Larry Summers , the Charles W Eliot University professor and president emeritus at Harvard University , believes that India is poised to be the fastest growing in the coming years, with the Modi government laying the foundation. The former US treasury secretary, however, underlines the need to push ahead with reforms and suggests that India focuses on creating more jobs in services and construction. Excerpts:
China is seen as the big threat and the over-capacity impacting the global economy
China’s economic problems go back to the suppression of consumption. The US typically spends around 70 per cent of GDP in household consumption and even during the second world war that number was close to 50 per cent. China’s consumption has run somewhere in the less than 40 per cent range. That means there is a large amount of resources that has to be devoted to something else. At some point that has been infrastructure but after laying more concrete in five years than the US did during the 20th century, infrastructure has run into diminishing returns. There is now clear overhang of residential real estate. China has been investing heavily in capacity for exports, often subsidized capacity, with very problematic implications for the rest of the world. This is an issue that is best addressed multilaterally by many countries rather than countries acting individually, but it needs to be addressed. Ultimately, I don’t see a way forward for the global economy that does not involve a more balanced Chinese economy with a substantially greater commitment to consumption led growth. I am encouraged a bit by the steps that were taken but how forceful and effective those steps would be remains to be seen.
There are import restrictions on Chinese products due to strategic considerations, but it also means higher cost for consumers. Is there a need to strike a balance?
It is very important, particularly when inflation has been a concern, to be very mindful of self-administered supply shocks. It is important that we avoid single points of dependence for key inputs. It is important that we are not overly vulnerable to China for technologies that are for our national defence. But it is also important that we minimise the cost of inputs that producers use, because it holds down prices and reduces inflation and makes our producers more competitive. The proposal for across-the-board large tariffs against China are almost completely misguided. The right policy involves finding a balance and confining protection to cases where it is motivated by resilience, national security, countervailing large subsidies. Simply seeking to protect because China has achieved a very high level of competitiveness is a strategy that is likely to boomerang in terms of the Chinese response and is likely to have adverse effects for inflation and purchasing power of working people.
Do you see India ready to take advantage of the situation? How do you see the Indian economy playing out in the next five-seven years?
I am optimistic about India’s prospects to increase its GDP six-fold by the century of Independence and be the most rapidly growing economy in the world over the next five years, the next decade and the next generation among major economies. Prime Minister (Narendra) Modi has been spectacularly successful as an energizer, putting in place infrastructure, establishing new initiatives in physical infrastructure and in intangible spheres involving payments or individual identities. I hope that in the years ahead, reform to assure strong and diverse incentives for initiatives allowing market forces to play can run strongly in the way that providing energy to broad public efforts has so far. It is in that way that the promise of the Indian economy best be realized.
What are the big challenges?
The geopolitics are substantial challenge. As there is an increasing axis between China, Russia and Iran, India will have to maneuver with great skill as its cooperates and seeks a more cooperative relationship with the US. India will have to work very hard in the age of AI to maintain its very strong presence in IT and all things digital. I also hope that India can continue the process where so much progress has been made of trying outwards and towards the world. The truth is that for most of the last 70 years the greatest barriers to India benefiting from globalization have been those put in place by the Indian govt and there is progress there, but there is still more room to grow in terms of reducing barriers.
Do you see generating jobs as a big challenge?
It is already a substantial challenge and is likely to be an increasing challenge. There is certainly a role to play in industry and manufacturing. My suspicion is that if India is ultimately successful, it will have a great deal to do with creating jobs in the service sector at a time when the service sector becomes much more expandable globally due to IT and also creating jobs in construction at a time when there is a great deal in India that needs to be built.
You and NK Singh had presented the reform roadmap for MDBs. How do you see the progress?
The good news is I have welcomed the enthusiasm in the World Bank and other banks for accepting many of our recommendations and that is gratifying. On the other hand, the rubber meets the road in terms of resource mobilization and implementation, there it is less clear that the kind of transformative change to which Mr NK Singh and I aspired is yet in train. We will be watching very closely and offering our views in a candid and constructive way.
Is it time to undertake a similar exercise for the IMF?
Yes, the so-called resilience trust fund that was enacted after Covid moved only small amounts of resources to the developing world. There needs to be exploration of new facilities to support transformation to a green economy in some ways reminiscent of a system transformation facility that was enacted after the Berlin Wall fell when in a rather different way there were a set of economies that needed longer term support for structural transformation. There has been great emphasis on how volumes of lending from the World Bank can be increased within its current financial structure but rather less attention to those questions where the IMF is concerned. I am struck that no one was worried that the IMF was under-reserved when the value of its gold stock was half of what it was today. The financial capacity of the IMF can be substantially enhanced. It is important to insulate economies from external shocks and the type of facility IMF implanted during the oil shock period, where with low conditionality simply being in good standing, countries had ability to rapidly access financing if they suffered an important external shock from a change in interest rate environment or a change in the commodity price environment. It would be worth close examination at this moment.
China is seen as the big threat and the over-capacity impacting the global economy
China’s economic problems go back to the suppression of consumption. The US typically spends around 70 per cent of GDP in household consumption and even during the second world war that number was close to 50 per cent. China’s consumption has run somewhere in the less than 40 per cent range. That means there is a large amount of resources that has to be devoted to something else. At some point that has been infrastructure but after laying more concrete in five years than the US did during the 20th century, infrastructure has run into diminishing returns. There is now clear overhang of residential real estate. China has been investing heavily in capacity for exports, often subsidized capacity, with very problematic implications for the rest of the world. This is an issue that is best addressed multilaterally by many countries rather than countries acting individually, but it needs to be addressed. Ultimately, I don’t see a way forward for the global economy that does not involve a more balanced Chinese economy with a substantially greater commitment to consumption led growth. I am encouraged a bit by the steps that were taken but how forceful and effective those steps would be remains to be seen.
There are import restrictions on Chinese products due to strategic considerations, but it also means higher cost for consumers. Is there a need to strike a balance?
It is very important, particularly when inflation has been a concern, to be very mindful of self-administered supply shocks. It is important that we avoid single points of dependence for key inputs. It is important that we are not overly vulnerable to China for technologies that are for our national defence. But it is also important that we minimise the cost of inputs that producers use, because it holds down prices and reduces inflation and makes our producers more competitive. The proposal for across-the-board large tariffs against China are almost completely misguided. The right policy involves finding a balance and confining protection to cases where it is motivated by resilience, national security, countervailing large subsidies. Simply seeking to protect because China has achieved a very high level of competitiveness is a strategy that is likely to boomerang in terms of the Chinese response and is likely to have adverse effects for inflation and purchasing power of working people.
Do you see India ready to take advantage of the situation? How do you see the Indian economy playing out in the next five-seven years?
I am optimistic about India’s prospects to increase its GDP six-fold by the century of Independence and be the most rapidly growing economy in the world over the next five years, the next decade and the next generation among major economies. Prime Minister (Narendra) Modi has been spectacularly successful as an energizer, putting in place infrastructure, establishing new initiatives in physical infrastructure and in intangible spheres involving payments or individual identities. I hope that in the years ahead, reform to assure strong and diverse incentives for initiatives allowing market forces to play can run strongly in the way that providing energy to broad public efforts has so far. It is in that way that the promise of the Indian economy best be realized.
What are the big challenges?
The geopolitics are substantial challenge. As there is an increasing axis between China, Russia and Iran, India will have to maneuver with great skill as its cooperates and seeks a more cooperative relationship with the US. India will have to work very hard in the age of AI to maintain its very strong presence in IT and all things digital. I also hope that India can continue the process where so much progress has been made of trying outwards and towards the world. The truth is that for most of the last 70 years the greatest barriers to India benefiting from globalization have been those put in place by the Indian govt and there is progress there, but there is still more room to grow in terms of reducing barriers.
Do you see generating jobs as a big challenge?
It is already a substantial challenge and is likely to be an increasing challenge. There is certainly a role to play in industry and manufacturing. My suspicion is that if India is ultimately successful, it will have a great deal to do with creating jobs in the service sector at a time when the service sector becomes much more expandable globally due to IT and also creating jobs in construction at a time when there is a great deal in India that needs to be built.
You and NK Singh had presented the reform roadmap for MDBs. How do you see the progress?
The good news is I have welcomed the enthusiasm in the World Bank and other banks for accepting many of our recommendations and that is gratifying. On the other hand, the rubber meets the road in terms of resource mobilization and implementation, there it is less clear that the kind of transformative change to which Mr NK Singh and I aspired is yet in train. We will be watching very closely and offering our views in a candid and constructive way.
Is it time to undertake a similar exercise for the IMF?
Yes, the so-called resilience trust fund that was enacted after Covid moved only small amounts of resources to the developing world. There needs to be exploration of new facilities to support transformation to a green economy in some ways reminiscent of a system transformation facility that was enacted after the Berlin Wall fell when in a rather different way there were a set of economies that needed longer term support for structural transformation. There has been great emphasis on how volumes of lending from the World Bank can be increased within its current financial structure but rather less attention to those questions where the IMF is concerned. I am struck that no one was worried that the IMF was under-reserved when the value of its gold stock was half of what it was today. The financial capacity of the IMF can be substantially enhanced. It is important to insulate economies from external shocks and the type of facility IMF implanted during the oil shock period, where with low conditionality simply being in good standing, countries had ability to rapidly access financing if they suffered an important external shock from a change in interest rate environment or a change in the commodity price environment. It would be worth close examination at this moment.
