Nearly six months before he became a Nobel Laureate, Abhijit Banerjee, professor of economics at the Massachusetts Institute of Technology, was in India for the launch of the book What The Economy Needs Now. The book has chapters written by Banerjee and other influential economists such as Raghuram Rajan, Gita Gopinath, and Eswar Prasad. He spoke to Fortune India about a host of economic issues, including the performance of Modi 1.0. Edited excerpts from the interview:
Despite infusing a couple of billion rupees in the banking system in public sector banks, the non-performing asset issue continues to linger. What do you think should have been done to resolve the problem?
We need to have something equivalent to Chapter 7 and Chapter 11 of the U.S. Bankruptcy Act. It means that the business will be kept running until a solution is found. Then there is the question of how do we recapitalise the banks. Basically at some point of time the government will have to create a special fund by borrowing money for this issue and clean up the balance sheets of the banks. There is no magic here, and clearly there is an obligation from the government not to default on depositors’ money.
If you actually do the arithmetic then many of these banks are bankrupt. But as lenders of last resort, the government is committed to bailing them out. I understand why there is tension there because the money was stolen by a bunch of rich people, which is now to be funded from poor people’s money. Earlier too, there has been recapitalisation and once that is done, growth picks up, we have seen this in 2001-2002. But more importantly, wilful defaulters need to be punished. The problem is that the government has been selective in targeting people. There is clearly some straightforward politics there. The government in a sense is trying to pretend that it is a problem that it can get around, but there is no way of getting around it. You can delay the solution by two or three years, which will reduce your GDP growth by 1% or 2%.
What should be the priorities of the new government?
I think the new government that comes to power with a reasonable majority should raise taxes because India is a chronic deficit country. The interest rates are very high by global standards. At a time when global interest rates are extremely low, we are a standout nation in the world. We need to raise taxes and stop giving some kind of exemptions to the middle class in every Budget. We also have to discuss whether a wealth tax should be implemented. We need to mobilise revenue because year after year we find the government hiding the country’s true fiscal deficit. But that is not taking us anywhere because the market knows that this is the amount that will need to be handed out to the government, and therefore interest rates continue to remain high.
Do you think that the middle class is a pampered lot?
I think using the word “pamper” is a little unfair, but the government is under pressure to raise growth rates. Lack of funds means that we are not building enough infrastructure, and I believe that extreme poverty in a middle-income country is unacceptable. These are reasonable social objectives such as investing in infrastructure and ensuring fund transfers to the poor. So we can give up on our ambitions of high growth rate and settle for something more modest, but we cannot have everything at the same time. At some point we also need to be honest that our public delivery system is poor and expensive. The ratio of our per capita GDP to the teachers’ income is one of the highest. Similarly, while our primary health centres are mostly closed, we continue to hire nurses. Money can be saved there. The NDA government in the first five years had a clear mandate, but they did nothing.
Why are you against the implementation of the Ayushman Bharat scheme?
It is not that I am against the Ayushman Bharat scheme but it is primarily a health insurance scheme for secondary and tertiary diseases. It does nothing for preventive healthcare like early detection of diabetes or development of the primary health centres. The scheme is not about health, but healthcare expenses, although I am sure that it will help a lot of poor families in the long-run. The problem of healthcare expenses may be solved over time, but not the problem of health, early detection, and its treatment.
What are your specific suggestions for raising revenues?
China and India were in the same place in terms of tax collection from income-tax some 25 years ago. What China did was to freeze the lower-end of the tax rate, and as the country started getting richer, more and more people started paying taxes. We should have done the same thing. Initially, there would have been some resistance but by now everybody in the middle-income group would be paying taxes. It was a policy choice and we have to reverse it. If we have ambitions of redistributing wealth, we have to go in for higher-income tax rates and wealth tax rather than increasing the goods and services tax rate, which affects everybody. This is how the rest of the world did it.
When the whole world is turning protectionist and closing their doors, why do you suggest that India lower its import duties and be more open?
I think our experience of levying high import tariffs have not been happy. First as a large economy small changes in trade taxes at the margin have very little effect on the outcomes. Most of our trade is internal and it is only a specific category of goods that we import. We can raise tariffs but it will neither bring in great dividends nor be disastrous for the economy. We have a small number of industries which import, and any increase in tariffs will only raise the cost for them. Since we are not very competitive as a nation, we will then have to subsidise these exporting industries like we did earlier. It will result in a complete mess and a lot of litigations and we should not go down that path. I am not definitely a champion of free trade but I don’t think there is much to achieve by raising tariffs.
How do you see the job scenario and the growing unemployment in the country?
We have been witnessing massive underemployment and disguised employment for many decades now. The real challenge in terms of understanding unemployment numbers is that employment is a vaguely defined category. We don’t even have a proper structure of unemployment statistics to interpret the data. We need high-frequency surveys because many people may hold temporary odd jobs and earn money, or there are those preparing for government jobs. There is a need for reclassification of the various categories of people. But the population at the margins of employment in India is very large, bigger than the population of many countries. Again, there is a massive mismatch of expectations, between aspirations of the youth and the job reality. Everyone wants secure, government desk jobs, which are not there, and nobody wants retail jobs that are available.
How can the government resolve the agrarian crisis?
The right answer is that you need to provide lots of insurance because agriculture is an extraordinarily risky business. Though the government has launched the Pradhan Mantri Fasal Bima Yojana, but it has been implemented very poorly. Given the fact that the government has not been able to develop a proper insurance system, it is only fair that the states should take some responsibility for price stabilisation of agricultural products. We tax agriculture by banning exports, which is a very odd way to tax it. There has to be a transparent way by which the government can tell the farmers that when prices are high you pay us this amount of money, and when prices fall we will pay you back. But what we have is a bizarre system where whenever there is scarcity of any agricultural product, we ban its exports and take away any opportunity to make money, but never compensate them when there is a surplus in the market. The terms of trade have gone against agriculture and that is why we have no problem in inflation targeting.
How worried are you about the growing inequality in a poor country like India?
I am worried because inequality has grown enormously everywhere. It is growing primarily because we have shut down all other channels of social mobility. Standard models of social mobility like providing good education to a smart kid in a good private school despite coming from a poor family has broken down. I think that the Ayushman Bharat scheme may help because one of the ways people become poor is through major health shocks. Taxation and redistribution will reduce poverty, post-tax inequality, but in order to reduce pre-tax inequality in a country like India, you have to open the avenues of social mobility, mostly education. Even job reservations can only help that much. The failure of the education system is what is hurting social mobility.
Are you disappointed with the first five year-term of the present NDA government?
Yes, for different reasons. First, they spent too much effort in dividing society, which had an adverse impact on the economy.
So you don’t believe that implementation of goods and services tax (GST) or the Insolvency and Bankruptcy Code were radical reforms?
GST does raise the possibility of raising taxation and so may work out in the long-run. However, it was implemented badly and created a lot of challenges for exporters and others. What I am saying is that compared to their mandate and the support they had, they did not do enough. They have functioned like other weak governments. They could have said that we will change the rules of the economic game but GST is the only thing that they did of any real consequence. Even they don’t take credit of much economic reforms themselves. In fact, the previous NDA government did much more for the infrastructure like the Golden Quadrilateral, and North-South, East-West Corridor, or Pradhan Mantri Gram Sadak Yojana. They really changed the landscape. I did not see a big policy shift or radical thing that happened with this government.