India's good growth is a miracle: Martin Feldstein, President Emeritus

5 MAR, 2012, 10.45AM IST, MC GOVARDHANA RANGAN AND GAYATRI NAYAK,ET BUREAU

India's good growth is a miracle: Martin Feldstein, President Emeritus, National Bureau of Economic Research

President Emeritus of National Bureau of Economic Research and Harvard University professor Martin Feldstein has the distinction of serving three US presidents, including Ronald Regan. He nearly succeeded Alan Greenspan as Federal Reserve chairman. In 1992, he wrote there's no justification for Euro - it turned out to be prophetic. Feldstein, who was in Mumbai for the Canara Robeco Mutual Fund's Thought Leadership Series, shares his views on India and the global economy with MC Govardhana Rangan and Gayatri Nayak . Edited excerpts:

What is your assessment of the global economy at this point of time?

What is happening in the industrial countries in the US and in Europe, for this year... maybe next year.. it'll be quite a lot slower. Whether it is technically a recession or not may not matter so much. But we're looking at numbers like 1% and 2%. China has decided to slow down a bit and re-direct its growth, I think that's a healthy thing for China. I think India has one of the strongest growth rates and it will be nice if you could raise it a little bit further. But five years - it depends so much on the policies adopted. I think that the Chinese are going to be focusing more on restructuring than the overall level of GDP.

How do you view the recent Chinese cut in GDP forecast?

I think the Chinese are pursuing the right policy. They have historically allowed too much of their GDP to go into investment and not enough into consumption. The growth rate has been so strong that even though the share going into consumption has been falling, the per capita consumption has been rising, but not as fast as GDP. I think their new 5-year plan is to reverse that, and to have consumption growing more rapidly, exports growing more slowly... I think all that is correct and appropriate if they can make it happen.

What about policy-making in India? There has been criticism about policy paralysis.

Cash transfers to individuals, very large cash transfers - the so-called guaranteed jobs - seem to me to be very wasteful. If I were looking for things to correct, that would certainly be one of them. Various price subsidies are in the headlines now because of the increased cost of oil. But what I say to people who know that I am a big fan of India is that it is something of a miracle that India works as well as it does, and it is growing as well as it does. There are so many problems.... whether it is primary education, infrastructure or tax system. If they can fix those problems, then think how much better India would do.

How would you tackle it?

You shouldn't have fiscal deficit of 7-8% of GDP. So that needs to be brought down, whether by reducing transfers, or other forms of government spending. I think high priority should be to bring down the deficit, so you free up the money for more investment. The inflation rate is a problem. With food prices no longer rising so much, that will help. But now you face the energy problem. Again, it won't be perpetual, they won't rise 20-25% a year, so you have to absorb that.