Nobel Laureate Economist, Prof Abhijit Banerjee, Prof of Economics, MIT, in a virtual conversation on “Atmanirbhar Bharat in the post Covid-19 World”, with Ambassador Surendra Kumar. Excerpts:

Q: The first question which is on the mind of everyone in India and abroad is how badly has the Covid-19 impacted the Indian and global economy?

A: I think we know the statistics; the statistics are pretty dire for both the world and for India, especially for India, India’s among the worst performers in the world. Having said that, what is not so clear is what the durable effect of this is? The reason why that’s a difficult question is because there is a sense in which the mechanisms through which in India a lot of people’s earnings were generated are mechanisms of relatively short term. India’s is an economy which has been driven a lot by Consumer spending and real estate investment, both of which, if they are revived, many of the same jobs will be coming back. So, if the construction revives, people will have to work there and people will have to migrate from whatever places they are; from Bihar and West Bengal to say Bombay, to build those houses. And in Bombay, they earn around 250 rupees a day and that’s the source of prosperity, a very big part of earnings in rural India. Obviously, this comes from urban migrants. We have a data set where we look at this and the average daily earnings of a migrant when he’s in the village is one 12th what he makes when he’s not in the village; a significant difference. I think that’s given; it’s not because these people were running large businesses that were shut down. The biggest shock comes simply from the fact that these people lost their entire livelihood. And that constitutes a big part of the Indian economy; the earnings of migrants and other temporary workers in general in the unorganized sector. To me, it’s both a general concern for the long run and, maybe, a little bit of a ray of hope for the short term. Thus, there isn’t really anything very durable that has necessarily changed in the Indian economy.

I think the economy was slowing well, before this (lockdown) happened; it has slowed for the last five years; the data was showing that very clearly. But given all that, I would say that there isn’t really a reason to assume that the 23% contraction is going to be very durable. I think the economy’ is already, you could see from the spending, kind of going up quite fast. So, I think, they will see a revival in this quarter. How much? I don’t know. But certainly, we won’t be seeing 23% contraction.

Q: Let’s now talk about the impact of the lock down. According to Professor Arun Kumar, Chairman of the Institute of Social Sciences, almost 200 million people lost their jobs in the organized sector. If you add the figures of the unorganized sector, that number will go up pretty higher. Do you think these figures are exaggerated?

A: I find that implausible. There aren’t 200 million jobs in the organized sector. We say that 15% of the labour forces is in the organized sector. If we take that there might be around 300 – 400 million people in the entire labour force; 15% of that number will be somewhere around 40 million and not 200 million. It’s clear that 200 million people could not have lost their jobs.  I just think that that’s inconsistent with what everybody’s been saying.

Q: Okay, now let’s talk about the response of various governments. The stimulus announced by the US government of US$ 2 trillion US dollar was the highest since WWII. The European Union has announced a Development Fund of 750 billion Euros; the Indian government has announced a package of 20 lakh crores which is equivalent to roughly US$ 1 trillion. Recently, Professor Raghuram Rajan, former Governor of the RBI has advised that the government must go in for more stimulus saying, “If economy is like a sick percent on the bed, then you have to give some more sustenance to it to survive”. What is your view on this?

A: I agree with him. I’ve been saying roughly the same thing; I do feel that our stimulus has been relatively limited in the sense that if you think about what has been the big chunk of the stimulus, in a sense, it’s a bank bailout. We have a public sector banking system, which was lending to a bunch of people who were going to default on the loans. And we have basically financially written off those, and given that credit to the banks. But that’s not increasing anybody’s spending. Some people think the banks are expected to be bailed out. So I don’t think that there is anything particularly happening to the spending. In my view, first priority is to increase consumer spending, especially by the low income population. We have been much more conservative, we’ve not been really willing to spend a lot of money, putting money in the hands of the low income population. So in that sense, I don’t think our stimulus was adequate to the need. I have said this before; I think we could do more.

Q: You might recollect two, three years back, Prof Rajan had said, based on the performance of her GDP, Indian economy was like one eyed King among the blind. With the kind of contraction which we have seen, do thing in 2021, India may not even remain the One Eyed King?

A: It’s important to distinguish between cap and real growth. I think we’re actually seeing, relatively, since June to 2020, some sort of revival of the economy, that’s going to look like a fast growth, because if we take the beginning of the slump as being the beginning of 2020, 2021 is going to be a better year than 2020. In that sense, the growth will look reasonable, the question is, will we go back to the pre lockdown level? There are optimists who would say that a lot of reforms are being undertaken right now: the controversial labour market reforms and agricultural reforms etc should stimulate the economy. I have a hard time being able to tell exactly what part of that will have short term stimulant effects. But I think there are a whole range of possibilities. I think it’s certainly the case that the growth in 2021 in India will look pretty decent; I think we could be reviving from having lost something like 10% of GDP. The question is, can we touch where we would have been had the lockdown not happened? And, I’m less optimistic about that.

Q: Professor Banerjee, please enlighten us on how to look at capitalism and globalization today. We witness, world over, governments are pumping in money; they are saving companies, saving banks and creating jobs. Market forces doing almost nothing.

A: It’s not that capitalism has ended. All countries are raising restrictions; they are raising barriers against terrorists and creating terroristic cell phone imports, and export and business. Has capitalism been impacted by COVID-19?  I think this is a pre COVID-19 trend. I think the demand for trade restrictions has been there for a while and you see creeping trade restrictions right from the mid-2010s. Even from the last years of Osama’s regime, you see a certain amount of willingness to go against the Chinese. And now you see a very strong trend in the US to put tariffs just on whatever they want to put on. The WTO has pronounced that a bunch of the US tariffs are illegal but the US has not actually budged.

So, the real crisis is in the crisis of authority of the WTO. It is one of the unique bodies in the world, where it’s one nation, one vote Unlike the UN and a bunch of others. I think it’s a key institution. In some sense, the US is very weak in the WTO; it can’t bully. I feel that it’s very important that the WTO holds the line and if necessary, finds way to be penal against the US like it is often penal against many countries, including India with the web of fines and countries mostly do cooperate with it, which is, I think, a very good record of an institution.  The US is trying to bully the WTO to just allow it to do whatever it wants to do. I would say that, at least, the European Union has shown a fair amount of, in my view, good judgment in being temporarily with the German central bank, famous for its conservative monetary policies, to allow the expansion of 750 billion Euros Fund. That was possible as the Germans and the French agreed on that. So I think they, in a sense, did the right thing in recognizing essentially the Keynesian nature of all economies, and not really on the question of whether it’s capitalism or notI think the really big threat to capitalism or global markets is coming from the assault on the WTO. And I think we really need to worry about that because in a sense, then it’s easy to drift into all kinds of places. If there isn’t a really strong commitment to WTO, it’s real risk to the global economy. But I don’t see the stimulus was clearly a very sensible response to the kind of baby harsh shutdowns that the economy has to resort to .May be, that was the wrong policy, but on account of fear of COVID-19, they went for a very harsh shutdown. And the stimulus was kind of compensation for that.

Q: Lord Meghnad Desai says that we are actually slipping into an unannounced Cold War. The kind of restrictions the US is putting against Chinese companies, banning them, banning certain Executives, banning Chinese technologies and applications and making things difficult for them is going to be the biggest threat for the recovery of the global economy. Today (Sept 29th) in the Hindustan, the former foreign secretary of India, Mr. Shyam Saran in his op-ed says the same thing, i.e. for the  recovery of the global economy & world trade, there has to be some minimal agreement between the US and China. In 2007 2008, when the world faced the financial crisis, things were different,G-20 offered a degree of international collaboration. But today, if the two top economies in the world aren’t cooperating with each other, how will the global economy recover?

A: A good question.  I am still optimistic; I feel that the US is so dependent on Chinese imports that it’s going to be very hard to continue the current standoff. And this is relevant for India, I just don’t think that there is going to be major repositioning of us purchases; it is just extremely difficult thing to do. And in particular, if the US puts pressure on China, and you see a substantial depreciation of the Chinese currency, Chinese goods are going to be that much more attractive. So it’s going to be, to me, quite unlikely that the US government will be able to constrain its own businesses from buying from China. I am more concerned with the institutional aspects of it, the WTO rules & authority being generally undermined and the US being able to stop it. While the Chinese currency can lose a little bit, it becomes even more competitive; it’s already very competitive. So I don’t know how this will actually span out. We should hold our horses before announcing end of globalization, good or bad.

Q: Do you think India can replace China as a hub of the supply chain? The emphasis in India now is to go vocal on local and grow to be global. In other words, do you think the campaign of Atmanirbhar Bharat will not only make India self-reliant but also facilitate her emergence as the hub of the International supply chain?

A: The key insight of 1991 was to make the  imports of  certain inputs which we  badly needed  very easy, like for example, all kinds of hardware and software was critical to India’s success in the 90s. The software boom came partly out of being able to import cheaply computers and necessary software and the price of computers came down massively in India. Keeping that in mind, I think, the word Atmanirbhar needs to be used carefully. I think it’s a word that can be interpreted differently. If we are going to source our own products/ production right now; that would be exactly what we don’t need to do. I think we need to be able to be competitive in the places we are good at. And to be able to do it, I think, there are going to be a bunch of moves towards automatisation.  More generally, in the world, if we want to be a major player; we are not going to be the producer of the hardware. That’s not what we are good at. So, we better not be too obsessed with being autonomous that’s point number one. Point number two is, I still think, that we are going to have a very hard time; we are sort of caught between China on one side and Bangladesh and Vietnam on the other side, both of which are more nimble players than we have been for a while. So, I think we are in a tight bind.

To be honest, our growth for the last many years has been mostly domestic economy driven. The stimulus announced is into the domestic economy; it will have a big effect on the domestic economy where, relatively, the capital markets are closed. We tend to basically look somewhat like a closed economy for many macroeconomic purposes. We had a long period when we were growing fast, we had farrowed inflation, and our government debt to GDP ratio was falling because of inflation. So we were basically doing a fairly, that’s a closed economic strategy of growth, you essentially close the capital markets, you don’t let capital go out and you use inflation to tax that’s something we have moved away from so maybe there was a good thing to do. I know that was clearly a political priority for the government. But I think we’re & we have traditionally been driven by domestic demand forcesAnd now we are sort of trying to move to international demand; we really haven’t positioned ourselves for it. So it’s a good idea for the government to articulate that we need to be globally more competitive. And we don’t do that by emphasizing too much our neighbor because I think our neighbor has the problem that will try to buy inputs domestically. That to me is the wrong idea. We should specialize in what we’re good at. Import what we need to import and go long on those.

Q: Apart from  the infrastructure sector which could include roads ,ports, airport ,smart cities, housing, water management, river cleaning, what are other sectors government should be targeting to generate maximum possible jobs. Arun Maira, a former member of Planning Commission has advised recently in an article that government “should nurture growth of local economic ecosystems”. What would you recommend for job creation? 

A: I don’t know the answer to that question. I feel like most others, even globally, the experience seems to be that creating jobs is mostly creating infrastructure, it’s not clear that there is much else. If you want to create large businesses, it is not clear that you do it by yourself. The place where we have intervened, on and off, is in capital markets. We have evidence suggesting that our intervention capital workers are actually relatively successful in the sense that when the priority sector expands, the businesses that benefited from it have higher rates of return. But that’s a place where we have gone back and forth, we have not really been very confident about it. So, if you had to take another direction you could think of basically doing what the Chinese did, which is to reallocate finance, and this was big part of Chinese growth for a long time. To allocate capital and finance, sort of it we have, it’s a dangerous strategy, we sort of have seen the pitfalls of it, we have a huge bad debt, and partly, but a lot of that I would say, comes from large scale corporate borrowing, the big companies are the real villains of that story of the NPS .A  lot of them come from very big companies, we who have almost ruthlessly manipulated that system of borrowing from public sector banks and defaulting and you know, the  client list relationship. So I feel that a little bit we we’ve been bitten by that.

We haven’t really created a great infrastructure for small entrepreneurs to flourish in the sense that we don’t offer the credit, the priority sector credit has been kind of allocated and reallocated is an expanded and shrunk it’s not a it’s not been a very solid commitment to them. Our research suggests that will require a kind of a first order change in how the banks operate; the banks have right now frozen by the extent of their NPA is and so you start an easy thing to call up because the banks themselves are in such a mess, to be honest. And so I feel, it’s not clear that there is any immediate action available.

Q: By hindsight, would you say the demonetization was a bad idea? Or it was a good idea implemented badly? Are some sectors still suffering from the negative consequences which might have been triggered off by demonetization?

A: That’s a harder question. I would say that there was no particular argument for it. I’ve sort of always taken the view that this was an experiment and I think we should have talked about before. I think the goal of kind of fighting black money is a noble goal and I support it but I think that the extent to which our economy is cash based, and especially the unorganized sectors cash based, it really makes it extremely hard for people to negotiate.

Suddenly losing their capital clearly had a substantial negative effect. But I’m not sure that the slowdown in growth comes as much from the demonetization as it comes from the policy on sort of the terms of trade moving against agriculture, the fact that the MSP was capped, if those things are basically anti-inflationary push, I have always taken the view that is not popular with almost any of my seniors macroeconomics schooling with. So I think India benefited a lot from being on a relatively high inflation, stable, high inflation path. We really, despite what Milton Friedman said, had 20 years of high inflation, high growth, and you know, it was and stable inflation  was around 10%. Now, whether that’s good or bad, that’s a different question. Because that, of course means that we are stealing from all the Savers, basically the savers where people have money in the bank put the money in the bank, their interest rates, where were we taxed by the inflation? So I there’s this, there’s legitimate debate on it. But I think our growth strategy was very much a kind of closed economic with lots of government creating lots of demand, and that demand was driving both inflation and growth. And we sort of moved away with a much more anti-inflationary government and a much more fiscally conservative government. And I would have thought that we would have survived from demonetization. It’s hard to tell, these are sort of reading tea leaves.

Q: India government has announced a number of pro poor schemes:  Jan Dhan yojana and many other schemes of financing inclusion. How many people might have been bought above the poverty line because many of these schemes are really targeting extreme poverty?

A: I have no idea. We see in the NSS, I think between 2014 and 2017 the per capita consumption is flat, slightly declining. So that’s the average people and correspondingly, poverty is drifting up that data has been whatever now disavowed. So you could say that maybe the data was wrong, but I don’t think the data was any more wrong than any previous, it was the same bad or same. So I, you know, whatever, it looked pretty convincing that the economy had stopped. But I think a lot of that is related to what I’m saying is, in a sense, the stimulus driven economy, you take stimulus away wage growth falls, and you get, you get a slowdown, and I don’t know how much of it’s just that it’s, you know, these things are so little you know about, we sort of have disavowed, the MSS would not have replaced it or improved it, and we sort of don’t really have enough data coming in. So it’s hard to know exactly what’s going wrong. And I think that’s a pity because India is a country which has had this heroic history of being the one leader in producing data, we were the first, an MSS isn’t the world’s first large scale survey of its kind anywhere. We were the world leader, we I think we should just take pride in, in how much just how remarkably advanced we were in producing data and put lots more effort into that. So right now, it’s hard to tell what’s going on.

Q: Would you say that criteria for measuring poverty need to be reviewed?  In a dollar and half per day for meeting all the needs, an individual may survive, but he/she really doesn’t live a healthy life? Do you think for measuring poverty, calories intake of a person could be much more a realistic criterion?

A: How many people are not poor? You know, I think I would go the other way. In fact, I think the calorie was a was a good measure when we were like super poor, when the real constraint was enough food now, even my, my sense is that leaving out COVID-19, extreme poverty is much less of an issue, than I would say, being able to afford all the things we now aspire for : educate your children, live in a house with the toilet, and just, there’s lots of the expectations have also shifted. So I do think that assuming we get out of this crises, I think, we should go back to revising the poverty line, we already revised in essence, nowadays, a lot of us use sort of $2 a day rather than $1 a day. But I would say move up, move up, I think we should have higher expectations.

Q: What do you think have been the major reasons for farmers’ distress in India? Some of them, you must have read in papers every year, have committed suicide; in some parts of India, their agitation continues. Could you suggest some doable practical measures which could alleviate farmers’ distress?

A: I think the problem has three aspects; one of them is temporary; I think this current debate about the Agricultural Marketing deforms. I actually don’t fully understand what the exact risks are. So I’m going to leave that out of the table; I am still studying it. And the bill is complicated, but it’s not obvious to me that this is as much a disaster as some people are claiming. I think there is some need for reform but, maybe, this is the wrong reform. We set up a system when we were food scarce. And we, now, are dealing with a situation where we are food exporters, and on the other hand, running out of water. We need to manage a better transition in agriculture. I think that’s clear that we have the pricing and the incentives in agriculture, which one way or the other, have to be done. Now, before that, I think two things are going on; one was credit. And we have almost no insurance for agricultural disasters. You know, in the US, for example, Farm Insurance is a very big deal in the US and we don’t have really much of a need. In India, when you get locusts coming, we have no insurance.

To your question, farmers borrowed money, they grew something, and you’re sort of out of luck and it didn’t work. There is no policy for farming audit. This government has paid attention to it. But it’s good to take a long time to build in; the private companies are not keen to participate in it. So agricultural insurance is very important to me. And if I had to pick one thing, I would do that. And then there is finally the political question of terms of trade, where we have sort of moved the terms of trade against agriculture, partly by choice as Gulati points out. So there’s really three different pieces to that story, and personally, I think, redesigning, designing a working market for agriculture insurance is going to be critical. And we haven’t managed in my view.

Q: You must have read in papers recently announced the National Education Policy now, which has been hailed as a big game changer, it can change the education system in India, for the better. You have been associated with education for the last four- five decades. What are your thoughts about India’s newly announced education policy?

A: Let me comment on one piece, which is sort of related to my own work, which is the piece about what you should try to do for the first five years, from kindergarten to or whatever to from class minus three to plus two. Basically, whatever the classes three, people should have basic competences down to basic math and reading down. I would say that the data suggests that we can be ambitious, but then we don’t realize it, we don’t do it, we don’t have the systems on the ground to actually deliver, we promise a lot and then not deliver, that seems to be the way it’s gone. I don’t mind saying that we’ll set the first years to just build a base, I think we can do that. I really do think that what is critical is the transition from that to a teaching context. So I think, it’s fine to not teach content in class one, maybe it’s okay for people to just focus on basic skills and build up basic skills till they are whatever, seven or something and then start to learn content. I’m sort of sympathetic to this. But I think what is really important is to notice that the ambition has been built off the fact that we have generally failed to do that.  50% of children in Class five can’t do second grade arithmetic. That’s the fact from awesome, year after year. So I feel, it’s important that we recognize that we’re going to fail even though our goal is to get them all up and running by class three, they will fail. So , we have to think of what to do about that. We have to build a system that’s much more robust, which goes back to them and say, look at the work that Prathama has done, for example, and other approaches as well to make sure that nobody remains there. So it’s not that we say that, in class three, if we haven’t learned to read, that’s it. Now we’re going to go to physics, and you’re going to study nuclear physics.

We have to somehow create transitions and remain mindful of the fact that this system might fail, even the new system might fail. And we need to do whatever is required. Let’s say, 30% of our country, in class three, we need to then have mechanisms for those 30% to have a very quick catch up. And we do have those mechanisms. The sort of problems work is very important, highlighting those mechanisms and how one does it.

But I think we shouldn’t create a new idea and say that this system will solve all the problems. I like to focus on basic skills, but I am worried that we should not just articulate it, we should implement it. We should be mindful that we’re going to fail, in part, and then, we need to do something about it and overcome it.