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economy | IST

Nobel economics winner Abhijit Banerjee: Modi offered voters clearest vision of a different India and they responded to it

Mini

Abhijit Banerjee, who along with wife Esther Duflo and colleague Michael Kremer, was awarded the Nobel Prize for Economics last week, said he was pleased when the government raised taxes for the rich but disappointed when it cut the corporate taxes. In an exclusive interview to CNBC-TV18, Banerjee talks about the state of the economy, taxation, AI and a raft of other topics.

India-born Abhijit Banerjee won the 2019 Nobel Economics Prize on Monday along with fellow US-based economists Esther Duflo and Michael Kremer for their work on fighting poverty.
The wife-husband duo of Duflo and Banerjee have helped millions of children by favouring practical steps over theory, according to the Royal Swedish Academy of Sciences.
Their work had shown how poverty could be addressed by breaking it down into smaller and more precise questions in areas such as education and healthcare, and then testing solutions in the field, it said.
The trio pioneered "randomized controlled trials," or RCTs, in economics. Long used in fields such as medicine, an RCT could for example take two groups of people and study what difference a treatment makes on one group while the other group is only given a placebo.
Banerjee who works with his wife at the Massachusetts Institute of Technology (MIT), told CNBC-TV18 that he was pleased when the government raised taxes for the rich and then disappointed when it cut the taxes. He talked about the state of the economy, taxation, AI and a raft of other topics in the wide-ranging interview.
Edited excerpts:
Q: I want you to first relive that moment when you heard about it?
A: I was sleeping, phone rings, voice says - it is an important call from the Royal Swedish Academy of Sciences and something like that and since I have heard other narratives, I know what this is about and suddenly your heart is trying to leave through your ear and then they are very blind about it. I said thank you  and that is it.
Q: We of course have been acquainted with your economic credentials, but your credentials in the kitchen have now come to sort of become something about headline, courtesy your brother and Chiki Sarkar, so was there a celebratory meal or special meal that you prepared post news?
A: I did actually, not spectacularly celebrated it.
Q: What was it?
A: I made Minestrone, artichoke with butter and sour cream sauce.
Q: And dessert? There was no dessert?
A: No dessert – my niece who came for the dinner, she made desserts. There was one more course and I am now blanking on what it was.
Q: I believe you have already taken class, you have gone over PhD papers, so a little bit of the life as usual has continued through this.
A: And will thankfully otherwise you will go nuts with this stuff. I have nothing against being interviewed by you.
Q: I hope not. Let me start by talking to you about one of the issues that you hope to address in this book and I think this is one of those polarising debates that is happening not just here in India but anywhere in the world. Should you be taxing the rich more and we have hiked taxes on the rich here in India to about 43 percent, do you believe that that is enough, do you believe that there is room for more and where – you would believe that this is the way to bridge the gap and to ensure that there is more equality?
A: It is more than that. We have hiked the taxes and then we cut it down. I think this is a mistake. I was very proud of the government for having hiked the taxes, I think it is a necessary move, we are playing this strange game of never balancing the budget and increasingly finding clever accounting tricks to pretend that our deficit is what it should be but it is in fact been accumulated, aggregated deficit of all government entities including whatever these special borrowing vehicles etc – 9 percent of gross domestic product (GDP), that is way above anything and anybody thinks is sensible. Given especially our savings rate has been falling, this means you are eating up a huge part of the savings. So I think it is important that we - given that we have an ambition of a government that is going to have a fair amount of welfare delivered and who wants to invest in infrastructure, I don’t see how we cannot also try to raise taxes.
So that is just for the macro-prudential point of view. I think raising taxes is important.
I also think that the exploding inequality is the cause in itself. I think that there is absolutely no reason to go backwards on that. It is important, it has the consequence of creating a time bomb. That is what has hit the US now, which is – because of the inequality has gone up so much and that the benefits of all growth have gone exclusively to the rich, it is very easy to make the case that somehow there is an elite conspiracy to cheat everybody – there is this whole narrative of growth and economic rationalities all kind of a front for a rip-off.
Q: I will talk to you about the hike in taxes in the context of India’s aspiration to become even more competitive and try and get a larger share of global trade and so on and so forth. We have just seen a corporate tax reduction here in India and the belief now is that we will see a cut in personal income tax as well if not now at least in the forthcoming budget. Do you believe that this argument that in order for India to be competitive, in order for India to compete with the likes of China, Vietnam, Philippines etc. we will have to go down this path?
 A: China raises more in taxes and has been doing so for a long time. The country’s fraction of gross domestic product (GDP) that is raised in direct taxes is higher than ours, it has been much higher than ours for a long time and this is not an accident. That is because for a very long time they have decided that they need to tax if they are going to build infrastructure, if they are going to make the necessary redistributions, they need to have money and to have the money they need to have taxes and so they took a decision somewhere in the 90’s to actually kind of freeze the tax brackets, so that you don’t get these every budget we announce that so many people were let off. So the fraction of people who pay taxes has gone up a lot as a result of that, because eventually everybody gets richer, they get into the tax bracket and they pay taxes.
I think in general this idea that taxes are of pure waste is a kind of dangerous idea and one that I think we can’t afford to actually buy in to it.
Q: I was at a conversation with Paul Krugman where he told me that this idea that reduction in corporate taxes is sort of the silver bullet of the panacea for economic revival is over stated, do you okay with that?
 A: Yes, I mean we have a long discussion of this in our book. I think the evidence is very clear that there are - and one way to look at it US states which cut taxes and others that don’t and you can compare them and see whether the cut in taxes does anything for them.  Mostly it doesn’t. You don’t manage to stimulate growth by cutting taxes especially in not, in a kind of generally depressed economic where demand is a problem. Businessman are sitting on tonnes of cash right now in India, they are sitting on tonnes of cash, the corporates, the big companies are sitting on tonnes of cash. The money is not going to do anything at this point in time.
Q: I will come to what you believe is the way out of this demand contraction that we are currently seeing, but I want to pick up on one of the issues that you addressed in the book and something that you just alluded to as well and this idea or the notion that anything that is done for poverty alleviation is somehow populist, it is leftist, it is not just welfarism but it is more sort of a waste of tax payer money, not an efficient use of tax payer money. Is it a problem of governments as well as economists not having being able to market this better?  The fact that the anti-dose to poverty is not just growth but bringing down poverty could actually help growth?
A: I agree, as a professional we have not marketed as you said. The learnings from the last 15-20 years of careful research which shows basically very systematically that that this famous disincentive effect of transfers etc. is really nothing. We have a paper called the Myth of the lazy welfare recipient and that is just what is look at what happens if you give people kind of one of these randomised experiment to give them a bunch of cash, do they stop working, the effect is zero, as really precisely zero. There is no effect on labour supply. Maybe if you squint there is small effects on it, but the effects are so small that if you think you are making a lot of people better off and especially if you think that they will spend that money and that will have positive benefits then I don’t see a reason to think that the net effect is negative.
Q: I would imagine that it has to do with legacy issues, inefficient delivery, leakages and so on and so forth which is given these schemes a bad name.
A: I think that is an excellent point. You are right, that is part of the problem. Part of the problem is deeper than that. I think there was a consorted campaign by people like Ronald Reagan to claim that this is true and it got support from some bad evidence that economists of the right were willing to marshal in favour of it. I think this is a combination of misinterpretation but also I think of a certain ideological bent to many economists of a certain generations especially the ones who are willing to come on TV and pronounce their views.
Q: Since you are talking about sort of misinterpretation by economists on the right, let me ask you about whether you are disappointed with the manner in which for instance your contribution to the NYAY scheme which was taken forward by the Congress party is being looked at, you have had a minister in the government essentially say that the idea itself has been rejected by India, look at the result and look at the mandate that this government got, does that disappoint you?
A: It disappoints me partly because in some ways it is very flattering to say that all these voters were paying attention to what Abhijeet Banerjee says. They didn’t give a damn about what I had to say.
They have voted for Modi who they genuinely admire, for nationalism and being tough on terror and a package of things - Modi offered them a clearest vision of a different India, I think they responded to it.
Q: Perhaps on account of poor marketing on the part of the Congress party but I want to focus on the issue of the universal basic income, which is an issue that you address in the book as well and Arvind Subramanian brought this up in an economic surveys and idea that India should take forward, you of course contributed to that debate ahead of the elections. it seems as of now, as of this idea has been sort of pushed on the back burner but do you believe that universal basic income is something India can afford and is something that India should take forward?
A: I don’t think that is quite right. I think this Prime Minister Kisan Yojana (PMKY) is an attempt to exactly move in that direction, which is let us replace other forms of subsidies by a single transfer and then how targeted it should be, that is the hard issue.
In fact, with NYAY also I was not a big fan of the way they were trying to implement it because I think it is very difficult to find the bottom 20 percent.
Q: You believe it has to be universal?
A: No but I think if you have to do the homework of figuring out if it is not universal, what should it be and how to do it properly etc and I don’t think we have quite got there on any side.
 Q: Do you think that this is something that the government should consider - maybe PM Kisan could be seen as the first step, first installments towards full universal basic income whatever the threshold eventually is?
A: I think Telangana has done it before.
Q: In fact PM Kisan is modeled on Telengana?
A: Exactly, they went before and they decidied that this the way they are going to - the extra subsidy they are going to give the farmers is going to come in form of some lump sum transfers. I think you could argue that their design was too favourable to the wealthier farmers and did not affect the landless farmers.
There are various ways in which you could skin that cat and we are making choices here, not sure we are making the right choices. It is a debate, I don’t think it has gone away, I think it is all there. I think the government is very conscious of it. I don’t think they are unwilling to think about it, I don’t think it is a Right, Left issue.
Q: You don’t believe it is Right, Left issue?
A: I don’t think it is a Right, Left issue, I think as I said the PM Kisan is opening the door and if government sees it is actually something that works and people are responsive to it then I think they are going to respond.
I would say to the government that they should do good evaluations - this is what we do, this is what we won the Noble Prize for. You should do good evaluations of this policy, so they really have grounds to argue that it is going to make the world a better place.
Q: Speaking of good evaluations, I remember the last conversation we had with you, you said that there was a tendency in India to do economic policy by Prime ministerial diktat and you weren’t referring to a particular government. How do we put the guardrails in place to ensure that we avoid that and what are the big risks of doing that?
A: I think you guys have a big role there. You have to ask the question, why did you do it, what is the justification, what is the evidence, why are we suddenly spending Rs 90,000 crore on this? Or a tax cut of Rs 200,000 crore or whatever?
Q: Are you seeing other countries doing more evidence based policy?
 A: Yes.
Q: Much better than us?
 A: I don’t know about much better but for example in Indonesia, we work very closely with the Presidency and we get called in when they want a major policy change, they call in and say can you do any study that will help us design this.
So, we answer every question they have and it is not that they always accept what we have to say but there is clearly a back and forth there which is much more clearly engaged.
I would like to make one more point. In India we work mostly with state governments and state governments across the political spectrum. We have worked with Gujarat under Modi and The Gujarat Pollution Control Board was very responsive to the evidence we provided and it was not that they just decided - they were willing to do research, took the results, took it seriously, they actually change policy. So I don’t think it is fundamentally against the grain. I think it is just that I think people feel less pressured to answer that question than maybe they should be.
Q: Just to take that point forward and you have addressed this in the book as well on the influence of politics and the need to have strong institutions that will then curtail the influence of politics on economic decision making, what is the way forward and what is the way out?
A: On this particular question, I don’t think the media is critical. At some levels these are complicated questions and unless you start a conversation they are not going to be settled by an institution saying that the RBI can pronounce that maybe this bank needs to be regulated more or something but on a question of whether PM Kisan at Rs 6000 is the right amount, it is the kind of question where we bring in large conversation, we should bring in experts, the experts should be judged not by their ideological commitments or by the amount of chest beating they do but by what substance and why do you believe this. You should ask questions of evidence. I feel that is one thing media can do very usefully is ask more questions. Like look you are telling us this is going to do so many great things Mr Gandhi, Mr Modi, Mr X, Mr Y, why do you believe it? What is the evidence? I think what is the evidence is a very good question and I hear it too rarely on Indian TV.
Q: I have to agree with you but this brings me back to the introduction that I remember reading in a book of essays that you had edited Understanding Poverty where you basically spoke of one of the many dilemmas that an economist face, you have said in that “to speak out is to risk misunderstanding, caricature, and opprobrium, with being ignored the most likely outcome”. You are not being ignored clearly but in a polarised times that we live in today, is this something that is weighing on minds?
A: Surely. When we decided to write a book partly because we felt that in these times what happens is that you only speak if you have a very strong ideological view then you speak or otherwise you are just silent because it is so difficult to negotiate this political space. So we felt that on the other hand that meant that all the good sense that we had to offer was just going – nobody was reporting on it. Like it is not most of the things we talk about in the book are not our own work, it is just the work of the community of economists who are doing excellent work but are not willing to take on the political kind of the nastiness of the process of going public with it. So I think that we were partly decided that couldn’t really afford to be silent.
Q: What gives you the stomach to take on as you call the political nastiness, thick skin?
A: Thick skin, very thick skin and a little bit of – we are both very political people, we live - politics is very much in our minds. So we feel that silence is very costly. We feel like influencing policy, influencing the world is in our genes.
Q: I hope that there isn’t a lot of name-calling but I want to talk about one of the issues that you discussed in the book and one of the concerns not just here in India but governments around the world, corporations around the world, people around the world are grappling with and that is with the rise and the rise of technology, machine learning, artificial intelligence (AI), these are not new by the way but with faster adoption, what is it going to mean for jobs, what is it going to mean  for employment, what is it going to mean for a skilled development or do you see in a country like India technology playing the role if applied well as an enabler as bridging the access deficits across education, healthcare, financial inclusion and so on and so forth?
A: Both I think. I think you have put in very well. I assumed that the way education has delivered could easily be improved given how low the quality thresholds are. Currently I would say we could do better by using technology in smart ways certainly also in healthcare.
On the other hand, do I think that a lot of the jobs that our BPOs do will go to robots? I think so. I worry very much that it is coming. That medical transcription, robot will be able to do it soon.
Q: When we talk about policy choices for government and let us use India as an example, to be able to adopt technology, to bridge these deficits, what should be the approach that we should take when we talk about the use of technology?
 A: I think we have very little control over it because it is very hard to know where a machine ends and where a robot begins. Our chance of having an effective policy regulating robots – I don’t think it is and it is worldwide, it is the robots in the US that is going to kill our BPO industry.
Q: So you see technology as a threat?
A: Threat and a possibility. As I said in education it could make things better.
Q: I want to talk a bit about global growth and there are two camps out there. The one that believes that technology has probably now got in commoditised or not going to see the kind of transformative changes that we saw and global growth is going to be between 1 percent and 2 percent kind of range. There is the other camp that believes that that is not going to be quite the case at least for the West. How do you see the global growth from hereon and the challenges that then it throws up for things like income inequality and poverty alleviation?
A: To be honest, one of the points we make in the book and I have tried to make this all my life, is that there are many questions which do not necessarily have answers.
Q: This is one of them?
A: One of the questions that doesn’t have an answer; God knows what is going to happen. We really have very few episodes; we think growth is going on forever but I started about 1850, till then growth was always slow; very slow. It has picked up after 1850 in the US and after 1920 in or depending on the country in maybe Western Europe, it really picks up after 1945 and then it grows very fast for a while and then it stops. Do we know that much? These are 30 years of fast growth – that’s all we know of all human history there were 30 years of fast growth in Western Europe.
We can make up a number of stories. I know that we know that much. It is just 30 years. It could happen that this was one-off. It could be that it will come back. We do not understand the mechanics of it well enough, the kind of thing that countries at some point use up their --- the fact that there was a punch of slack in the economy, labour resources that were not used very well, they get used up after a point and so growth slows because there is no free resources any more. But when that happens and how technology interacts with that and is the technology change; I mean basically despite all the great innovations in information technology we have seen in the last 25 years, productivity growth is still way below it was between 1945 and 1975. In the US, for example, the US means home of Apple, Microsoft, Google etc., productivity growth is pretty much what it was before 1945 and it hasn’t come back to 1945 to 1975 peak. So that is a fact that is interesting, troubling. Does that mean it is impossible? No. does it mean it is inevitable. No.
Q: We just don’t know yet?
A: We do not know yet and we may not.
Q: What does this mean in the context of the choices that we will see governments make to deal with poverty especially when there is more insular approach being taken. There are forces against trade and globalisation. How do you see that impacting the way that income inequality as well as poverty alleviation is going to be addressed in the future?
A: That is a very interesting and complicated question. I mean who knows what is going to happen. One of the things we have seen the world over is a move towards the extreme Right in politics and that has consequences for whether economics will even be central to the conversation; maybe we are just going to be fighting ethnic battles throughout the world for the next 25 years. It looks much more fragile than I thought even 10 years ago. I thought it was pretty robust and it turns out that because partly we had ignored the already large explosion of inequality we might be in a place which is very uncomfortable.
Now, within that I would say that people are using trade to cover up a fundamental unequal basis of the internal economy. It is not the trade. I think trade has done some damage. I think technology has done some damage but the nature of good effective welfare states is to undo the damage and a lot of countries especially Anglo-Saxon countries have been very bad at using that instruments. They have not done anything for the people who got hurt by trade and as a result they have lost everything; wages of the bottom 20 percent in the US have basically stayed flat for 30 years. So that is a fact that we should not blame on trade per se. If you take trade and say trade is not going to cause any problems so we do not need to do anything about it then you are making a policy mistake, but I do not think that that means that you should ban trade. It means you should create a policy frame within which the effects of trade are mediated.
Q: So your prescription for the world to sort of get through this period of addressing some of the inequalities on account of technology and trade is higher taxes and then better distribution so that you actually don’t leave so many people behind?
A: That is right.
Q: But is that the thinking that you are seeing, is that the risk that you are seeing that we are still not being able to see this peculate into policy making?
 A: If you hear the democratic candidates in the US now, I think they are beginning to talk about it. I think some of them are talking about much higher tax rates and they are talking about broader-based re-distribution. I also want to make a specific point, which is that I think heart of the mistake we make is to treat to decide that the way you deal with trade is by general welfare policy. One of the things you have to deal with is that people get hit by trade, they are really - clobbered - those people, so we have to do something for them. So as the policy it can't be just very general, it needs to be specific and targeted as well.
Q: In the Indian context, we are still under 2 percent of global trade and the aspiration is to double x and so on and so forth. What is it that you would think needs to be the prescriptions that the government must keep in mind from a policy point of view as we moved down this road?
A: I think a much better understanding of who are the people who are going to get hurt by it. I do think that evidence from India is also that while trade liberalisation in general was good for the economy the places where poverty failed the least where places we should most expose to trade. I just think we can’t afford to ignore the clear signals we have which is that certain people really get clobbered by to opening to trade and those people need special policies or you need to think of what to do for the areas where they live or do something which is sort of bails them out because after all they didn’t make you change trade policy. They are just the kind of passive victims of it.
Q: Speaking of one of challenges that we specifically face here in India is financial inclusion, access to credit, insurance and so on and so forth. We have seen some schemes being unveiled by the government, being rolled out, specially Ayushman Bharat on the insurance side. Do you believe that this is a step in the right direction and much more of this kind of policy initiative is required?
A: I think that Ayushman Bharat is absolutely something that addresses a real need. I think the real need is that if your mother gets cancer, for most people that can wipe out your entire, everything you have owned. That is just not a good way either from an economic point of view, because then your livelihood is destroyed or from a welfare point of view. I think it is a good idea, it needs to be implemented well and it is not a trivial thing to do because of course the possibility of fraud is rife, but it is something that they should use all their expertise available to make it work.
I think the presumptions of Jan Dhan is a bit more that its savings is going to substitute for credit. I don’t see a strong evidence basis for that claim. I think people just don’t save a lot and whereas when they need credit is usually for an emergency daughters’ wedding or something and then they pay absurd interest rates. So I don’t think that is going to be solved by people savings Rs 5, Rs 10 or Rs 100, the access to credit will have to be designed for it.
Q: You brought up the issue about the fall in demand that we are seeing and whether corporate tax cut would necessarily be the way out of that. What do you believe should be done at this point in time to stimulate demand given the fiscal deficit concerns that you have?
A: But the fiscal deficit concerns, the corporate tax cut, the amount of money that it will cost the fisc is roughly twice what National Rural Employment Guarantee Act pays, so there is a lot of money there which could have used differently. If I had to think about it, I mean now that it is done, I don’t know what to say but I would have gone the other way. I would have taken that money and pumped it into the hands of the poor. Instead of cutting corporate taxes I would have pumped into the hands of the poorer sections, I think that would have been a more effective way to revive the economy. I think if you raised NREGA just temporarily for example, you could or doubled the Pradhan Mantri Kisan Samman Nidhi or quadrupled it you will get all money into the hands of people and there would be spending that money and that might have revived the rural economy quite far.
Q: It comes back to the consumption versus investment argument that the government is saying where we want to bet in reviving investment at this point in time?
A: Correct, but I am not convinced that in a demand slump you revive investment by cutting taxes.
Q: You said that you are feeling a little more uncomfortable about where the world is today economically as well as with the move towards the Far Right socially. So what would be the key risk that you see especially when we talk about the kind of work that you are doing and the move and the efforts to continue to bring down poverty and make progress there?
A: I think partly I am worried about just the fact that we could end up in a worldwide recession driven by – this is what happened in late 20s, the US and other countries closed themselves and that sponsored more closing by other countries and so the world went into a recession. Is that an inevitable? No. But I think that every sign of government is deciding that closing their borders is not so bad and especially if the US which has been the world’s central economy, if it closes its borders enough, that is going to have consequences for China. When China is closed down, China buys a lot of stuff from the rest of the world, that will slowdown and you could imagine it spreading everywhere. So that is one big risk is that global economies are going into a recession driven by these silly trade policies by the US.
Q: If that is the single biggest risk, what is the other?
A: That is one big risk. Another big risk is just that we get into even more heightened ethnic and anti-outsider politics and economics just loses its central claim on governments. Government starts playing the - Trump administration has been playing this game of building the wall rather than doing anything about economic policy. That was okay while the economy was growing. If the economy slows suddenly then it is not clear that they know what to do about it or even they have the expertise or the political consensus or anything to do about it. So you don’t know what – in that world where in a sense the elites are all suspect and therefore no expertise is worth anything.
Q: The economists are also suspect?
A: Economists first but all elites are suspect. You too.
Q: Absolutely.
A: We are all a suspect – it is not clear where the expertise would come from. Think about the US, there are people who are economists worth the name is associated with the Trump administration, not a single one.
As against for example, the Bush administrations and the previous Bush administrations and Reagan which had all like well-known solid economists associated with it, Trump administration has none.
Q: The economists are no longer relevant or fast receding into irrelevance. Let me then end by asking you, what do you hope that the Nobel is going to do at least for the kind of work that you have been doing, do you believe it is going to open up more doors for you, do you believe it is going to give you access to people who will perhaps now take what you say more seriously than before, how do you hope it is going to change things?
A: I hope more of the former which is that – I want people to take seriously the message that evidence is valuable that there is some knowledge out there that it is not so difficult to get which would be better in designing programmes. I don’t think people are unresponsive.
As I said, we have worked with a bunch of state governments, probably 15-16 state governments in India across the political spectrum from Mamata Banerjee to Narendra Modi and everybody else. And I have not found that when you give them concrete evidence at the state level, they are unresponsive.
So I do think that it is there, hopefully that will dial-up and people will be more willing to say, this is a useful thing to do. It is like with many things, you don’t expect me to say ‘oh the evidence is this, I will do it tomorrow’, political constraints are all fine but I think they could do more.
Q: One final question on the way that we measure GDP. Of course there is a whole debate there, you are a signatory to a letter that was sent out on that issue. Without getting into that – do you believe that there is a need to, this is again not a new debate, new approach to how we measure it and how we measure wellbeing?
A: These are two separate questions. One is wellbeing. I think wellbeing is clearly not being well-measured and I worry about that a lot because at some level the consequence of destruction of the environment and in particular it cannot necessarily climate change or pollution, I even mean just the fact that people are living in extremely ugly places. You think of the suburbs of Delhi, they are dusty with crowded little houses. I don’t mean there should be parks in every house but I think the public amenities are not there. So I think we are really not creating equality of life for our urban population. We are creating a place to live maybe. If that but certainly not quality of life.
I think that is one question which is what is quality of life. I do think that we should start to take seriously the idea that quality of life is what we are interested in and not GDP alone.