Meghnad Desai, known for his frank views on the state of the economy, says the world is looking at tough times. An Emeritus Professor of Economics at the London School of Economics and Political Science (LSE), Desai believes that India should concentrate on its creamy layer of 200 million people as the growth of these wealthy individuals will propel the economy and lift the bottom 40 per cent out of poverty. The 82-year-old, who sits on the board of Elara Capital, says that economics is all about people’s lives and livelihoods, and not about debt-to-GDP ratios or deficit finance. In an interaction with Business Today’s Anand Adhikari, Desai speaks on a host of issues confronting India. Edited excerpts:
Q: What impact do you see of historically high global inflation and high interest rates on emerging markets, including India?
A: I hold a somewhat unorthodox view. I lived through the previous stagflation crisis of the 1970s. It was very similar because oil prices had quadrupled in 1973. The OPEC countries, which had not changed the price of oil since 1918, after 55 years decided to increase prices. At that time, many people said that this monopoly would never last, and that there would be competition. It, however, totally changed the whole paradigm of economics and of the global economy. The oil price rise didn’t end for 20 years. Inflation went up to 22 per cent in England. Margaret Thatcher [became PM] in 1979, and she let all the pain be inflicted. She had a simple view: inflation cannot go unless you inflict pain on the public. This is what monetary policy is all about. It was about deflating the economy until the economy stopped growing and people stopped buying or bought the [bare] minimum. And that’s how inflation gets out of the system.
The central banks now have this delusion that they control inflation. They cannot control inflation. They tried to, but it is very hard, partly because it’s a global phenomenon and, in essence, local imperfections add a little bit further to it… People are not seriously aware of how long this [stagflation] is going to go on. I believe in being a pessimist. We don’t know what the growth rate [of GDP] is going to be… But I think we have to be prepared for a very tough time.
Q: Why are you being so pessimistic?
A: If I go back to my old-fashioned belief in Kondratieff cycles [long-term periods of evolution and self-correction brought on by technological innovation that results in a long period of prosperity], when I was doing economics in the 1950s in Mumbai, we believed in long economic cycles. We read a lot about business, like a history of business cycles. [Economist] Joseph Schumpeter wrote two volumes with the theme that Kondratieff are long economic cycles. But I have now lived through one Kondratieff cycle, and I have come to a second Kondratieff cycle in my life—1970s and 2020s. A perfect 50-year fit. So, why it happens is very complicated. Ultimately, the whole global crisis is not an Indian crisis, or developing country crisis. During the last crisis, the quadrupling of oil prices was an aftermath of the Arab-Israeli war. This time it is during a war. And we don’t know how long the [Ukraine-Russia] war is going to last… The UK is also paying [a price], though the country is not that dependent on Russian oil. But once energy prices rise, it spreads to other prices… So, this is a very serious stagflation problem. It is quite clear that we had a zero rate of interest for a decade after 2008 because we did quantitative easing. We stuffed the market with liquidity and bonds. This easy money was used by large businesses to recover. You never pay the poor when they need money, but you always manage resources to pay the rich. Economically speaking, you cut interest rates and investment goes up and the economy bounces back, right? We didn’t see that happening.
Q: What are the big lessons for a country like India, which is still expecting growth of 7 per cent-plus while the world is likely to slip into a recession?
A: The perspective of central banks and fiscal policymakers should be over a longer period of five to 10 years. There should be some mechanism, at least in India, for long-term thinking. We [in the UK] have something called the Office for Budget Responsibility, which is independent. It is a government body, but it is independent. India should make its Finance Commission permanent… You can’t prevent political parties from making promises… And when making a promise, they can’t say, ‘Where do you get the money from?’ They [the political parties] say, ‘When we come to power, we’ll find the money.’ But a finance commission would be able to constantly evaluate and issue reports periodically as and when they like on topics like this. I think we are going to need something like that, in this long stagflation cycle… And I think what happened to Sri Lanka is just the beginning of a lot of other countries that are going to be badly hit. Pakistan is going to be badly hit. My view is that if stagflation is going to last a long time, we’ll have to begin to think long-term. And secondly, India will have to make up its mind where it is in the global chain. Is India serious that it is going to replace China? Is India going to collaborate with China? Either solution is possible.
When the last stagflation crisis was going on in the’70s, and ’80s, the big manufacturers of America and Europe came to Asia, especially South Korea, Singapore and Indonesia. I would really like to see [that] in this time of stagflation. We seriously say to the private businesses, ‘You are patriotic, we trust you to contribute to India’s growth. We are here to help you.’ I think at some stage, somebody will have to make a big change and say that this is the one chance India has of getting to the top on its own strength. Our own strength is our skilled labour force at all levels, and [our] good education system. We also have a good gender ratio. This is India’s chance. And the way India will win is by using its business sector in cooperation with the government.
Q: But we are starved of capital…
A: If you think about the Indian economy, think about 20, 40, and 40—20 per cent are all right, 40 per cent are middle class, and the last 40 per cent are poor. I don’t want to go into details, but the top 20 per cent have a near-American style of living. And 20 per cent of a billion is 200 million people. India is a market for 200 million people. It’s three times the market of the UK, which is why people are pouring in dollars. This is why we have unicorns. India has become a very efficient service economy. People are pouring in money because they know here is a market where people will buy and consume goods and services. I think one has to have a slightly cynical mind about this. Don’t keep on talking about the bottom 40 per cent. Take a look at the top 20 per cent. They are going to deliver the growth that will make the rest of them [the population] better off. Growth will benefit everybody… We have to grab the opportunity because this is the time… China is getting into problems. The world is large enough to have two big economic powers and India has to stop being satisfied with its own performance.
Q: Will private capital move away from the mainland because of the way the Chinese Communist Party is cracking down on start-ups?
A: China has internally slowed down… I think Zero Covid-19 is complete madness… The Chinese government had shut down Shanghai. You cannot shut down Shanghai... It is one of the largest industrial cities [in the world]. This is where the Communist Party fails—it lacks flexibility.
I think India has an opportunity… It has been a stable democracy for 75 years. And there is no danger of any impediment to Indian democracy… I don’t care whether we are the fifth-largest in terms of GDP or not. I only care about per capita income. We have to take advantage of the 20 per cent rich, that is, 200 million. That is a huge market. In my younger days, we were obsessed with becoming a manufacturing country—we still are. [But] we have to be the most efficient service economy. That’s what people pay us for. And it’s an old principle of economics that you let people make things that they are good at.
Q: The government is focussed on Aatmanirbhar Bharat and the Production Linked Incentive Scheme…
A: I don’t care whether textiles are made here or in Central Asia. I want to be able to buy and deliver. India’s strengths are the service economy, digitisation, financial technology, a young population and mobility. India is not only a large country, but fully mobile as well. The world has realised that India’s young population who graduate from the IITs and IIMs are fantastic assets… This is our opportunity. We have to play to our strengths.
Q: Do you see India making big moves in manufacturing or taking advantage of the China-plus-one strategy?
A: This country is obsessed with manufacturing. India wasted the first 40 years after independence because we would not import machinery but wanted to make our own machinery. That was Aatmanirbhar. And we wrecked the economy. Until then prime minister P.V. Narasimha Rao and then finance minister Manmohan Singh opened up the economy in the early ’90s, we had huge tariffs on foreign goods. Suddenly, the whole game changed and you could get telephones to toothpaste from abroad. We have a very patriotic private business sector. In the past, this antagonism between the private and public sectors was very damaging to the Indian economy. And even now, people talk about [billionaire industrialists] Ambani and Adani. They (the big industrialists) are [like] open books. They became rich because they were hard-working, clever people… profit comes from being smarter than your competitors. I think even in politics, no politician is willing to say that business is a good thing and that businesses create jobs. Ultimately, there has to be a symbiosis between business and the government. That’s the only way the country will ever get out of poverty. There is no other way. As I said, you have to go from 20, 40, and 40 to 40, 40 and 20.
Q: This government has made some moves to privatise public sector companies. What are your thoughts?
A: We have been through the debate about the state versus the market. You can trust the market. It can make as many mistakes as the state can. Let’s concentrate on human development. Let’s concentrate on health, climate change, poverty—things like that. Don’t worry about who owns what… And by and large, India has a good private sector. India has always had a good private sector. Let’s concentrate on getting rid of poverty as soon as possible.
Once upon a time, India used to export labour to sugarcane-growing countries like Mauritius. We are now exporting people who run multinational corporations… We have to be confident that we are going to win… Yes, we have problems. But we are not like a Sri Lanka or a Myanmar. We are a serious economy. I lived through a time when everybody thought socialism was the answer to all problems. It’s all over. Capitalism is here and going to stay forever… We really [need to] have faith in our private businesses, which are our greatest strength.
Q: You make an interesting point about having a permanent finance commission. Are you confident that India will adhere to fiscal management with its deficit growing?
A: A lot of these targets are misleading because they encourage opaque accounting. Take for example, pension schemes, which are unfunded. Look at one rank, one pension (OROP), which is completely unfunded. What are the debt implications of OROP? Nobody wants to talk about it. We like our defence forces, but OROP is an unfunded programme. But basically, it’s a political issue. It’s not an economic issue. A country like India can more or less deal with debt easily.
Ultimately, economics is about lives and livelihoods. It is not about the debt to GDP ratio or deficit financing. Are you protecting people’s lives? Are you protecting people’s livelihoods? That’s what the pandemic has taught us… The saddest pictures for me during the pandemic were of people walking from Delhi to Bihar. That should never happen again. If they are out of jobs in Delhi, give them MNREGA or urban MNREGA of 100 days’ work. Have them stay put in the city itself because you are disrupting their lives… Our priority has to be lives and livelihoods.
Q: So, how does this fit in with your earlier remark about focussing on the top 20 per cent of the population?
A: Again, what the pandemic showed was that it hit [people] across income groups… And at the end of it, the important thing the pandemic taught us is to look after people’s health and their livelihoods. Even if you have to give people money for free, give them [the] money for the time being; you will get the money back later on. That’s what we did in the UK. We had what’s called a furlough payment. You can’t work, but that’s not your fault. We will pay you while you can’t work because we know that when you can work, the money will come back. Ultimately, we don’t want anybody to die because they did not have enough medical care or enough food to eat. That is what a democracy is about… We have to care about all 1.3 billion people because they are us. They are our people. We have to be with them because that’s what… a nation is about. We are in this together. And what is economics for? Economics is for serving the people, and people are not for serving the economy. Ultimately, economics has to serve the people.
Q: India has signed free trade agreements (FTAs) with the UAE, Australia and Canada. The FTA with the UK is under discussion. How do you see the India-UK FTA?
A: We have to have a bilateral trade treaty with the UK because it foolishly walked out of the EU. It’s not India’s problem. It’s the UK’s problem… Basically, India is in the driving seat. India is going to be the UK’s solution… You have to look at the UK-India FTA that way. We have more or less equal total GDP size, but we have got highly skilled labour which they want, and a huge market. [Then] there are things which the UK does very well. They are very good at research, especially university research and development. Places like Imperial [College] or Cambridge have made the education departments like corporations. If you are a researcher, say, in astrophysics or medicine, you are encouraged to form a corporation. And your research is your patent. And you’re going to make money, and the university doesn’t mind. They get their cut. But that idea that you can make universities into corporations is a great British idea… The UK has amazing universities now and is immensely rich. We have to learn that. We have to export people... if half of those [people] come back, [your] job is done. We have to concentrate on exporting our skilled people. And that is a win-win solution because that is our strength. Indian strength is skilled labour. India should play like a winner.
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