The leading development economist speaks out on the predicted global recession this year and why the extremely adverse environment for small and medium enterprises is likely to continue

Jayati Ghosh, professor of economics at Jawaharlal Nehru University (JNU) in New Delhi, is one of the world’s leading development economists. A fierce critic of the near-universal obsession with ‘fiscal discipline’, Ghosh believes that India cannot revive its economy without increasing public spending. In an exclusive chat with the Magazine, she spoke about, among other things, the looming global recession, the situation at JNU, and what’s in store for the next generation of Indians. Edited excerpts:

Tell us something about your childhood.

I was born in Bangkok. My father, an economist who worked for the government, was posted there for a few months. My mother was expecting, but she went along with him. But they came back to Delhi, which is where I grew up, for the most part.

What about college?

I went to Miranda House, where I did sociology. I was interested in understanding social processes. But the more I did sociology, the more I realised that it’s just the surface, that it is the economy that’s really shaping social processes. So I decided to study economics. I had to learn mathematics over the summer holidays. The entrance exam at JNU at the time was such that you didn’t need an earlier degree in economics to enrol in an MA course there.

After the M.A.?

After my MA in economics from JNU, I did my Ph.D. from Cambridge. I stayed on in Cambridge as a research fellow for a couple of years, working on issues of external debt in developing countries. Then I realised that I couldn’t stay in England. It’s wonderful when you are a student — it’s international, there are lots of students from all over the world, and you are a community. It’s when you start working that you realise that this is not where you should be. So I came back, and worked briefly with the Planning Commission before I got this dream job at JNU.

You’ve been at JNU a long time. How would you describe what’s happening to it today?

JNU is one of the best universities not just in India or Asia but possibly the world. It has an amazing combination of good faculty, bright students, and diverse students. This is a very special characteristic because it isn’t just geographical diversity or gender diversity but also caste, class and ethnicity, and the OBC reservations have made it even more diverse. Such an institution, especially in the social sciences, gives you a much greater richness of conversation in the classroom and outside.

I’ve seen that many of the students, when they come in, are reticent. They don’t participate in discussions. Once they’ve been here two-three years, they become totally confident and articulate. A whole lot of awakening, not just political but also social, happens, and an institution that does this is very special. But this is precisely what is being sought to be destroyed now. The recent move to increase fees would force nearly half the students to leave. It would not only be a terrible blow to their prospects and those of other less well-off students in the future, but also damage the diversity that makes for much better scholarship.

International agencies have predicted a global recession in 2020. Will India be badly affected, or somewhat insulated?

The prognostication of a global recession is something I share. Unless something radical is done, and I don’t see that happening, we are on the verge of a significant crisis. We are already seeing all kinds of skittishness in global financial markets, and there is a downslide in investment everywhere. Well before the global slowdown, we had several internal problems: falling investment rates, falling employment, falling consumption — all bad indicators domestically. Now you add to that worsening exports and capital moving out, and not just foreign capital. We now have data showing that domestic residents are sending huge amounts of money abroad, thanks to the liberalised remittance scheme. In the latest quarter, it was 20% of inward remittances.

There’s been so much debate on whether the slowdown is cyclical or structural. What’s your take?

This is a foolish debate. ‘Cyclical’ would mean that growth will go up, and then down, and then up again. But it is not automatic. If it goes down, and nothing happens to make it go up again, it will stay down! Then will you call it cyclical or structural? These terms are being misused. What’s happening is that we are going through a downswing, and this downswing is reflecting a lack of demand in the system. Workers don’t have jobs. Farmers don’t have income. So they can’t buy. So eventually even the formal sector is hit.

What would you suggest to resolve the demand problem?

The government has to step in and create demand — this is basic economics! Increase your MGNREGA, spend more on infrastructure, put more income in the hands of farmers. They will buy more. They will spend the money. That will have a positive multiplier effect — it will generate more income, more production, more employment, more investment, and all that. But for some reason, the government is doing the opposite. Not only is it not spending more – it is spending less.

It has to be mindful of its fiscal deficit target, right?

This whole fiscal deficit business — first of all, it’s a big lie. It’s much larger than they claim it is. The government doesn’t pay the public sector enterprises. Take the Food Corporation of India (FCI), for instance. Every year, the FCI is supposed to get a subsidy to cover its losses. Suppose they don’t give it enough, and then they can’t cover their losses, how do they manage? They take on debt. So, every year, for the last 11 years — P. Chidambaram started it — the FCI was not being paid its dues. So it takes on debt, on which it has to pay interest. But this is off the central government budget. The CAG [Comptroller and Auditor General] has calculated that if you added allthis other spending that the government has done, then your fiscal deficit is close to 5%, not the 3.3% or whatever it is that they are claiming.

The claims may be untrue. But what’s wrong in maintaining fiscal discipline?

Why are we so terrified of a fiscal deficit? Because people think it will create inflation or a balance of payments crisis, or both, right? Now, clearly, it has not created inflation, because the fiscal deficit is much larger than they claim it is, and it hasn’t been inflationary. In any case, 3.3% is not some gold standard that you have to meet. The balance of payments deficit is happening for other reasons — because our exports are a disaster; not because our imports have shot up. So the reasons why you would be scared of a fiscal deficit don’t exist. In a downswing, when you have unemployment, when you have unutilised capacity, if you spend more, it is not inflationary. Rather, it increases economic activity. So I don’t know why they are unable to do this.

Is it to do with the bond markets?

The bond market is why they lie about the actual fiscal deficit too. But if you want to do that, you can still do that – you can keep on lying, and also create special purpose vehicles that will do public investments for you. You don’t have to do it yourself. You got a windfall from the RBI — spend the money! Increase public services — it would generate employment. But no, what do you do instead? You give tax breaks to big corporates.

Many people have said that the tax breaks will boost investor sentiment, and thus help attract FDI, helping India use the opportunities created by the US-China trade war.

Why does a company go into a country? It’s because they anticipate profits. Now, if you are otherwise not competitive — if you have terrible infrastructure, your ports are clogged, your electricity doesn’t work half the time and you therefore need expensive power backup, your workers are not trained in the way we want and are not fed properly or housed properly, as a result of which their productivity is not great — why would they come here? In other words, taxes are one of the factors. But a number of studies have shown that taxes are like no. 17 on the list of factors that firms consider when deciding where to invest.

So when companies say they invest in, say, Ireland, for tax purposes, that is just an office with ten people in it. It is not real investment. The opportunities created by the US-China trade war have already been grabbed by the likes of Vietnam, the Philippines and Cambodia. Some FDI from US companies has already moved there. It didn’t come to India — why? Because we are bad at all the other stuff. And how do you fix the other stuff? With public investment.

As an economist, how do you differentiate between ‘good’ GDP growth, due to greater production of goods and services such as food and hospitals, from ‘bad’ GDP growth, coming from, say, production of weapons, and construction of detention centres for non-citizens?

We don’t. That’s why it is so foolish to be obsessing about the GDP — whether its growing at 5.2% or 7.1% or whatever. It is meaningless in terms of the welfare of the people, even purely material welfare. You identified an example of bad GDP. Let us take the example of Delhi. We have a terrible, polluting, congested, unliveable system of privatised transport, with too many cars. Instead, if we had instituted a clean, green, ecologically efficient public transport system that was free, it would bring down GDP significantly, but would offer a much better quality of life for everybody. GDP is a bad indicator. Economists have known this for a while.

If that is so, then what’s the alternative?

I feel we should have an index that is relatively simple and is based on the material standards of the bottom half of the population. I’d say, let’s just look at the consumption standards of the bottom 50%. I want that to go up by 5% a year — that would be a decent goal.

The world over we are looking at interest rates close to zero, if not negative interest rates. Even the RBI has been steadily cutting rates. What does this mean for a common man?

It’s terrible news for the common man because it really means that if you’re planning to save for your post-retirement income, you are going to be a loser — big time. Negative interest rates are a way of attacking the working class over time, as opposed to today. The reason we are stuck with very low or negative interest rates is because governments the world over refuse to use fiscal policy.

How is that?

After the global financial crisis in 2008, the West went in for very low interest rates. They think if they have very low interest rates, somehow investments will come. Investors are looking at the difference between the rate of profit and the rate of interest that they have to pay, right? If the rate of expected profit is coming down, then the only way that you will invest is if you keep the rate of interest even lower. Anyway, that’s the argument behind low interest rates. But if at the same time you had also adopted a fiscal policy — by which I mean public spending — you would have created economic activity. You would have created demand, and you would have actually survived even with higher interest rates because expected profits would be higher. So it is the neo-liberal straitjacket — this mindset that you just cannot do fiscal policy — that is keeping interest rates low. There is this blind obsession that we can only do monetary policy — put lots of money in the system, keep interest rates low, and hope that things will recover. The logical culmination of this approach is negative interest rates, but that’s not a solution.

What happens to the idea of saving when there is a very low or negative interest rate, because then your savings wither away, right?

Yep. The very fact that this policy can become mainstream is a comment on how all economic analyses in our media are so heavily biased in favour of the upper class. Because who would really like negative interest rates? Finance-walas. They use the money to play around with all these other things that they make us invest in.

What other things?

Increasingly, people are being pushed away from bank deposits. They are being told, why don’t you put your money in a mutual fund? Put it in an investment programme that will generate money over time! It’s a combination of debt assets and equity assets and all kinds of fancy things that you won’t understand. You will get monthly statements that are so incomprehensible you won’t even know if you are losing money. And if you do make money, much of it will be taken away by brokers as commissions and fees.

Given the rise of automation in a big way, is job creation as a policy goal even feasible anymore? Since we don’t need so much labour, should we then think of an alternative policy approach?

Such as UBI?

Such as UBI.

Look, there was a time when we used runners to send information across. Now we just send an email or make a phone call. Throughout history, technology has displaced labour. It’s just that new activities are created. The problem today, the misfortune globally, is that the fourth industrial revolution is happening at the time of neo-liberalism, where this whole obsession with austerity means the government does not intervene to create jobs, and therefore we leave it to the market to create jobs. The market always goes for the most profitable, and the most profitable have always been the businesses with the least labour involved. This is not new — it is much better to hire a machine because they don’t talk back at you, they don’t ask for higher wages, they don’t combine and form a union. Technological progress doesn’t necessarily mean an aggregate jobs fall, because it all depends on whether there is enough spending to create demand for labour-intensive activities.

You want the state to keep coming up with new labour-intensive activities?

The economist Wiliam Baumol has pointed out that there is a whole bunch of service sector activities where there is no concept of labour productivity increase. For instance, you need exactly the same number of people to play a Beethoven symphony. You can’t say I am going to be more productive and do it with half the number of musicians. Similarly, there are several other service sector activities that are fundamentally relational. Care activcities need a human being. The human being can be assisted by machines, but you need the human being. So if you need less and less human beings to do the boring work, I would say that is wonderful, because, in an ideal society, you could have a much shorter working day, and everybody could have much more time for creative activities, care activities, relational activities and entertainment — all of these are hugely employment-intensive. If you go to a restaurant, it’s better to have more waiters than less. In a hospital, it’s better to have more nurses than less. It’s better to have more artists, performers, and musicians than less. It’s because we have progressively lost our imagination that we think we can only do the boring office work and now machines can do our boring office work. We have been so ground down by neo-liberal capitalism that we can’t even think beyond this.

Why is it that even in Europe, where unions have traditionally been powerful, they are unable to challenge austerity? Do they in fact see some merit in austerity?

I wouldn’t say they see any merit in austerity measures, I think we underestimate the lethal combination of finance and lobbying power, and their ability to control politics. We can see this in our own country. There are too many cases of turkeys voting for Christmas. People keep voting for things that are actually against their best interests. Also, the media keeps presenting things relentlessly in a certain way. This whole idea that public spending is bad but tax cuts are good — there is no rationale there, but the media onslaught is relentless, and the media is controlled by the corporations. We cannot underestimate their ability to influence public discussions and debate — either in the global North or in countries like India.

Is there a schism in India between manufacturing capital and finance capital? Are they at loggerheads over what they want from government policy?

About 15 years ago, I would have said yes. But today, all the smart ones in manufacturing have created a finance company as well. They have diversified into other things. The distinction today is between large capital and small/medium investment. Small and medium, first of all, cannot diversify. They are just trying to make a living out of making a particular thing, and they’ve really been messed around with. Large capital can play around, can diversify, can lobby, can influence policy, influence media, and pretty much get what it wants. But it’s the small and medium who are the main job-creators, and this is the big divide at the moment.

Describe the Modi government’s policy orientation in one line?

Extreme crony capitalism.

But you can be very friendly to certain crony capitalists, and also do a lot for small and medium enterprises. Isn’t the government doing that?

Not at all. There is a lot of PR, such as Mudra loans, for instance. They are a good idea, but when you look at the actual loan amounts, they are pathetic — most of them are in the under ₹50,000 category. What can you do with ₹50,000? As for medium enterprises, they were smacked by demonetisation, they were smacked by GST, and now they are being smacked by tax inspectors. They are facing an extremely adverse environment; and that too in a scenario of declining demand. So I would say this government is the opposite of small-investor-friendly.

What do you think life is going to be like for the next generation of Indians?

I worry about this a lot, because I have a daughter who is just beginning her life. I think we are headed for a demographic disaster.

But everyone keeps talking about a demographic dividend.

Demographic dividend refers to a scenario when you have lots of people of working age. But what do you call it when you have lots of people of working age and no jobs? That’s why it’s a disaster. Because you then get a massive increase in social and political instability. You may paper over it, or even make it work for you politically for a while, by diverting them into loving cows, loving Mother India, lynching people, and all that. You can do this for a while, but eventually you lose control of it. So we could be heading towards very serious anarchy. There could be a general breakdown of civic order. The more you try to unify a country like India through a very top-down kind of structure, the more the chances of a breakdown. This is my pessimistic vision.

And your optimistic one?

My teacher Joan Robinson used to say, anything you say about India, the opposite is also true. Every time I feel depressed about India, I also remember that we have amazing resilience. Amazing courage, not just individual but community courage. I have, or I used to have, this faith that Indian society, being so complex, doesn’t go for extremes easily. I don’t think that there is any such thing as one ‘Indian’ who is tolerant and secular and all that. But the extraordinary multiplicity among Indians is irrepressible. This absence of homogeneity is something that you cannot do away with easily, and that is a massive strength.

I see two pianos here. You play?

Yes, I used to. The older one [piano] has died. So I bought the other one recently.

How did you get interested in the piano?

I started playing the piano when we were in the U.S. My father was a great lover of Western classical music. He decided that we should learn an instrument. So my sister was put on the piano, and I was put on the violin. One day he discovered that one of the best violin teachers in Washington, D.C. — he used to train people for the Washington Symphony Orchestra and so on — lived nearby. He went to him and said “You have to teach my daughter.” The violin master replied that he only taught advanced students. And naturally, my loving father said, “Yes, yes, my daughter is very advanced.” So I went along, I was seven years old. I was a disaster. And the poor man, he had said he would take me on, so he had to. One day he got so fed up with how terribly I was playing that he grabbed the violin and hit me on the head with it. His building was across the road from our home. So I walked back, crying. I arrive home, my father opens the door, and sees me standing there, violin in hand, bawling. He asked what had happened. I said the teacher had hit me on the head with the violin. My father, unfazed, said, “Never mind, we’ll find you an instrument you can’t be attacked with.” That’s how I got to learn the piano.

sampath.g@thehindu.co.in