Kaushik Basu, professor of economics at Cornell University and a former chief economic adviser to India during the UPA government between 2009 and 2012, has been deeply troubled by the politics of divisiveness in India that has fractured debate, muzzled dissent and hindered efforts to find workable solutions to the myriad problems in Indian society.

Basu, chief economist at the World Bank between 2012 and 2016, also believes that hyper-nationalism has riven West Asia and Pakistan — and that India needs to ensure it doesn’t go down that perilous road to disaster. Instead, the authorities need to focus on fixing the problems in the economy, which is growing at an “atrocious” level of 4.5 per cent.

The mistake of demonetisation should have been acknowledged. He believes that the Modi government is far too obsessed with the idea of improving its ranking on the World Bank’s Ease of Doing Business Study to the exclusion of the other problems that have beset the nation.

“If you aim to improve only this ranking, you will focus only on those measures and leave out the rest (of the parameters) which are not ranked,” he said in an address delivered on Friday at an event organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) in Calcutta.

Excerpts, edited for space, from the speech and a post-event interaction:

Politics of divisiveness

I have to say that the politics of divisiveness is affecting India. That worries me a little bit because that can create long-run damage, when people do not get a sense of belonging and trust. The importance of trust — it is such a mystical topic — is often undermined; it is often difficult to define or measure. But there are studies from Israel to East Asia which show that societies that developed trust, do well.

When it is a big transaction, trust does not matter, because there is a contract and the courts will enforce it. But if you ask somebody to paint the house and say I will pay you tomorrow, there is a bit of trust involved. Trust permeates society. And once trust begins to erode, this may damage the progress of society.

There are macro studies by Francis Fukuyama which show that the countries that have high levels of trust, grow better. The early studies of societies with high levels of trust were carried out on societies in the Scandinavian and Nordic countries.

But trust does not have a genetic code. Given the history and your situation, you become trustworthy or you start to fear one another. East Asia became a very trusting region; Japan and Korea have seen growth pick up (because of high levels of trust). There are lots of studies on that.

The other aspect is the sense of belongingness. A few weeks ago, the Harvard Business Review published a paper which studied companies where ordinary workers had a greater sense of belonging and took pride in the company they worked for. The study showed that at companies where workers have a greater sense of belonging and more pride in being part of the organisation, performance is 56 per cent higher. Sickness days dropped by 75 per cent. The paper calculated that a company with 10,000 workers could save $52 million if it ensured that the workers had a greater sense of belonging.

Charles Hazelwood, the famous British orchestra conductor, said that when you don't trust the musician and set exact rules — I swing my left hand or gesture with my right and you play exactly as told — you will get a decent orchestra. But if you have trust in your team and permit them to innovate a little, you can get magic.

India is going through an erosion of trust in recent times. I just hope we have the sense to come together.

(Later he clarified: “I was referring to the political situation. It has become very, very divisive. India is a diverse population. Unless we can hold it together… and hold it not by force --- people have to feel part of it. Indians used to take pride in their country, across religions and castes. During my period in government, I used to be very optimistic, because once you enter --- that may be true even now, I don't know ---- once you enter the ministry premises, I would not even know what a person’s caste or religion is. We had a joint problem, mission together. I feel it is eroding in India.”)

Democracy, Secularism, Freedom of Speech

I do worry about democracy and secularism: I know these are political matters but these notions have value for me. If India is a democracy, you may have different views. One thing to keep in mind is that India became independent in 1947; it invested in freedom of speech, democracy and secularism. A lot of countries tried that but with military coups (and) the emergence of religious groups that started to wield great influence on those societies, one country after another collapsed and retreated backwards.

Was it right that so early in its infancy, India invested in these sophisticated institutions, in terms of economic growth? I don't have an answer. I like those principles but those are my views and you can disagree. In terms of economic growth: is it good or bad? I don’t know. I know one thing. Having made those investments, growth may have been slow in the early years. But from 1994 onwards, India was on a very good growth path, and from 2003 (it achieved) phenomenal growth. To go back at this stage is a bit like building dams and bridges and saying we shouldn’t have done it 50 years ago, and then go about dismantling them.

Now there are advantages (because of the course we took). India looks like an industrialised country in terms of our institutions. We should build and capitalise on that.

What needs to be done

India’s bureaucratic transaction costs are still very high. India is making a mistake by focusing excessively on improving its rank on the ten Ease of Doing Business (EODB) indicators to the exclusion of everything else. There may be more than thousands of indicators for any country to measure bureaucratic efficiencies. The ones measured by the World Bank (the EODB indicators) are a statistical convenience. If you aim to improve only through this ranking, you will focus only on those measures and leave out the rest, which are not ranked. India is doing that.

Corruption

We need to deal with it intelligently. Passion and determination is not good enough, unfortunately. You have to marry intelligence and expertise (in order to weed out corruption).

Corruption happens side by side with legit activities, and that’s the problem. Corruption is like a malignant tissue: if you use a blunt instrument to take it out, without being sensitive to the healthy tissue (around), the patient will be damaged.

Infrastructure

I am very glad with the recent announcement of huge investments. India needs that. Execution is very important. We need to look into these details and see how this is done. But that was a good policy measure.

In the long run, nothing is more important than investment in human capital. The world is getting sophisticated. India was ahead of China on most indicators: higher education, engineering, business, finance, medicine. For an emerging economy, it was phenomenal. India is beginning to lose the lead.

India had the initial advantage. The use of the English language was an asset for India. This is one reason why China took so long to break into the top. They picked up engineering skills but took time to develop linguistic skills. It (English language proficiency) should be used.

Diverse opinion & education

In our schools and colleges, we need to emphasise the need for creative thinking and diverse thinking. You have to be open about this. As soon as you allow intelligent people to start thinking in public, there will be opinions that will be in conflict with yours. We are a strong enough nation and should not feel cowed by diversity of opinion.

It’s a shame we are doing that. I hope we will have the sense not to do so. The future of India will be huge --- given the investments that we have already made --- if we can overcome this very difficult period. And I hope that the future will prevail.

Perils of hyper-nationalism

The Middle East collapsed due to hyper-nationalism. Take Pakistan as an example. We must not make the same mistake. Pakistan started out as a reasonable economy. But it got so overwhelmed by the divisive forces that it hurt their economy. We must not make the mistake. I hope we do not.

Short-term measures

Investment in infrastructure…. The idea is good, like GST, but needs to be implemented well or it can spark inflation. The fiscal policy has to be handled well and needs to be married with monetary policy. Indian demand is slackening because the agriculture sector is faring worse than it did in the 1960s.

The growth in India’s economy was going well at 9.5 per cent between 2005 and 2008. But it plummeted to 3.9 per cent in 2009 because of the global financial crisis.

Rural poverty

The percentage of people below the poverty line has gone up from 31 per cent to 35 per cent between 2011 and 2018. That has never happened after 1960.

India’s economy

India is going through a very difficult economic phase. There is no way of concealing that. At 4.5 per cent, the growth rate is atrocious. This has occurred only 2-3 times since the 1990s. The situation could worsen in the short term.

The rate of unemployment is the highest in 45 years. The growth rates in exports, index of industrial production (IIP), index of agriculture production and bank credit are all doing badly.

The rural sector has been badly hurt; consumption by the rural population went down by 8.8 per cent during the five-year period before 2017. That is very unusual for India. Growth often goes down ---- it has gone down to zero, but that was in the 1960s. Unless we intervene quickly and make course corrections, the problem can spill over across the country.

There has been a shocking drop in automobile consumption. Even if you say this was because of ride-sharing companies, this cannot explain such a sharp decline. Growth in electricity generation has also been poor; this shows that large parts of India are under strain.

The demonetisation and the GST backfired. The government must be given credit for pushing the GST through. It was politically challenging. But it was hastily implemented, poorly implemented. Small businesses got badly hit.

During the demonetisation, we did not make any interventions. The mistakes should have been acknowledged (as they were in Korea) and corrective action should have been taken.

The investment and saving rates are both coming down. Our investment rate used to be 39 per cent; it is now down to 30 per cent. Our savings rate has come down to 30 per cent from 38 per cent. Over a nine-year period, both rates have come down.

Our households are not saving as much. It may be because of the recent strain in the agriculture sector. This needs to be corrected as it can have a long-run effect on the economy.