Demonetisation has been harmful for the Indian economy and Prime Minister Narendra Modi’s commitment to market economy is under a shadow of doubt, American economist Lawrence H. Summers has said, on the first anniversary of the controversial exercise. Mr. Summers, meanwhile, praised the Goods and Services Tax (GST) as a “favourable step” for the country’s economy.
He was speaking to The Hindu on the sidelines of a lecture he delivered on rethinking global development for the 21st century, at the Center for Global Development, a think tank working on global poverty and inequality.
‘Not a model’
“I am fairly sceptical of the Indian demonetisation exercise. It seemed to me, someone arbitrarily undermining confidence in the predictability of the economic system… it didn’t hit the wealthiest people in India, and it had a larger impact on upper middle class. I am not an expert, but I don’t think Indian demonetisation is a model for other countries to follow,” the economist said. Mr. Summers, now Professor and President Emeritus at Harvard University, served as Secretary of the Treasury for President Bill Clinton and the Director of the National Economic Council for President Barack Obama.
Asked how the rest of the world perceived Mr. Modi’s reform agenda, Mr. Summers said: “Tax reforms [GST] was a very favourable step, there has been some progress on infrastructure issues. I think there has been some increase in the energy and accountability of the civil service…On the other hand, I think that the concern has been that the PM is more of a believer in reform than he is a believer in markets. I think India needs both —reform and liberalisation. And I am more sure that there will be more reform than I am that there will be enough liberalisation.”
Five questions
In his lecture, Mr. Summers identified five questions that confront the global development agenda in the current century, of which the movement of people around the globe is the most important, he said. He would like to see a world where movement of people will be easier than it is today, “but at the same time if the consequence of that is a backlash…..and hyper nationalism, it is not going to work.” “There isn’t a more important development issue than getting questions of migration right,” he said.
He said mobilising more money for individual countries would not have the impact it had a generation ago. Mr. Summers, who was chief economist at the World Bank in 1991, recalled the Indian experience to illustrate his point. “We [the U.S] had an important role in shaping the World Bank strategy for India. The three billion dollar WB loan in 1991 was highly important to the destiny of one sixth of the humanity. Today, the bank can give India six billion dollars loan also, but India has $380 billion in surplus,” he said, noting that the West cannot influence global development by controlling financing any longer. “India itself has an aid budget of five-six billion dollars.”
The third challenge is finding funding for global public goods, such as preparing for a pandemic, in which the outcomes are not immediate. The fourth challenge is “management of global private sector integration,” which Mr. Summers said, has been muddled due to wrong notions of free trade that have come to dominate the debate. He cited the continuing revelations of globally mobile capital avoiding national taxes, as a serious issue in this regard.
The fifth issue is how to work with China. He said what is often talked about as the U.S strategy to deal with China is a “wish list of things that we want other countries to do.” “What is the system of global governance that the West and China can agree on? The fact is that we do not have a strategy that is appropriately respectful of the scale and success of the Chinese economy,” he said.
Mr. Summers said these challenges would have to be understood against the backdrop of the fact the economic interests of the West and the developing world are less aligned today than it was a generation ago.