Lawrence Summers, president emeritus of Harvard University and a former top economic advisor to US President Barack Obama’s team, painted an uncertain economic outlook for the world in 2016, during a recent visit to Mumbai. At the same time, he also said that India was likely to emerge a gainer due to the impact of the economic challenges China faces at the moment. Over the longer term, though, he stressed that India will need to focus on building human capital, including health care and educational institutions, to boost the prospects of growth.
But the bigger picture he painted was far from bright. During interactions with Forbes India and CNBC-TV18, he said he feared that the risks of slow global economic growth are high.
His concerns are playing out as well. The International Monetary Fund (IMF), ahead of the recently held G20 leaders’ summit, had forecast gross domestic product (GDP) growth to average 3.1 percent across the globe this year and 3.6 percent in 2016. This is weaker than its own July forecast of 3.3 percent in 2015 and 3.8 percent in 2016.
“The risks are far more on the side of excessively slow growth, rather than excessively rapid growth. The risks will be more towards low inflation or deflation rather than high inflation. The challenge for most developing countries will be [that there is] too little confidence and too much capital outflow, rather than too much confidence and too much inflows,” he said.
However, in this scenario, Summers said emerging markets, including India, were better placed to face the impact of the US Fed’s interest rate hike. (The US central bank hiked rates by 25 basis points on December 17.) “The right thing for countries to do is to focus on their own fundamentals,” Summers added.
The Reserve Bank of India (RBI) has said it is ready to tackle the impact of the Fed’s rate hike. At a board meeting in Kolkata on December 11, RBI governor Raghuram Rajan said: “The best defence against external shocks and volatility is sensible and sustainable domestic policies for growth.” Summers also felt that in an uncertain economic outlook for China, India could stand to benefit. “India can be in the leading spot—east to west. India can do impressive things because of the challenges faced in China,” he said. The country also benefits because of the fact that there are increasingly questions being raised about China’s slowing pace of growth. “That will prompt several people who might not have looked at India, since it is a smaller economy compared to China, to take a serious look at the country.”
A Liberalising Agenda
India’s economy grew at 7.4 percent in the July to September quarter this year, more than the 6.9 percent growth recorded by China in the same three months. “But India’s government needs to focus on liberalising, rather than just performing. There is a tendency for governments [of the past] to focus on managing their controls better, rather than lowering their controls,” Summers said. The government will have to increase its pace of reforms, he added. “The pace of decision-making needs to greatly accelerate if the quality of the business environment is to improve substantially.”
He was supportive of Prime Minister Narendra Modi’s economic reforms but said that more was required to boost the country’s climate to do business. “I don’t think India can get where it wants to be if people don’t feel that they can get a licence to do business and rely on that licence on a go-forward basis,” said Summers, who is also the former chief economist of the World Bank. “There are a whole set of issues that go into the business climate, which are in India’s interests to address.”
He continued to be hopeful that the much-awaited reforms, such as the Goods and Services Tax (GST), will help boost growth. The GST legislation is stuck in Parliament and runs a real risk of missing its April 1, 2016 implementation deadline. “GST is an important start. The acceleration of infrastructure, freeing up regulation of entrepreneurship to start a business and investment in health care and education will improve the prospects for growth,” Summers added. He has maintained that India has the potential to grow at 9 percent for a decade and 8 percent in subsequent years if it takes bold reform measures.
He also called for increased privatisation of India’s banking system, from current levels. “I would like to see more privatisation in the financial sector. But India has to first repair the institutions and make sure they are healthy before you can contemplate that agenda.”
Summers also stressed on what can be called a ‘Study in India’ campaign, urging policymakers to strengthen the existing standards of educational institutes in the country. “India has got huge opportunities to be an exporter of services, particularly university and higher education. But it has not exploited that potential at all,” he pointed out. He claimed that India had fewer foreign students studying in the country than those studying in New Zealand, despite the island’s much smaller population.
“Prosperity of nations is tied with the success of their universities. It is no accident that Silicon Valley is essentially in the same place as Stanford University or that Harvard University in Boston is now a bio-medical science hub,” Summers told students of the University of Mumbai during his talk ‘Reinventing the university: Reconciling Equity and Excellence in Higher Education Worldwide’. “India should aim to have at least a third of its young population avail good quality higher education by the year 2030. It should aim to have at least five universities ranked among the top 100 universities in the world. It should also look to attract at least 10,000 American students to come and study in the country’s universities,” Summers said. “India will not be a great country without great universities.”
(This story appears in the 08 January, 2016 issue of Forbes India. To visit our Archives, click here.)