful for the honour. I feel humbled by it and giving me the opportunity to address people here. I don't know who are involved in this organization, but I must mention Aarti, who's really helped me in us two days. Alan, I managed to do a 20 minute round of the National Gallery of Art. And my days, two days, got cut up into half an hour slots, but I really packed in so much because of kindness of people who were organizing this. Thank you once again. Let me begin by saying that I feel humbled by this invitation, both because of the person after whom the lecture series is named India's Ex-President, Sri Narayana, a remarkable human being starting out with great, great disadvantages in life, Adalit with all the discrimination that was there historically and remnants of that even there today, that he faced as a child growing up, there are accounts of his hardship. There were times when the family was too poor to pay his school fees and the rule in his school was that you could not be inside the class if you had not paid your fees, so he would have to stand outside and listen to what was going on, grew up to be a phenomenal academic performer and then into the foreign service and quite a remarkable career. In Asian countries, leaders do talk about how many miles they had to walk to go to school every day and on that actually Narayana takes the cake I think because I've read Park Choong-hee doing some 3-4 miles a day to get to his school there are other kinds of mileage as I've heard. I recently learned that Narayana had to do 15 kilometers a day to get to his school so he takes the cake on how far you have to walk to get to school India's first Prime Minister unfortunately didn't have to walk at all because he was so well off and I think he used to try to hide the fact that he dropped off at his school most of the time but it's a different range of experiences and different range of achievements Friends, I'm also honored by the distinguished list I knew of a couple of people who have spoken in this series my friends in government, Dr. Morte Singh Alubalia, Dr. Subba Rao, in fact I was in Sydney around the time when Subba Rao was giving the lecture here and I discovered that he was here for the Narayana lecture so it's great to be following in their footsteps The big story for India and I thought that's why I picked this lecture on that is the globalization of the economy. India getting hooked up to the world. Yes, the growth has been phenomenal, there have been other achievements and all big surprises really because I remember as professor in the Delhi School of Economics in the 1980s it would be taken for granted that yes the country had made some remarkable achievements in terms of political openness, cultural openness, our doors were open to books, films, ideas coming in from all over industrialized countries but economically we were relatively closed and we were more or less reconciled to the fact that it would be a closed chugging economy that would continue endlessly that changed, that changed very very dramatically over a relatively short period. We are going through a very difficult time right now and I will talk about it. This past year has been very difficult for the economy but if you look at a 15 year run it has been an outstanding run but the most outstanding feature of that is the hooking up to the world and the responsibilities and challenges that come with that hooking up. I thought I'm going to peg it around that and bring you up to today's contemporary debates I'm going to make use of my somewhat dual perch. I've been a professor all my life in academic then two and a half years ago completely out of the blue when I was taking a summer vacation in Delhi. I get a call from the prime minister's office asking me whether I would be interested in the job of the chief economic advisor I was thrown off by that. There was absolutely no hint that this was coming the following day I was returning to the US I said that it's a very nice offer but I really need to speak to the prime minister since you're calling from the prime minister's office it's too big a thing suddenly being suggested to me and I got to see the prime minister just as I was leaving India in 2009 I had a chat with him more or less made up my mind at the end of the conversation and he said that look I mean we are interested but there's still a procedure and you realize some of the strengths of a democratic system that the prime minister can't tell you here's the offer you take it because I'm interested. There is a procedure and at times you fret that the Indian procedures can be just endless once you want paperwork being done but there is the plus side that no single person can take a decision like that yes it was their interest and I joined government. It's been a remarkable run for me because India I've been I talked for many years I was back and forth even when I was in the US I would spend good three months a year the usual American academic leave in India so there was nothing I mean I'm very familiar terrain, Delhi in particular but government was a totally different cup of tea my only interaction with government before that in fact there are two things of interest I had no interaction with government and never before in India had there been a chief economic advisor with no experience of the Indian government and I actually thought that was a sign of India's boldness and growing confidence that they could bring someone in from outside offer it from someone outside one of the reasons why I was keen to take it on was also India's boldness my in fact only interaction before that was early 1990s and Raghav might remember at the Delhi School of Economics we were working to set up a new center called the Center for Development Governments and you know in India to do something like that you need a host of government permission and clearance I thought that was about as selfless and act as possible setting up a center which was grasping up my time but I was being given a run for my money a ministry of finance, home ministry, your phone up they don't reply you write letters to them no response then I thought I'll have to see the finance minister so I made an appointment the finance minister at that time was the current prime minister Dr. Manmohan Singh so I went to see him and trying to make sure that I don't keep him waiting I went early very early and I was in his waiting area for a longish time and a lot of these people who have been very rude with me the bureaucrats in the ministry of finance would people see me there they realized I'm waiting to see the finance minister and the psychology of government is quite interesting I didn't know that that would make a difference but seeing there then I got to see the finance minister after that my letters were being responded to and phone calls were being returned things began to move just being in the waiting area so much so that I had thought I'll write to the finance minister and tell him that from now on till the center is fully set up if you would allow me to come once a week to his office I would not disturb him at all I would quietly sit in his waiting room area make myself visible and then vanish from there well the center took off that was my only experience of government-government interaction and then into government and I must tell you the culture shock that I was in a different setting was my very first or second day my government driver who's a very senior person in the government who drives me around I was getting I got into the car and I was reaching out for my seat belt and he a seasoned government driver knew that I was coming from being a professor to being the chief economic advisor somewhat embarrassed by my reaching out for a seat belt he turned to me and said sir now that you're chief economic advisor you don't need to wear a seat belt and put on a joint you realize it's a different world view and that first day I did not actually wear a seat belt I felt so bad I couldn't offend him I just clutched on to my seat and he had to be driven back with me as subsequently he's compromised to me when I'm in the front seat I do do that indeed well friends let me tell you the way I'm going to pitch this is from an outsider's view and since this is an academic gathering let me tell you about the peculiarities of policymaking economic policymaking which puts us in a very very different unusual spot I had a fascinating conversation today with your policy makers over lunch and you realize the great difference between say economic policymaking and an engineer's problem an engineer building a bridge or an aircraft in a country there is no sense in which people feel that they should participate fully in the building of an aircraft so you're never told that look in building this aircraft you need to worry about majority opinion about the length of the wingspan or the angle of the nose of the aircraft if you did all that with majority opinion the plane would be unlikely to fly but when you do economic policymaking there is societal participation very very healthy participation but you also realize that puts severe restrictions on what you can do because democracy encroaches on this terrain of decision making and this is not as if people are making a mistake and participating economics is very awkwardly placed discipline it's a half understood science which is halfway there so running the economy of the country is like running a half understood machine a machine where the best minds the best professionals don't quite fully know whether the gas pedal will make this machine speed up or slow down whether the gear which one is the back gear which one is the front gear there are uncertainties about the various knobs and switches that they are there in the machine this positioning of the machine is indeed places it very very peculiarly and you need to be aware of both if you think of an economy as something written up in a textbook manner then you would make the mistake with which many very academic oriented economists and government would make they would pull out their textbooks try to follow the way you would do with an engineering problem take out a book and decide how to assemble this you make very very big mistakes you have to allow intuition common sense to play a role and to that extent of course the whole society has a big role to play with its intuition and common sense but if you leave it to that if you just think that it is all common sense and guess what that we know nothing about the machinery you make another set of mistakes that you run an economy based on populism everything is just by what appears to be right but the economy is full of little bits that we do understand very well where very often what appears like good policy is bad policy what appears to be bad policy is good policy we know this through research we know this through statistics and information collected over time so this creation of space where you have space for professional information and also public view being taken in but the professionalism not being drowned out by populism is a very difficult treacherous narrow path and for most emerging economies this is ill-advised there is too little room for professionalism most of it is on populism what seems right to the masses is what you want your pressurized to carry out I feel India is changing point of the economy and time being short I'm not going to go to before 1991 Indian economy began to change in 1991 and it was because for the first time India was beginning to behave actually in terms of the use of knowledge a bit like an industrialized country we were bringing in the best information opinion aware that look there are lots of things we don't know but there are things we know and we ought to put these into place and get them functioning what happened in 1991 which allowed us to do this and really the tribute has to go to the current prime minister who was then the finance minister he took advantage of a great opportunity along with the prime minister then who actually created the space for these professionals to come in and make very major moves and I was saying hello I mean we must not forget that what happened was the Gulf War the first Gulf War in 1991 meant that remittance money to India dried up those days and that is a part of the Indian economy that was changed totally the bulk of India's foreign exchange flow inflow was remittance money and remittance does not come from well-off professionals, professors, engineers all over the world they don't send that much money home but the workers who have their family back home who want to go back and settle down in their own age send a lot of money back home in 1991 that remittance dried up during the Gulf War simply because the workers had to scamper away from a large part of their usual Middle Eastern terrain when that foreign exchange started vanishing India reached a day this was in the middle of 1991 when there was enough foreign exchange reserve with the government for 13 days of usual imports so that would run out very soon if we continued the way we were doing India has always been a risk averse country Latin Americans usually take big gambles occasionally they do very well occasionally they stumble Indians don't like to do that I mean we played safe you grow less but you don't want to default on your big international loans when we were on the brink of an international default it was a national crisis you did not want the country to default and the government that time in which you retrospectively you look at it and you marvel took advantage of that and put through a slew of reform measures that were being talked about for ages but nothing was being done we had a licensing system if you want to start a business you have to get a license from government to get that license you would be given a run for your money the licensing system was revoked you can start up without a license you of course still need environmental permissions and other things and I still think India is too far mired in a permissionistic society one of the biggest hurdles the license was removed India's tariff fall had gone sky high we were a very open cultural political society but a very very close economy and it's a strange competition among politicians historically each one raising the tariff a bit more and showing one's national commitment that I'm protecting the economy by raising the tariff meant that the tariff had gone sky high and a sense of how high the tariffs had gone was very clear from a statement by Dr. Malmohan Finance Minister that time when in 1991 he said I will bring down the tariff ceiling down 250% there are very few countries in the world that can bring it down 250% you can take it up 250% but it just showed where we had gone slew of reforms put in very difficult year 1991 income growth was close to zero next year was also sluggish then things began to change these reforms that were put into place began changing the economy and the most important changes were let me give this to you briefly because I want to get into the contemporary situation very quickly the most important change that took place you could see is opening up the international sector exports and imports were made much easier you could convert on the current account currency very easily to dollars and peoples were saying initially when these reforms were put in that if you make it so easy for people to take dollars out of the country then the mega 5 billion dollars that India has will exit the country and will be left without it this is where you need again a little bit of professional thought clear thinking and a commitment to pursue that clear thinking if you prevent people from taking out dollars out of the country you are also discouraging them from bringing dollars into the country in the first place so allowing them to take dollars out of the country means they can bring the dollars in in the first place feeling a bit more secure that they can also take the dollars out India used to have a foreign exchange reserve of roughly 5 billion dollars for 14 years from 1977 to 1991 5 billion dollars with the reserve bank of India occasionally going down to three occasionally rising to seven after the opening up and giving people the freedom to take their dollars out and free of law of goods and services what used to be 5 billion dollars for 14 years did not vanish it began rising and over the next 14 years it reached to 300 billion dollars so something which had remained 5 billion roughly for 14 years rose to 300 billion over the next 14 years India's growth rate which used to be very very sluggish from 1994 moved up to 7% per annum we got three consecutive years of 7% growth and after that it slowed down a little bit it dropped to 4.5% in 1977-78 and some of you will be able to guess why that was happening nothing to do with India it was the East Asian crisis India was not too open an economy there we had just began opening up so we did not take too bad a hit but we did take a hit the growth rate dropped a little bit and then it picks up the next pickup takes place around 2003 and it goes surging ahead the big change that has taken place is the globalization of the country and I have inflicted a couple of numbers on you on this and you can see that quite apart from the growth rate having picked up the growth rate from 2005 moved into 9% per annum 9% plus per annum for three years dropped a little bit in 2008 to 6.7 the global crisis was there climbed back to 8.4 for two years and the year that has just ended 2011-12 we did do badly it has dropped to 6.5% the growth I will come back to the government seen in a moment in terms of numbers and you can see quite apart from other changes the integration with the globe that has taken place around the middle of 1995 our total exports plus imports as a percentage of the national income was 19% around 1995 15 years later 2010 that 19% had increased to 38% double down the share of exports and imports exports and imports of services who are from I don't have exact figure with me from something like 4% in 1995 to over 12% 15 years later and capital flows the total amount of capital coming in and exiting from India in 1995 was roughly 15% of the national income had climbed to 54% and I've already told you about the foreign exchange balance from 5 billion dollars to 300 billion dollars right now we are sitting at 292 billion dollars it tends to change every day I've been outside of India for two days now but you know it's roughly roughly that so that's where we are what happened was the first growth unleashing in 1991 with the reforms the main reforms were in the international sector India was opened up India was allowed to trade freely and we got the benefits of that and some of these numbers I just gave you in terms of global integration of India I think are a fallout of that there's another fallout that came around 2003 what happened then is the following and here there's a lot of intertwining with politics that takes place and I'm not a political scientist or specialist in international relations but I'll give you my somewhat amateur account of what I think did happen around 2002, 3, 4 which gave India the second big bust of the growth and after that I mean really the global perception India's own perception of India changed around 2004 or so what happened is I believe that the scope the positioning of India in the global quality began to change and that's the economics behind it there's politics behind it India and the United States both countries were very simple similar political structure commitment to secularism, commitment to democracy yes there were occasional blemishes in all this but these were very very deep commitments in India very similar in the United States there was a lot of knee-juck animus between the two countries some element of dismissiveness on the part of the United States and a certain amount of anger on the part of India that changed can't quite tell why but there are certain two factors you can look at the US has had an immigration policy where you don't let in all Indians but it is professional Indians not the best thing to do because you're allowing only the cream to get in but it begins to change the relationship between the two countries the H1B visa category in the United States which is professionals, engineers, computer scientists, professors roughly for many many years half the H1B visas the US would give up would go to Indians the second biggest group would be the Chinese with about 10% so Indians were getting a disproportionate amount of this and the Silicon Valley Indians that grew and got nurtured over there became a sort of contact point between India and the United States it also gave a boost to India's exports to United States and services exports because every time you are sitting around and there's some very expensive software work you're doing if you've got lots of people from Bangalore all you need is someone to say that look I've got a couple of fellows over there they are pure technicians but they can do this and this information channel once it opened up the services started getting outsourced quite a bit to India and India's services sector growth was absolutely the world's highest higher than China's higher than any countries for about 15 years and that was the driver of India's growth and this link with the United States was helped by another factor which is US's worry about the rise of China and this is the worry of the following kind the United States after the downfall of Russia Russia as a political global force the US was in a very comfortable zone as a single big power in the world over time it has become clear that that is not what the world is going to look like there will be at least one more big power in play internationally which is China and you know what's the worst kind of ideal scenario for our country is that you are the big power one big power in some ways the worst is that there are just two big powers because it's a face off it's a much more dangerous world you need a couple of other big players on the block it's an element of comfort you get out of that and I think the United States calculation was India is a potential in this region and interestingly enough even for China the reason why India's relationship with China has just continued to improve steadily is that for China also there is a perception that it will not be simply Chinese dominated world it's going to be a face off with the United States or another couple of big powers and it is comforting to have another one come up and India was viewed as a big player in the world there is very often an Indian naval presence in the states of Malacca and I'm told that one of the reasons is that this is maybe the world's most active shipping corridor freight corridor today the states of Malacca and the U.S. is worried that if it is simply a single country control over there and something goes wrong politically between the U.S. and China and that we get stuck off or there is a terrorist movement that cuts off that trade link through the states of Malacca it becomes a world economy will go tumbling if that happens so I guess and I've been told there are knobs and wings through which the U.S. does not mind Indian presence over there and so that this is of course the political side of that and then there is the terrorist threat which India has faced some huge dreadful actions which the United States has felt so these things brought these two countries together and actually the so everyday relationship between the U.S. and India changed quite dramatically there was another side effect which I believe played a role during the elections U.S. elections 2004 this came up in a big way that the outsourcing of back office work to India and a certain amount of the Philippines to Indonesia to South Africa was a big television debate so there were people who would go on television and say that look there are Americans being unpatriotic and sending off their work to these poor countries and making greater profit new jobs the television commentator a conservative television commentator in the United States would go evening after evening talking about the unpatriotic American entrepreneurs I think what happened with this is for lots of entrepreneurs who did not know the small entrepreneurs that you can save some cost by sending work out it was like an advertisement on television channel every evening that you can make some profit by sending some work out of the country and actually if you look at the small out shopping of this kind of work out of the United States it's gone up very sharply from 2003-2004 so I take it to be the sort of root jobs effect because for the small India not the big ones but the small Indian operators would do this advertising on American television is so expensive that on their own they would never be able to advertise their services but the criticism of what they were doing turned out to be an free advertisement every evening and that actually I do believe it's a serious point that that did cause another spike and from 2005 there was really no looking back for the Indian economy the current scenario I should just briefly tell you that with Australia I will come back and talk about this because I think that's a lot of scope again for again the reasons of secularism, democracy and now that India is a bit of a serious economic player those two are there for a very long time but India is now a serious economic player I think the scope for collaboration with Australia not just economic collaboration but economic strategic collaboration is huge and really done right this is a sector that can grow with collaboration or education collaboration on a variety of goods mining and even a certain kind of political collaboration I think there is a very large possibility over here the current scenario I'm going a bit behind my time schedule well I've already given you the growth numbers the growth as I said it picked up once again in 2005 when we grew for three consecutive years for over 9% after that the slowdown was a little slowdown the slowdown caused a global situation picked up again this year has been a difficult year but the major drivers of India's growth among them since this is again an academic audience I'll point to just one particular indicator which is extremely heartening is for emerging countries there is a very very common theory for economists a theory which was actually first discovered, what do you do with a theory, you discover it I suppose by actually an American economist on Australian funds Solo and Swann wrote his growth models where the same year where they showed that for an emerging economy this doesn't quite work as effectively for industrialized country like Australia if you save and invest a large part of your national income that gives a boost to your growth what I mean literally of the total national income the percentage that you save India currently saves 35% of its national income the amount that you invest meaning of the total the mic is here I hope I'm not disturbing the level of volume by moving in and out but I'll stay try to be here the of the total production the fraction which is machinery investment basically factories etc that needs to be large for India that I said the figure wrong the investment is 35% savings is 32.5% so we are of all the goods produced 35% is investment these are the kinds of numbers you used to see in East Asian countries during the hey days of their growth Korea Singapore etc and India was never thought of as a high saving high investing country in this respect we used to be a bit like a Latin American country or an industrialized country but this changed changed for a variety of reasons politically very interesting why he became a high saving high investment country but the fact of the matter is that is the case and that is driving the economy I think despite a lot of the turmoil that and the improvement in the through the reforms were the major drivers and you're seeing the economy do well after that now in the current situation the last year has been a very difficult year and the growth number that came out yesterday of the last quarter is a very disappointing number which puts down last year's growth at 6.5% and the last quarter of last year's growth is down to 5.3% so this is not heartening yes at one level even this remark is a bit of a reflection of the change the yardstick because 15 years ago 6.5% growth would not be a matter of lament but it's a good sign in India today that with this growth there's a lot of anger and people are upset that something is being done wrong and we are slowing down what is happening well there are two factors or three factors behind the slow down and I believe that it is a temporary slow down that is happening it will change sooner rather than later but let me give you my reasoning the cause of the slow down the most important one which is affecting every country in the world virtually Australia is not too affected by this which is the Eurozone crisis we are all worried about what happens on the 17th of June when Greece has an election and will that be the start of Greece dropping out of the Eurozone country what happens during an uncertainty of this kind is investors money when the global investors begin to see that there will be global turmoil there is a tendency on the part of investors to take money out from wherever in the world put it in a couple of safe places the US Treasury is considered a safe place for a lot of the money investment foreign institutional investors money begin to exit from different countries and all go in largely into the US Treasury some into German sovereign bonds the money fly there and we actually have the numbers it is happening over the last couple of months foreign institutional investors are taking that money out of India and a lot of it is going into the Treasury and the irony of this world is this actually began in a very sharp way in August I believe 2011 August or was it July August early August when standard and poor downgraded United States what happened with that United States being downgraded money started going into the United States it is a very peculiar thing when US was downgraded there was fear that there will be global turmoil the economy will be affected all over the world Europe will be affected where do you put your money not in US stock markets but in US Treasuries and the view of the investor is that in the US Treasuries you will make no money because they don't pay you any interest you will probably lose a little bit from the 2% inflation that the US has but you won't lose your money when you are nervous your main thing is you don't want to lose the principle and so money rushes into the United States and the appreciation of the US dollar and the appreciation of the Indian rupee Brazilian, real, South African run even the South Korean won Mexican peso that you have seen over the last 2 months it is all a reflection of money exiting these countries going into the United States and Germany and indeed that this is affecting us in a big way 2 other factors played a role India had an inflation of roughly 10% over the last 2 years that's considered intolerable actually in India and politicians also fortunately on this are fully on board that you need to bring it down because nothing annoys an electorate as much as generally rising prices and you tend to lose elections if this happens for a long time the inflation was put on a war footing but in an emerging economy I had a fascinating lunchtime discussion with policy makers in Australia in an emerging economy inflation control we don't quite know we don't have these 3 variables you control them and inflation comes down it's one of those semi-understood areas of economic management we have some idea of what these control variables are but we don't have full ideas and most lay people feel that inflation is something that the government announces almost like a fiscal deficit but inflation is the product of the actions of hundreds and thousands and millions of individuals we have some sense of how to control but not a full sense I'll do one kind of complication that you get in inflation control usually we talk in terms of inflation control the central bank has to control the money supply to control inflation but see one thing which I'm certain is happening in India is the rural households tend to put their savings keep their savings as cash under the pinup most of them don't have bank accounts they don't know of the stock markets they keep their cash savings as cash over the last 3-4 years there's been a huge effort in India this is called the financial inclusion program which is to get people to not keep their money as cash but put it into various forms of savings and with this financial inclusion see what is happening money which was effectively outside the system because the poor were keeping them stashed away in their home is being injected back into the economy so even if the reserve bank of India is not changing its policy ministry of finance is not changing any policy ordinary people getting brought into the economy means their money which was effectively outside the system goes back into the system so the effective money supply in the country begins to increase chasing the same number of goods and prices begin to rise so it's very very likely that one of the factors causing India's inflation is the financial inclusion program there are other things of course there is the report rate, there is the fiscal deficit, play a role but inflation is a partially understood subject and most lay people have very great difficulty in understanding that there can be things which are partially understood we don't quite know what to do. I still have relatives in Calcutta who will phone me in the middle of the day very very upset these are usually elder liens who are courageous enough to pick up the phone and say you know even today the prices have gone up in the market next to my home the expectation is that we sitting in the ministry of finance can do something and put it all under control all over and we do know in a few cases when countries have tried to control prices through dictates from the center you have no prices but no goods the goods will vanish from the shelves the goods will become black marketed just out there the Soviet Union and the communist countries of East Europe face huge problems from that so this is one of the problems and winning this town meant that we've tried to control demand and with that there has been a slowing down of where as demand has been contracted growth has also contracted and the third factor there has been a slow down in decision making and reforms in India it's controversial people don't like to talk about it but I think that's a fact and the reason is the complications from politics there are certain moves that we made half made we were opening our doors to foreign direct investment in the retail sector controversial to the point even my colleagues in the United States write to me and say what an awful thing you're doing for India trying to open the doors to big retailers but I think in a poor country you do need the big retailers to come in the government was about to open the doors to foreign direct investment in the retail multi brand retail sector got stalled by the coalition political pressures there were other reforms which have got stalled over the last six months and I think that is also taking a toll these three things put together have placed pressure on growth in India what we need now is I will take five minutes that is alright why am I optimistic despite these last six nine months of poor performance poor performance again you have to think of this in contrast to what we are doing a couple of reasons the fundamentals that I was pointing to the huge savings rate the huge investment rate all those things have gone down a little bit but once you are in the mid 30 percentages it's a very handsome figure to be even if the 35 percent goes down to 34 percent 33 percent is still a very big figure so that driver is in place where India needs reform are two areas infrastructure and governance infrastructure I think you will see big changes over the next five years as early as five years changes are already taking place there I think China is playing a very useful role for India it's the frequent movement of people between India and China people going there having meetings coming back they can see what a relatively poor country I mean China is today going very rapidly but it's still an emerging economy but still the per capita income nowhere near that of industrialised countries but you see what it has done to its infrastructure and its plans for infrastructural development and these plans are pretty firm footing so you will see changes in that that's going to feed into the growth as well governance is much stickier I hope there are big changes in governance I've actually talked to my some Australian friends because at one level we all inherited the same governance structure from Britain I've also actually talked to British policymakers and bureaucrats that it's inherited the same system but somehow you people have changed modified much more India has been much more stubborn with the old colonial system in terms of rules of governance and we remain very sluggish in terms of governance but that may happen that may not happen but here is the reason why I feel we will go back to our growth power of high 8% 8.5% 9% we will go back because the governance has been more or less constant from 1947 India has grown despite that and one merciful difference between India and China is our government by all measures is a small government it does interfere try to interfere in many things but it's not as strong and powerful a government as the Chinese government so even with the bureaucracy and the interference it's a relatively small government and our entrepreneurs have learnt to work around that so I think that we stand us in good stead we do need to make reforms and I've already begun writing this lecture and when I write it up I will put in some ideas of the structure of decision making in government which does need reform but final point and this is again reverting back to politics why I remain very very hopeful yes economic mistakes I've taken place the last year has been difficult the bureaucracy the slowness of decision has been there with us and despite that the economy is going fast if we can manage to reform that we will break into the 9.5% growth if we don't we will be at 8.5% still it's very good but the reason actually I'm hopeful for the medium to long term is India invested in something not quite deliberately these things happen in retrospect you are grateful it happened in a political structure which is quite remarkable for a poor country it's democracy and the vibrant media the media is vibrant to the point where you at times wish it were a bit less vibrant than it is any event and you're stepping out of the ministry of finance and you have 20 journalists descend on you asking you 100 different questions and even a non-answer gets flashed next day that there was no answer and people try to make meaning out of the non-answer on a particular matter but it's I've noticed it's analyzed it's criticized very very happily and very very intensely and I think that plays a big role democracy has deep roots in India there's a civil society activism I feel a lot of civil society activism often can be wrong headed but that is civil society activism you would never want to wish them away because very often these are actually the most honest people with a lot of personal integrity and whether you agree with their views or not it's a very very valuable role in turning up ideas politically getting your system right is probably harder than getting your economic policies right and India has made a huge investment in a particular political system we have to be grateful to our founding fathers and their very deep commitment to this Gandhi Nehru and others to this system which we've inherited what I worry about China and since we are so close to China and this I've actually talked in Shiamen University a few years ago what worries me about China is that China has done so very well because this very very powerful government in China is an extremely intelligent government so they've adopted very good policies and very good policies where you allow individual incentives to play also in the right way but when a very powerful government which is not easy to dislodge because you don't quite know how you dislodge when such a government falters and makes mistakes that can be a very very difficult route because then you dig in your heels you begin to adopt policies which are good for you those who are at the helm rather than for the country and suddenly things can disemble very rapidly I worry about that for China and worry is the word I use because there is nothing being in the same region there is nothing you would wish for a neighboring country but to do well if you have any sense you want those countries to do well because you get all the good fallout of that country doing well but I feel for China there is that risk China will have to at some point sort out its political system and that's a very difficult sorting out that has to be done India makes economic mistakes big mistakes the government will get thrown out of power another group will come they'll experiment with something also in economics you make mistakes you revert back and you get out of it there are countries which have come successfully Park Chun-hee very strong armed policies in the beginning but Korea with some difficult years has made changes for the better North Korea was not so lucky it did have rapid growth actually in the early years but then once it began faltering there was no way it began to spin away in the wrong direction I feel this big investment with India coupled with the fact that policies have moved on to the right path in the media from 1991 and gradually people already people have got faith in the way the economy is being run means that yes we will go through this period of one year or two years of economic difficulty and we will turn that Europe has a difficult couple of years ahead the big borrowing that was done by Europe in December 2011 and February 2012 the LTRO the unleashing of 1.3 trillion dollars onto European banks that were teetering there was no choice in the matter I think ECB did the right thing but pumping in so much money with a three year window you have to pay that money back means that some of this problem will come back to you in three years time because these are banks which were not actually doing very well you've kept them afloat by putting in this money and at that point of time there was no choice you would have precipitated a crisis so what Draghi did what ECB did is right but if during the three years from the two big infusions of money things are not connected there's going to be big turmoil in Europe we will have to live with that in the world but for an emerging economy and also for industrialized economies like Australia a bit outside the mainstream industrialized economy this is the time to strengthen your side and that's what annoys me occasionally about India is that we are not using this time to strengthen our fist strengthen our monetary policy everything possible so that even if a big European turmoil comes you know that you will come out of that as a player that is driving some of the global economy but why providing the engines of growth at that point of time thank you very much Dr. Basu has agreed to take some questions so if the audience have questions could you identify your hand up and then I can follow yourself and ask a question yes please over here I enjoyed your Yes I recognize you I didn't want to risk trying to say I recognize and get it wrong I enjoyed your presentation very much in fact I am great admirer of your work not only your academic writing but also the pre-compendium of your corporate pieces of people and businesses, economy, craftsmanship and economic miscellany which also contain a drama as well my question relates to your comparison between Indian and South East Asian and Chinese experience as your growth figures clearly point out India's growth rate over the last five years is not very different from that of China or that of the East Asian economies at the take off stage in the 70s but there is a big difference between Indian experience and the East Asian experience when you look at one important economic indicator which is employment creation the rate of employment growth has not kept up with diplomatic growth in the economy and some that we just will see are in Karnagari and others they have kept up the growth process the employment growth simply because it has implications for our history because labor is the only well borne by the poor you can't inject money to the poor without generating employment this is also part of the reason behind the government's ability to sell the big firms what is the parallelism also related to this do you consider this as a big problem as the chief economic advisor in your view what are the underlying reasons thank you very much very good question and I agree with it whether or not I was chief economic advisor I would agree with this and what is being pointed out by the way I should just tell you though this is not the quick employment fully with the poverty because in India the poverty is falling it's still very large but especially over the last five years there's been a very sharp decline in the percentage of people below the poverty line where the poverty line is drawn is very controversial in India if you read India newspapers you'll know it but no matter where you draw if you use the same line over time you will see that there is a very sharp drop over the last five years but a lot of this is direct action pumping in money into rural areas and I take your question to be that actually for a more robust long run growth and dynamism in the economy you need proper normal employment people find jobs here there is a very controversial element of Indian policy making that I think gets in the way something called the industrial disputes act in India hiring and firing laws and this was done without very well meaning sense that it's very difficult to fire workers if you are an organized sector employer and you know the shocking thing in India is the number of people working in the organized sector in India is approximately 10 million can you believe in a country with 1.2 billion population some 50, 60 billion working age population 10 million are working in the organized sector and about half of that will be the average so a private organized sector is miniscule I believe one of the reasons and this is very controversial that you can't even bring it into public debate it's difficult that we need to change our labor laws to get this to change and in particular this sounds very harsh when you say this is that there has to be room for downsizing of farms I've spent a lot of time with Indian textile factories who are supplying to the New York market and they say all the time New York fashions change so if you are supplying products which are responding to New York fashions there's a sudden sound way you need to swell your labor force but after you've swelled your labor force if you can't downsize it if you're stuck with it when the demand has gone what do you do you just set up well I mean I don't want to live for the next 10 years with a large workforce I'll just not take up this demand which is I know the demand for 3 months I will not take it I will not supply so India's textile sector has suddenly been affected by this what it is this becomes a very ideologically heated debate and I think this is again where what I was saying this is a good question because it illustrates my original point if you are just looking at a policy in a knee jerk fashion there are certain policies which are thought of as right wing and left wing as soon as you say that look there should be some more space for downsizing of firms that is right wing and then you don't need to anymore and everywhere I have to tell in India when I speak in India and I talk about this I say that you know my deep sympathies are all left sympathies but you have to be intelligent about policy making and in the end it's workers who will benefit the most if you allow this flexibility because there's going to be greater demand for labor once you allow the downsizing I know this is not the only thing there are other factors the lack of infrastructure also plays a role the reason why India's services sector did so well and manufacturing sector which could have provided employment did not is the services sector did not face the two big stumbling blocks that I talked about infrastructure and governance India's services sector typically does not produce things which you have to put on a cart and send over the road and then at a port load onto a ship and send out that you do with your manufacture products a lot of the services sector skips over the infrastructure all you need is electricity and that can be a captive generation a couple of computer terminals and a lot of your services work you can do so the services sector was not affected by India's poor infrastructure bureaucracy and governance the services sector used to be outside the tax net India did not tax the services sector which means there for the most part they did not have to interact with government left free of the hurdle of infrastructure and governance it just zoomed ahead did very well manufacturing sector which is the employment generator faced both these hurdles and employment has done well what I expect over the next years is what I said in the lecture I believe that the infrastructure hurdle will go very quickly so the manufacturing sector I do expect to pick up jobs so employment will begin to pick up in that sector but if we can change our labour laws at least have them debated in public before we do something about it and do something about improvement in governance employment will go very rapidly and that is what I agree very very important in the long run as you see I give very long answers question question what prospects do you see for reform in the agricultural sector and also what is the appetite for reform within the in the electric has that changed in any noticeable way let me take on the latter I do think that has changed there are of course a lot of reforms that have been tried but much less than in 1991 and I remember 1991 when the reforms took place I used to occasionally write in the newspaper and support the reforms that were taking place and the attacks you got is that there is a mindless set of reforms just following the Washington consensors that has gone now in India so it has improved but you will always get a lot of pushback any democratic country sensible or insensible policy you will get a pushback on both but that is a problem so I think in general India has improved on that agricultural policy we haven't done too well on that but there are details of our acquisition of the way we acquire some food and try to release to the poor I have a long paper on that but I don't think you are asking for that I won't bore you with the details of that I will talk to you after this but the bigger one is if government could provide some basic infrastructure and agriculture and then step away allow people then to use that enterprise and do well I feel about to come out of that but am I that hopeful on infrastructure, agricultural infrastructure a little bit less than industrial infrastructure urban infrastructure because India's infrastructural boom that is already occurring and I think will occur over the next five years is as I said being driven by urban elite Indians travelling to US and UK alright but there they shrug and say of course in which country you will have good infrastructure but travelling with China has made them aware that you can do a lot but the urban elites first reaction is you think of the urban industrial infrastructure there I feel pretty confident India is going to be transformed over the next five years to agriculture it will have to be through lobbying through insistence that it is very important so I will go slower with my expectation but you should see some positive fallout there as well Thank you Can I say that what is the elaborate on the impact of Indian population growth on the Indian economic growth and also what do you think of the security of the region because in full case is that population growth and security of the region the state in the states may not have that much control and that might have significant impact on the economic growth Yes Okay population first of all India's population is large growing but the growth rate incidentally let me move here again the growth rate has come down it is going at about 1.5-1.4% per annum so way down from what it used to be the growth rate population took a bit of a setback our population policy from aggressive government population policy and forced sterilization in 1975 to 1977 that became such a bad word population policy that no politician ever mentioned it but as they only developed people realized the benefits of a relatively well managed household and that has led to a sharp falling off of fertility and for instance the state of West Bengal has seen the sharpest decline in fertility but all over India it's dropping off and the population growth has gone down but what is changing in India's population is the structure the age group from 15 to 60 which is often described as the demographic dividend from your question I take it you're broadly a demographer that structure that age group is increasing the population there can be huge benefits that come from that Ireland is a country that got a very big benefit from this humping of the working age population India seeing a rise in this we are still in the foothills of the demographic dividend 2034 is the year when our working age group population as a percentage of total population will peak this gives us a couple of advantages this is after all the working age population so the dependent population shrinks so you tend to do better through that another advantage you get very small children of course don't say they eat, they drink, they drink, sorry water and they wear clothes but they don't earn an income very old people also have very little income but they eat, drink, in this case I mean not qualify what kind of drink, there can be anything and they wear clothes, they live in a house etc the savers are this working age population that say so typically when a country goes into its demographic dividend more than this age group pumps the savings rate goes up so that's also going to feed into our growth process the only downside of the way the demographic is going is when the working age population peaks if you are not imparting adequate skills to them then you are getting a group that can be more easily angered, more easily troubled and if you are not employed properly this relates to Professor Atokonala's question if you are not finding any jobs if you are not giving them the skills this can become a flash point some risk of that India's malice movement, some insurgencies that you have in different parts of India probably reflect a little bit of this problem that is coming into play but over the last 2-3 years the government has woken up properly that over the next 15 years you are going to get a swelling of this age group so there are skill development plans there are employment plans slowly but all this is taking shape so if you ask me to bet what will the population speaking do I think it is going to actually help the country also another part to your question security you know I am not the person to ask this question but yes we are spending our defence we also are maybe a bit too much at times we interact with neighbouring countries fortunately the old style of Cold War is tending to go away from the world with countries with which there is a security problem that with India and Pakistan that is the biggest one because with China we really don't we have some border issues but those are relatively minor border issues with Pakistan there is a potential flash point and I personally believe that you have to keep talking and including them because also people rise when you interact the one time I have been to Lahore once you have passed the officialdom and in the streets even when you are telling them they are coming from India the neighbouring war in countries there is a sense of commonness the sense of commonness we have to utilise and I have to say when I say this the sense of commonness in the world I like to stress even though it is India's economic policy I work on the world is too small a place for strident nationalism anywhere I mean you go to a far away country meet with people who on the face of it look very different but you get to know them a little bit and you realise the commonness and I think there is a case for us to push the human commonness on the globe and again a bit of a tribute to India's founding fathers Nayru almost always awkward because as Prime Minister of India he is championing the Indian cause but he will always add that in the long run this nationalism has to wear off because it is a small world and it has to be a global sense that we have Rabindranath Tagore repeatedly taught that and I think in the end that is the best security that we have to nurture Thank you very much Thank you very much Thank you all very much for coming to the 2012 Narayana which as was mentioned is the 16th in the series this lecture along with the message from the president Alexei Shubati Pratibha party will be printed and be available from ASA and the soft puppy of this lecture will be available for free download from the ASA website as well so at this time it is my pleasant duty to bring this relation to a close by thanking the people and organizations who have contributed to making it such a great success this relation is named after the now deceased Dr. K. R. Narayana former president of India Dr. Narayana inaugurated ASA in 1994 and continued to support ASA throughout and we are fortunate that we now have a photograph of Dr. Narayana and his wife courtesy of Dr. Dikshan my old friend we have to show you along with the Narayana relations we have in the audience here senior public servants from the Commonwealth Government of Australia Indian High Commissioner His Excellency Mr. Biren Nanda and Mrs. Nanda are distinguished staff as well as a number of distinguished guests from the Australia India Council and the ANU including the Vice Chancellor Professor D. Nya in particular we would like to welcome High Commissioner Nanda and Mrs. Nanda and Professor Young for whom this is their first Narayana relations in addition we have a distinguished speaker, Borshi Basu who has played a key role in recent economic policy making in India and I am sure you are all quite aware if you control. Following from President Narayana President APJ Abdul Kalam continued his support for the relations series we are indeed grateful that the current President of India has continued her support for this lecture so that the Narayana relations now forms part of the institutional link between the ANU and the office of President of India President Patil will be retiring next month we thank her for her unflinching relations since 2007 and wish her the very best in her retirement the High Commissioner of India in Canberra and his staff including Deputy High Commissioner Mr. B. Keshelma and others have provided invaluable help in coordinating our contacts with the President's office and the logistics for this relations for which I am much grateful we look forward to the continued support of the Indian High Commission to the Narayana relations activities Mr. Keshelma will soon be leaving Canberra for hosting in South Africa and I want to record my gratitude to him for his support to the relations and to VESA and to wish him the very best for the future now I would like to thank the organizations and individuals who have made important contributions to this years relations when plans for this years relations will be made I approach the Australia and their council as in the past I express my sincere gratitude to the AIC for financially supporting this years lecture as well I thank our Vice Chancellor Professor Yann for chairing this relation at ASARC Stephanie Hancock from your all met worked tirelessly tirelessly and efficiently in organizing the many best details of this relations I would like to thank her most sincerely for her many efforts finally I thank our speaker Dr. Kaushik Basu ASARC is delighted and honored to be associated with him we are sincerely grateful to Kaushik for taking the time and the trouble to prepare this relation and to undertake a long journey to be with us today ASARC's list of Narayanan speakers leads like a who's who of important Indian economists and public figures and Dr. Basu is a stellar addition to this list the Narayanan relation now ranks among the very best India victor series in the world Kaushik's relation has as usual been insightful and lucid we thank you for it thank you all very much