The Hindu Business Line : `Big success comes from sound policies, well applied'— Sir Nicholas Stern, Director of Policy Research, British PM's Commission for Africa

Opinion - Interview

`Big success comes from sound policies, well applied'— Sir Nicholas Stern, Director of Policy Research, British PM's Commission for Africa

G. Srinivasan

IT IS rare to find an economist without parochial postures and rarer still to get one steeped in Western education and part of the developed world yet critical of the unjust global economic system that perpetuates trade protectionism, even as the air is thick with persistent plea for free and fair trade. Sir Nicholas Stern, Director of Policy Research for the British Prime Minister's Commission for Africa and Second Permanent Treasury Secretary, is one such rarity though firm in his convictions on economic development and growth, tax reforms, public policy and the role of the state.

Mr Stern is no stranger to India. This former World Bank Chief Economist and Senior Vice-President, Development Economics, has been studying for the last 30 years the economy and society of Palanpur, a village in North India, where he lived for eight months in 1974-75. He has also taught and worked at the Indian Statistical Institute in Bangalore, as also in Delhi. He has worked at many renowned institutions including Oxford and Warwick Universities, the Massachusetts Institute of Technology, the Ecole Polytechnqiue in Paris, and the People's University of China in Beijing.

In his new role as the Good Samaritan for the Dark Continent, which remains untouched by the economic prosperity that has reached the shores of many an emerging economy, Mr Stern has his task cut out. Asked about the inspiration for Mr Tony Blair to set up the Commission for Africa, Mr Sternly said the UK assumes the Presidency of G-8 in 2005 as also of the European Union in the second half of 2005.

As the New Partnership for African Development (NEPAD) was one of the initiatives of G-8, and the EU has a long development agenda for Africa, it is but natural that the UK prepares itself to play some positive role in this direction.

Mr Stern said that his report would say something strong about trade policies and suggest measures to help Africa develop skills and infrastructure, social and physical and building, human development and commandeer resources to combat HIV/malaria/tuberculosis. It will also recommend strongly about rebuilding African's educational institutions from primary to tertiary.

Mr Stern shared with Business Line some thoughts on India post his sojourn here, when he met the Prime Minister, Dr Manmohan Singh, the Finance Minister Mr P. Chidambaram, the Planning Commission Deputy Chairman, Dr Montek Singh Ahulwalia, and senior officials of the Ministry of External Affairs and the Prime Minister's Office. Mr Stern is quite optimistic about India emerging stronger to take its rightful place in the comity of nations, the challenges and all.

On India's economic progress, he said "when I came first (to India), everybody thought that it would be very difficult to get the long-run growth rate much above 3.5 per cent — what the economists used to call the Hindu Rate of growth. That was also the time when the population growth rate was 2 per cent.

"So we must recognise that the kind of growth rate that has happened over the last decade. It is very impressive and I think it shows the returns to the economic reform decisions that India has taken. So the most important point is to recognise that big success comes from sound policies, well applied. It has transformed India, cutting down poverty and raising growth rate.

"The challenge for India is such a large part of the population in agriculture and is vulnerable to vagaries of weather. You have huge stocks and exchange reserves, which protect you against this kind of shocks. India had huge food stocks in 2002-03 and got through difficult monsoon. But the problem of vulnerability in agriculture does not go away as India has something like 60 per cent of the population in the rural areas. Though this will go down but will remain so for some time. I think the emphasis on agriculture, employment generation programme, rural credit and management of irrigation are likely to be part of the story."

On enhancing economic growth, he said, "in agriculture, irrigation will be of help. Rural infrastructure is very important such as rural roads and require investment. Making space for public investment is part of the story and the Indian authorities recognise that very well and are looking how they can create that extra fiscal space for the kind of public savings and public investments. Another part of the story would be through growth itself, through investment in agriculture and irrigation.

"Another thing is lagging regions. It is difficult to raise the growth rate if large parts of the country lag and it will be good if India could find a set of policies that might overcome the slow growth of Uttar Pradesh and Bihar."

On the inflation and growth situation, Mr Stern said that "India has had inflation but never out of control. I don't believe the Indian fiscal management authorities would like inflation get out of control.

On the supply side, prices of fuel go up and on the demand side India is a country which is saving well. So when foreign exchange comes in and gets converted into local currency, the money supply increases.

This is affecting demand. The monetary authorities have recognised this and are building on that. Given the skills and the understanding India's policy managers have, inflation would not become a problem. The problem is deficit and is a structural thing and India has to take a stand.

"Having been coming to India for 30 years, I have a lot of confidence in the judgement and skill of Indian policy-makers. I think they have recognised the issue of rural growth, fiscal challenge and the importance of creating the fiscal space to make investment, many of which would be in public sector and a lot would be in the private sector.

"I think it will take time to build the revenue side of the budget, to overcome the fiscal challenges, but the measures proposed in the early 1990s are the right way to go. India has the time to build the revenue side and is on the right direction. Public investment will be affected by the overall fiscal position. So Indian authorities are right in following the Fiscal Responsibility Act and are right to follow the 1990s as the most promising route. In a country where services are increasingly important, taxing them is necessary if the tax-GDP ratio is to pay off."