See one Fed hike in '16, lift-off timing was right: Kaushik Basu

The US Federal Reserve did the right thing by hiking interest rates in December, is the word coming in from Kaushik Basu, Chief Economist, World Bank. "It waited out in September last year when there a turmoil in the Chinese market, when December came, Fed decided that it will not move into the near without a rate hike and now again the Fed is watching and it will depend on the global situation, he told CNBC-TV18.

Going ahead, he believe the Fed will move very slowly on the back of the US dollar strengthening and financial market slowdown, among others. He sees maybe another hike in the calendar year 2016.

Below is the transcript of Kaushik Basu’s interview with Shereen Bhan on CNBC-TV18.Q: You talk about the disorientation that you went through over the first few months that you actually spent in North Block but walked away feeling a lot more enriched at the end of your experience here. Let me ask you whether you appreciate the art and science of policy making much more today than before because, this in a sense was your first real brush with the real world.A: Absolutely. No doubt that this was a hugely enriching experience for me. But, right at the beginning, and you must remember, I was the first Chief Economic Advisor who came in with no previous experience of government. So, it was indeed disorienting, I came from an academic world where I would sit on a closed room and work on a paper or read papers, whereas here it was a rough and tumble of policy making. But, after that initial couple of months of feeling that I am completely out of my usual setting, it became a phenomenal experience, so much so that this was the first time in my life that I actually kept a diary. Q: I know and I will talk to you about the diary in just a bit and I wonder what the diary said. We are about a fortnight away from the Budget and the economic survey, so I wonder what you had written in your diary as part of your notes in the process of putting the economic survey together. But, I want to pick up on the comment that you made about the rough and tumble of the real world. And this brings be back to a conversation that Marc Faber had with CNBC a couple of weeks ago, where he said that the world must be crazy to give so much power to central bankers, because at the end of the day, they are a bunch of professors. So, what do you make of that comment and this seems to now be something that people are talking about.A: Just that there is not such an easy solution, that keep it to just hardened policy makers to do that or bringing in academics from outside. I do believe actually, this infusion of people from outside, whether they be professors or corporate people, being brought in for a couple of years to the government is extremely important.So, one of my takeaways was the way that I learned the art, arriving from outside, and I could think outside the box, because what was outside the box for the government, was actually for me, very standard thinking. I had just come from a different world. So, if government brings in a small percentage of people from outside, who will spend a couple of years, it is going to shake up thinking within government. It will be very difficult for these people, it will be difficult for people in government with these new ideas coming in, but on the whole, that is the way to do it.Q: Since we are talking about the challenges of the real world, let me ask you about what you are seeing as far as the real world is concerned today?A: Growth forecasts have been cut whether it has been the IMF or the World Bank. Global equity markets are in significant amount of turmoil and pain today, how bad are things looking and what do you make now of the Yellen testimony and about the glide path as far as the Fed is concerned?A: It is a very difficult time for the world because about a year ago, we were beginning to expect that the crisis which started as far back as 2008, with the sub-prime crisis in the United States after that by 2012, there was the Sovereign Debt crisis and last year it was looking that the world is going to be improving. However, as you say, that it has actually gotten worse. And now, we are forecasting that even the emerging economies which were earlier really the drivers, are beginning to slowdown. Latin America has slowed massively, Brazil is shrinking – last year by 3.7 percent, it became a smaller economy – Russia shrank by 3.8 percent. So, the global situation is indeed looking bad. So, as far as the Fed is concerned, what the Fed did thus far is exactly right, which is it waited out in September, last year when there once a turmoil on the Chinese market. When December came, they more or less decided that they are not going to go into the next year without the first movement, so they took a first small movement of a rate hike. And now, they are once again watching and it will depend on the global situation. And my hunch is that the global situation, from what we are seeing already, the financial markets slowdown in trade, for instance, and the US dollar strengthening which is causing some problems, the Fed will probably move fairly slowly now and that will be right.Q: Would you anticipate maybe one hike in this calendar year?A: Yes, maybe one hike in the calendar year is what would be my expectation. Not the earlier, some people were saying four, I do not think that is going to happen.Q: So, at least one. But do you see this going back to 2008 in a way?A: 2008 was the start of the crisis. It began with, it is a financial sector, so it will not quite go back to that, but this time, there are new drivers. The commodity prices going down in particular oil price going down which in the long run, is good for the world, for India it is good right from the beginning, the oil price going down. But in the long-run, it is good for the world, but this period of slowing down, when you are adjusting, you had invested, thinking oil price will be high, companies are being hit by this, so it is a different kind of problem from 2008, but it is a global problem, it is hitting countries across the world, from Nigeria and Angola in Africa to Venezuela and Brazil in Latin America. This part of the world, fortunately is not affected by commodity prices adversely, but Indonesia is being affected. So, it is a global situation.Q: Given what we are seeing play out as far as China is concerned and I want you to talk to me specifically about even the possibility of a revaluation as far as the currency in China is concerned and what that would finally mean. But, the stress and the pain in China, we have seen what the official Chinese numbers are, scepticism, not just about the Chinese GDP numbers, but also about the GDP numbers here in India, are we setting ourselves up then for prolonged pain as far as the global economy is concerned?A: Again, I am hoping that will not be the case. With China for instance, what we have seen thus far, a lot of turmoil in the financial market, but if you look at its growth rate, it has been what is often described as orderly slowdown. It is slowing down but steadily. That does not mean that there is no risk of a disorderly slowdown, there is probably some probability that China will stumble during the process of orderly slowdown, but thus far what we have seen with China is fine. It is a slowdown that is taking place.For the world economy as a whole, my own expectation is that once the commodity prices stabilise and at the World Bank, we have done forecasts on oil, our expectation is that it is going to rise a little bit and this year, the average price is going to USD 37 per barrel. If once oil begins to hold steady over there, I feel a lot of the investment that was based on high oil prices, gradually these people will adjust and the global situation will improve next year, is my expectation.Q: But is the USD 37 per barrel based on any sort of a supply cut on the part of the Organization of the Petroleum Exporting Countries (OPEC) at all?A: The USD 37 per barrel is actually based on taking everything into account. In particular, earlier we had a forecast about a year ago, USD 55 per barrel, so we did have to make a change. One reason for the change is the arrival of Iran which is going to make more oil available in the world. But the reason why we expected to stay roughly in that band. Shale oil is relatively costless to start and stop, so if the prices rise very high, shale will come in, will lower it. If prices go very low, the little bit of shale there is going to be pulled out. So, the shale is going to put a cushion above and below and so USD 37 per barrel is our projection as to what we would expect.Q: That is as far as oil is concerned. What about India, how do you read the situation in India at this point in time? Of course, the government is going to town saying we are the fastest growing economy in the world at 7.6 percent. There are questions on the quality of the GDP number. This is an opportunity for India to seize it and you talk about that extensively in your book as well. How confident do you feel about the strength of the India story today?A: Up to now, what we have seen is indeed India is doing very well and as far as the forecast goes, I do not think World Bank has ever put India on top of its growth table of forecast which it is doing now. Our expectation for this year is 7.8 percent. And as far as the data question also goes, that are the GDP numbers wrong, I do not think so. I belong to the school that in India, this is done transparently. There are some conceptually tricky questions which there are two ways of doing, but this is usually done very professionally. So, subject to the difficulties inherent in GDP computation, I do not think there is any... (interrupted)Q: It is not management on part of the government.A: It is not management on part of the government and the GDP figure that you get in India, you can rely on. But, the risk is going into the future, our point forecast is 7.8 percent. And the Indian economy is looking stronger than virtually any other large economy. But there are risks. One is India’s trade has been slowing down. Almost through the previous year, it has happened. And India has a space in the manufacturing sector. I am glad that there is a lot of emphasis being given on that, but that is a space where India has done very poorly. We have done very well in services in a couple of areas, but manufacturing has not been our strength. So, if India does not make the right moves, this very good scenario right now for India could indeed run into difficulty.Q: So, would you worry then about this over emphasis perhaps, on Make in India?A: I do not worry about that because I feel that is the right emphasis to give. But, the emphasis has to be backed up by a lot of action. So it is the right thing India is targeting that India is in a position that it can make for the world. So, bring in investment here, we will manufacture and we will send it out, but for that you have to act on several fronts and it will be seen how well India manages to carry these out.Q: Speaking of risk and I want to talk to you about a risk that you talk about in the book and that of course, is fiscal deficit and you say in the book that this is a risk that politicians do not spend too much time on because the inflation risk is a much more palpable risk as far as politicians are concerned and hence gets disproportionate amount of attention. But on the fiscal deficit, there are two camps at this point in time. Should we stick to the fiscal consolidation roadmap? Should we slip a little bit in order to pump prime the economy at this point in time? How do you read this situation?A: My view is that the long-run, the fiscal targets that you have even from next year, you should be very serious and stay with that. This year, the world economy has run into a greater difficulty than was anticipated by anyone even 9-10 months ago. So, should the need arise for a small violation of the own rules that the government had set for itself this year, I feel it will be fine. The markets will tolerate and everyone can see that it is being done under very special circumstances. It should be small, but if the need arises... (interrupted)Q: How would you quantify small?A: I would not give a number, but it has to be kept within limits.Q: But do you think a little slippage to pump prime the economy at this point in time is fine?A: I think that is the way even observers will treat it as this is a special situation and as long as the violation is not large, that it is really just to get the economy going.Q: But how do you explain that in the context of an economy that claims to be growing at 7.6 percent or 7.8 percent as the World Bank is projecting?A: India there is one problem that on certain indicators, there is deflation going on, so the nominal growth is a very strained situation is actually not as high as the real growth because of the deflation. So, that is going to cause some computational problems with the fiscal numbers, but there is a bit of a risk. Though our forecast is 7.8 percent, if the global trade continues to go down, there is a downside risk, there is no getting away from that. There being a downside risk, in case you have to use fiscal policy judiciously for a very short period of time, to get the economy going, I feel that is worthwhile. Q: You also talk about how fiscal, the deficit and sort of tweaking the fiscal deficit targets could perhaps or fiscal stimulus could act as an antibiotic in the short-term, but it should only be used in short durations or short spells. But the problem with that kind of thinking, or the problem with antibiotics is that it actually suppresses the symptoms and it does not really address the cause. So, when the cause comes back, it comes back with a vengeance. And the risks of being able to say alright, let us administer another stimulus at this point in time and see where that takes us, do you believe that?A: It is a wonderful point that you are making, but here is the thing. The same way that despite the fact that the antibiotic usually just covers up some other problem, we do take antibiotics even for the economy. There are situations where you do want to give that dose of antibiotic to just calm down the symptoms and then attend to the bigger problems. The important thing is that again, the analogy of antibiotics holds that if you use it too many times. Even that efficacy goes of curing the symptoms. So, first of all, it has to be used limited occasionally, but when the occasion comes, you do use it.Q: And you are saying that this is the right occasion perhaps for the government to want to exercise that?A: I do not watch the Indian economy in as great a detail as I used to do three years ago, but given the global situation, this is a year where there is space for a little bit of fiscal, the use of the fiscal instrument which is the deficit to get the economy going, will be understandable.Q: Let me talk to you about another issue that you have spent a lot of time in the book on and that is on inflation management and you have rightfully explained the past as far as inflation is concerned, and the peaks that we saw, about 30 percent in 1975-1976 and then this trajectory that we have been on since the 2000’s . What has fundamentally changed as far as the character of Indian inflation is concerned and do you believe that we are now in a space where we are going to have to live with higher rates of inflation and what does that mean as far as policy making is concerned?A: I do not think there has been a fundamental shift in India’s inflationary experience or character. By the standards of developing countries, India is not a high inflation country. The fact that as soon as inflation goes to 10-11 percent, there is restlessness and furore. There are many countries in the world where with 10 percent, you actually calm down that inflation is now down to 10 percent. So, India’s history has been yes, in 1972-1973, it had gone to 30 percent. When I was here, it was crossing 10 percent for a couple of months; it was up above 10 percent. But on the whole, it is low, there is a bit of a risk to watch which I do not think in the case of India, it is serious. For rich economies, there is a risk the other way around. That you can get into a deflationary period where Japan has faced that for a long time where you are getting a deflation and a growth stagnancy that takes place with that. You have to watch that as well. So, you are watching on both sides in a country like India, but on the whole, I feel India’s inflation management record is not bad.Q: I want to talk to you about what you have written in the book and you say, “It is arguable that India erred in following the traditional policy of trying to control inflation by keeping central bank interest rates high. This reigned in some of the growth while having minimum impact on inflation. Do you believe that that perhaps, may still be the case today?A: At the current situation, I will not be able to comment on. I do not follow closely, but I do feel that during that time, it was overreacting to the inflation and using the interest rate as an instrument too strongly. And lowering that could have had some advantages on growth. But on the current situation, I really do not have a close enough picture to be able to comment on it.Q: Staying with inflation and you talk about this in your book, you say that the management of inflation and deflation cannot be reduced to a mechanical exercise, it requires a combination of science, intuition, experimentation and we do a little bit of the latter. On the experimentation front, what is it that you would actually like to see?A: That actually, I very strongly feel, most monetary policies in developing countries is done pretty much by the rules that the Fed follows or Bank of England follows, or Riksbank follows, they know the rules and you go by the same. I feel in developing countries, there is a case for a bit more experimentation. Like occasionally, even when inflation is high, you may need to move interest rate down rather than up because of carry trade possibilities and we have seen episodes of that kind. And then you have to collect masses of data with that experimentation and devise rules for yourself. So, I feel there should be a bit more development of rules for ourselves instead of taking these very mechanically from rich countries and that is the point that was making in my book.Q: So, what would you do differently today then?A: Today, again right now, in India, I am not in a position to comment, but I can tell you there are situations where suppose money is flowing into your country because you are holding on interest rates too high compared to another country. There no matter what is happening on inflation in your country, there will be a case for lowering the interest rate to cut down this flow of capital coming in excessively into your country. And there are some countries, Turkey for instance in 2010, did experiment with policies of this kind, but on the whole, experimentation is too little, and we should do a little bit more so that we can devise our own rules of macro-policy, monetary policy, fiscal policy.Q: We are about a fortnight away from the Budget and you talk about how we need to press on improving the tax to GDP ratio which has actually been declining over the last few years. What kind of levers do you believe that the government should exercise at this point in time in the context of growth, in the context of what we are seeing happening in the global economy today?A: Rich countries, the tax GDP ratio is much higher than in developing countries where the need is huge. You want to invest in infrastructure, you want to spend on healthcare and on education, and all this requires money, so you have to raise your tax GDP ratio, I would set it that India should try to push towards 14 percent as the tax GDP ratio that you are pushing in the economy. And in the medium-term you go towards 20 percent which we know from middle income countries, high income countries, they have all got there.Q: But we are still stuck at 10.A: And you know this is not to do with tax rates. You do not have to raise rates to do that. You have to plug loopholes, you have to bring people into this net. And you will be able to get to 14-15 percent, you can get by not touching rates at all, but just making it much more efficient, the collection of taxation. And a lot of effort has to go into that. We at the World Bank recognise this as not just the Indian problem, but a problem of developing countries and you are going to see some research on how we can do better on this front.Q: You talked about how you had maintained a diary while you were in North Block and I believe you continue to do that at the World Bank as well. Take us through what the notings would have been in the Budget month? Are you missing being back in North Block?A: I miss the craziness of the Budget month where it would be really round the clock and we would be in the North Block till 11-12 o’clock at night, when it would be a run up to the Budget and you really that to work on an adrenaline rush that you get from the excitement from the day it is coming when the Budget has to be presented. So, I do miss a little bit of that, but now it is another kind of pleasure I get which is the global engagement – small countries tucked away, very little expertise, you are going there, you are sitting with them and devising policies, so that is what I am doing around the world now.Q: You say in the book that Amartya Sen told you when you took over as the CEA that you should measure what you say and that was the ‘Sen Rule’ that you followed. I am hoping that you will break the ‘Sen Rule’ at the end of this interview because you also talk about how many of our policy mistakes have been because of the lack of common sense or deductive reasoning. What would you say have been the big policy mistakes in the time that you spent in government?A: I genuinely feel what I have said then, I would say now. Policy mistake as such, there was none. There were important things that we were trying which we did not get through. One example is GST.Q: Still looks like it is in limbo.A: It looks very similar to what it was during my three years, we were trying to push that through. If the GST had gone through then, it would have given the economy some flip at that point of time. The plugging of the holes, in the giving of subsidies. I do believe that the poor do need to be supported, so you do not pull that out. But while you are trying to support the poor, you cannot afford to have leakages in the bucket, that is again the struggle is going on. So, in some ways, India is very eternal. You see some of these problems, we had struggled with that during my two and a half years and you see many of the same struggles still going on, but again the good news is that despite all that, India actually has grown very well. All the way from 2003, it picked up even more in 2005, slowed down a bit during the crisis, the international crisis at its peak and now, at over 7 percent, which is slow compared to what India was doing in the past, but compared to what is happening n the world, that looks like a very handsome performance.Q: Another book in the offing?A: Ultimately, there will be one.Q: About the time at the World Bank?A: I continue to keep a diary, but invariably the diary is more interesting that the book that I can put out.