'The demand slowdown is the result of a combination of factors like stress in agriculture and shocks from GST,' says the co-recipient of this year’s economics Nobel
New Delhi:Abhijit Banerjee, co-recipient of this year’s economics Nobel, believes in an experiment-based approach to find solutions to global poverty. The approach has transformed development economics, according to the Royal Swedish Academy of Sciences, which gives the prize. Banerjee, who is the Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology, endorses the Indian government’s pro-poor schemes, but not tax cuts for businesses. In fact, he believes higher taxes on businesses could help the government spend more on welfare measures such as the income support scheme for farmers and bridge its fiscal deficit in the medium term. Edited excerpts of an interview:
What is the significance of the Nobel prize to you?
The prize is for the entire enterprise of work we do, not just for the three of us. We have been fortunate to be the initiators of that for which we get a lot of credit. In fact, what makes it successful is that hundreds of researchers are part of it.
Some critics such as economist Jean Dreze believe that policies based on randomised controlled trials (RCT) while making a dent, will not put in place a sustainable process for reducing poverty. Do you agree?
I do not agree with that for the specific reason that I do not think that I have the luxury of choosing between a sustainable process which I can make happen and an RCT which I could do. I do not know the recipe for long-term sustainable growth, nor do I know how to change the political system to be much more pro-poor. My honest view is that I want to do something useful. RCT is useful in understanding why people behave in certain way which helps in designing programmes. I do not know any other useful thing that I can do.
Your book Good Economics For Hard Times speaks of the infrastructure gaps in urban areas that make it difficult for migrants and low-income groups to find a living place other than in slums. It also results in long commutes by workers. What is the solution? Allowing more high rises?
One of the points some experts have made is that most democratic cities are high rises. One big mistake that we made in Delhi is that we made it a low-rise city which means that rich people have nice green colonies while the poor live in dusty areas. High rise cities are more democratic cities.
The current government has implemented schemes to give people access to electricity, drinking water, toilets, cooking gas, bank accounts and health insurance. Its tax policies aim to redistribute wealth. Are you happy with the government’s approach?
Insurance is important for protecting the health of people and Ujjwala is quite useful to low-income women. If PM-Kisan is implemented well, it will leave some money in the hands of poor farmers. I am, however, not convinced about the recent (corporate) tax cuts, which I think is unwarranted. If the government wanted to do something more, it could have raised the fiscal deficit and given the cash to the poor, and not to the rich. On the tax side, there should be less influence (on the Indian government) by the Western idea that we have to give tax cuts to the rich.
The government has reduced taxes for low-income earners too.
Taxes are paid by three percent of the population. If you want to leave move money in the hands of poor people, you cannot do it through personal income tax cuts. You have to just give them money. Basically, increase the amount given under PM-Kisan. On the other hand, you can raise the taxes on the rich, consider wealth taxation and keep corporate tax rate high.
You are recommending higher corporate taxes and higher income taxes on the well-off so that the government can spend more on welfare?
Yes, for redistribution through schemes in the short run and for plugging the fiscal deficit in the medium term. Resources raised this way can be used for PM-Kisan and the rural employment guarantee scheme.
Would you recommend an inheritance tax?
Inheritance tax is even better, but it is hard to implement.
What is your diagnosis of the economic downturn in India?
The demand slowdown is probably the result of a combination of factors such as stress in agriculture and shocks from GST. A bunch of reasons has reduced the purchasing power of the low-income groups.
Besides tax cuts, the two other things that the Indian industry demands are land and labour reforms. What are your thoughts on the social impact of labour flexibility and easier land acquisition for businesses?
Labour flexibility is a good thing to take on. There are a lot of things to be done in the labour market. The system now puts the onus of protecting the worker on the firm. This responsibility should be taken away from the firm. It does not mean workers should not get protection. There should be a system of firms contributing to a pool, which covers, say 75% of the salary of workers who are out of jobs, for a specified period. The same firm does not pay the whole cost. If workers have access to some kind of social security network, labour flexibility will not affect the earnings of workers in a downturn.
The Congress party has acknowledged that you have contributed to designing their income transfer proposal announced during the Parliamentary polls. What were your suggestions?
I have contributed (to Nyay) but I would say I did not design it. I was asked as a professional, what numbers should we think of and how much will it cost etc. PM-Kisan is a good step towards replacing the support prices. There has been a very substantial fall in support prices. There is a case for scaling up the entitlement (under PM-Kisan) and we need to think through if we can extend it to landless farmers too.
Your book says liberalization increases inequality and a controlled economy keeps inequality low at the expense of growth. What are the policy interventions needed to ensure trade and liberalisation will work for the bottom of the pyramid too?
It is not too hard to predict who is going to be hurt by trade policies and we should have programmes targeting those people.