The government should consider reversing the corporate tax rate cuts it recently implemented and should expand the PM KISAN scheme to include non-farmers as well, Nobel winner Abhijit Banerjee said in an interview.
Dr. Banerjee, who, along with Esther Duflo and Michael Kremer, was recently awarded the 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, popularly called the Nobel Prize in Economics , is in the country for the release of his book co-authored with Dr. Duflo Good Economics for Hard Times .
“I would not have cut the corporate taxes,” Dr. Banerjee said. “Reversing now may be too costly, but it’s something to consider, because that’s a huge burden on the fisc and that money I think would have been better spent by giving more money through PM KISAN and raising the NREGA wage. Those are the kinds of things that will get money in the hands of those who really will spend it.”
He said the corporate sector is already sitting on a lot of cash and the reason it is not investing is more to do with the fact that there is no demand in the economy rather than the fact that the companies do not have money to invest.
Dr. Banerjee said India should have more items in the higher slabs of the GST because you cannot improve the government’s tax to GDP ratio by simply implementing tax hikes on income. In addition, this higher tax collection should then be used in a broader version of the government’s PM KISAN scheme, he said.
The government should address the fact that the Minimum Support Price (MSP) system had a knock-on effect of increasing the demand for labour and that relying purely on PM KISAN to support the farmers will reduce this demand for labour, Dr. Banerjee explained.
“In the case of PM KISAN, if it is combined with not using the support price as the mechanism for supporting the farmers,” he said in response to whether the scheme was an example of “good economics”. “I think that the landless labourers have no reason to be excluded from this benefit. In particular, if you think about it as a substitute for the support prices.”
“The support price partly increases demand for labour because it’s more profitable to grow more wheat, and so I hire more people to cut the wheat,” Dr. Banerjee explained. “If I’m going to remove that extra incentive to produce [by giving money through PM KISAN], it’s going to reduce the demand for labour. I think that relying purely on PM KISAN has the disadvantage that it doesn’t address this fact that the support prices had spill-over effects on labour demand.”
Dr. Banerjee said the distress in the auto sector caused by the massive layoffs could have been mitigated if India had a system where companies contribute to a fund that can then be used to pay workers who have been laid off.
“That’s a way to make people more mobile,” he said. “So you’re not stuck in this firm not being used. You can go work somewhere else and you preserve your entitlements. That’s how most countries do it.”
Full text of the interview:
‘I think India could be going through a hard time’
Your book is titled good economics for hard times. In your estimation, is India economically and in other respects going through hard times right now?
I can’t be certain because the data is a bit mixed. You look at the GDP data, India is still doing pretty well. Look at the other data, it doesn’t look so good. The NSS data suggests growth basically stopped after 2014-15, at least in the per capita consumption level. I think India could be going through a hard time.
We have a majority government, which has a clear ideology. Do you feel that that is putting some stress on our social fabric?
There’s lots of stress on our social fabric. And it’s been there for a while. It seems to me that when we talk about hard times in this book we mean mostly an economic decline driving social changes. That’s what the subject of the book is.
What would your top three “good economics” suggestions be to bring India out of this current slump?
That is, if we are assuming we’re in a slump, which I am moderately convinced of. I think it’s harder to do now because the corporate taxes have been cut. I would not have cut the corporate taxes. Reversing now may be too costly, but it’s something to consider, because that’s a huge burden on the fisc and that money I think would have been better spent by giving more money through PM KISAN and raising the NREGA wage. Those are the kinds of things that will get money in the hands of those who really will spend it. The corporate sector sitting on tons of cash... It’s not as if it doesn’t have cash and so is not investing. It’s not investing because there is no demand.
In the book you had actually argued for an increase in taxes rather than cutting them...
And the government had increased taxes. This Budget, I was very pleasantly surprised, went in that direction. But then they retracted and that’s unfortunate in my view. They should have stayed with the high taxes.
Even when it comes to things like indirect taxes, the trend in GST has been to move more and more items to the lower tax slabs. You feel they should have stayed in the higher brackets?
I think so. You can’t have a substantial increase in the government’s share of the GDP without taxing middle classes. And so I think that you can’t just take wealth taxes and income taxes on the rich and expect to get a huge share of GDP. China has done this completely systematically. At some point, they froze the brackets. So as the economy got richer and with inflation, real incomes went up and so the tax collections have gone up. India and China used to have roughly the same fraction of GDP in indirect taxes and now China is much higher. They’ve gone systematically, saying that even the middle classes need to pay taxes to get good services.
You mentioned PM KISAN and it’s been said that you contributed to the idea of NYAY. Do these two also classify as “good economics”?
In the case of PM KISAN, if it is combined with not using the support price as the mechanism for supporting the farmers. Because the support price is an odd mechanism. It means the government is committed to buying tonnes and tonnes of grains, which then it has to give away somehow. That whole process seems a little bit, you know, 50-year-old economics. We could modernise and we could have a situation where the government doesn’t have to buy tonnes of grains to support farmers.
NYAY was aimed at all the poor, whereas PM KISAN is only for farmers. Do you feel PM KISAN should be expanded?
I think so. I think that the landless labourers have no reason to be excluded from this benefit. In particular, if you think about it as a substitute for the support price. The support price partly increases demand for labour because it’s more profitable to grow more wheat, and so I hire more people to cut the wheat. If I’m going to remove that extra incentive to produce, it’s going to reduce the demand for labour. Whether we want to go through PM KISAN or we want to have a redesigned version of NREGA, both are mechanisms for getting money in the hands of people. That’s a debate one would have. But I think that relying purely on PM KISAN has the disadvantage that it doesn’t address this fact that the support prices had spill-over effects on labour demand.
The support prices were increasing and are not increasing any more. One of the things this government has done is that it has brought down inflation massively by stamping down on the rate of increase of support prices.
In the book you also say that one shouldn’t focus on growth so much because we don’t actually know where it comes from. But then where does employment come from, if we aren’t going to focus on growth?
I mean, it’s not that right now people are not employed. Most people over 30 years are employed. How do you create good jobs? Well, I don’t have a miraculous suggestion for it. We have this other book, which came out in March called What the Economy Needs Now , edited with Gita Gopinath and Raghuram Rajan. There we make the point that we have lost our chance on creating manufacturing employment when Bangladesh and Vietnam won that competition for a variety of reasons. If we want to get into creating employment in manufacturing, one of the things we need to do is we need to make it easy for people to get into manufacturing. We gave the suggestion, which is just a suggestion and is subject to trying it out, of creating some version of export promotion zones, which doesn’t have to be only for exports, but they should really be for production. Where you can get plug-in real estate and maybe a different set of labour laws. Where you have specifically designated areas where you can go in and have, not absent labour laws, but labour laws which don’t put the entire burden of sustaining unnecessary workers on the firm.
The firm should pay into a pool, but then the pool should pay for workers. Even if I fire a worker because I’m unlucky and my firm is shrinking, I shouldn’t be required to hold on to all the workers. But that doesn’t mean workers should be starving. Most countries do it by having a flexible fund, which basically has firms paying into it. So, the firm is allowed to let people go, but the incomes of those people is protected by that fund.
Can something like that be applied then to, say, the auto sector because a lot of contract workers are being let go?
Now it’s hard to do it. You have to do it ex ante. When firms are hiring, you tell them that when you hire a worker, this extra amount you pay into this fund, and then you’re free to fire these people, but when you fire them we will pay them out of the fund. And that’s a way to make people more mobile. So you’re not stuck in this firm not being used. You can go work somewhere else and you preserve your entitlements. That’s how most countries do it. We do it in a relatively odd way.
And how would you restructure NREGA? Is it only about giving the workers more money?
Well, there’s a separate set of issues which is to do with whether NREGA has gone too far in in having a very transparent control system or relatively transparent control system. So as a result of that, NREGA is not something that responds quickly to job losses or when people need employment. The reason why it doesn’t is that the village panchayat has to propose a set of projects, they have to approve, then you can do it. But imagine that today I suddenly discover I don’t have a job. I can go and apply to work on the existing projects. But most of the existing projects can probably only hire 50 people and they’re full up. This is why, we give some numbers, about 50% of people are refused work in NREGA. That’s a number that should worry the government.
In the book, you’d also mentioned this phenomenon that people are resistant to change, and especially resistant to geographic change. They don’t like moving at all. How does the government tackle this issue when it comes to employment? How does it bring the jobs to the people if the people are not willing to move?
I would say right now, given that there aren’t that many jobs, this is not a huge issue here. I feel like at some level we have a big reverse problem, which is that the real estate sector, which was a very big connector of the urban, more affluent sections of society and the rural poor, through the fact that it creates jobs... The real estate sector is broken right now, partly as a result of the NBFC crisis and the IL&FS crisis. I think what is very clear is that the NBFC crisis is hurting directly.
There has been a lot of criticism about randomised control trials in a country like India, with people saying that they can’t be extrapolated nationwide, and that externalities are not accounted for. How would you react to this?
People say all kinds of things. It’s not that anything can be extrapolated. Everything could be different elsewhere, and we are pretty careful in not pronouncing till we have tried something several times and tried it in different places. There’s no proof that even if it works in five places, it will work in the sixth. But all empirical research is like that. I think David Hume pointed this out, that the fact that sun rose every previous day doesn’t imply that it is going to rise today. I’m not panicked by the criticism.
I mean, we have to be careful. At some deep level it’s a concern with the entire structure of empirical knowledge. Why did you step out of the house, why did you not expect the street to change into the sea. You have no proof that is not going to happen…
On a personal note, how do you continue working so successfully with your wife. As in, how do you balance life and work when your life partner is also your colleague? Do you take work home with you?
Yes! I don’t think we are different from other academic couples. I think most academics take work home with them. We have children and we have a fairly active social life. So it’s not that every minute when we are home, we are working. There’s lots of distraction. It just means that if we want to write something, we can kick it back and forth over a longer period of time. The pacing is nice, where you can quickly say okay, fine, I don’t like that piece but let’s come back to it. If you have somebody who you won’t see for another three weeks, then it’s harder to do that. The pacing is kind of pleasant.