What Abhijit Banerjee Thinks India Should Do To Revive Its Economy

“It’s frightening. It’s not like anybody actually knows what’s going to happen next,” Nobel Prize winning economist Abhijit Banerjee said about COVID-19 during a conversation with Rahul Gandhi on the economic impact of the pandemic , a series being broadcast by the Congress party.

As they discussed ways in which the Indian economy could recover from the crisis, Banerjee stressed on ensuring money reaches the bottom 60% of the country’s population to keep million from going into poverty.

“The US is very aggressively doing that. This is a Republican administration run by a bunch of financiers and if they are willing to do it, we should be too. This (US) is not run by a bunch of socially-minded liberals but by people who were in the financial sector. But they’ve decided that just for the survival of the economy, we need to pump money into people’s hands. I think we should take a cue from that.”

He said the government needed to give money to states so that they can come up with creative solutions.

Reviving demand

Banerjee touted Keynesian economics, saying that reviving demand would be more useful than targeting the MSME sector.

“Giving money in the hands of everybody so that they go buy in the stores or they buy consumer goods. MSME sector produces stuff that people buy but they are not buying. But if you promise them (people) money, it doesn’t have to be. In the red zone, we could say whenever it’s lifted you will have money in your account. You will have Rs 10,000 and you can spend it. Spending is the easiest way to revive the economy. because then the MSME people, they get money, they spend it and it has the usual Keynesian chain reaction.”

Keynes’s theory, developed in the wake of The Great Depression in the 1930s, says that aggregate demand—measured as the sum of spending by households, businesses, and the government—is the most important driving force in an economy.

Ensuring people have money in hand

Banerjee said that some form of the Congress-proposed NYAY scheme or direct cash transfer to people was necessary but should not be limited just to the poorest.

He said he wouldn’t want to waste time on targeted transfers based on figuring out who needs how much because it would be “extremely costly”.

“I would say bottom 60% of the population, we give them some money, nothing bad will happen in my view. If we gave them money, well some of them might not need it. Fine they’ll spend it. If they spend it, it would have a stimulus effect,” he said.

While agreeing with Gandhi that this needed to happen fast, Banerjee added a caveat against creating a situation of mismatch in supply and demand by giving people money to spend when the retail sector is shut. “We need to plan that better so that you get the money when you can go out and buy.”

“In places where there is no production or supply right now, putting money in will burn the money. There will be inflation,” he said.

Banerjee reiterated what he, economist Amartya Sen and former RBI governor Raghuram Rajan had said in an op-ed for the Indian Express , that the government should hand out temporary ration cards to people to deal with the problem of food distribution.

He said the government should hand out temporary ration cards to anyone who wanted one, which lasted for three months and could be extended if necessary, while putting all other rations cards on temporary suspension.

Stimulus package 

It was important for India to announce a large enough stimulus package to deal with the crisis on the lines of what the US, Japan and the Europe are doing, Banerjee said.

“We really haven’t decided on a large enough stimulus package. We are still talking about 1% of GDP. The United States has gone for 10% of GDP,” the noted economist said.

“We have done one thing that I think is wise, which is to kind of put a moratorium on debt payments. I would say, we could do more than that. We could even say that the debt payments for this quarter will be cancelled and will be taken care of by the government. It’s not just a matter of rescheduling it, but permanently cancelling it,” he said.

Movement of migrant workers

Banerjee said he found it odd that so much of the migrant workers movement had been handled by states. “In a sense, I feel that that is a problem because this is a place where you don’t want to decentralise because you want to aggregate the information.” 

“If this is a population of people who could be infected, you don’t want them to be moving through the whole country. That’s where I think we should have tested people before they are allowed to board a train. That’s a central question, that’s something only a federal government can do (where you) tell the government of UP that you cannot just bring your migrants home,” he said.

However, Banerjee said that the question of how to serve the migrants in the city or state was the local government’s responsibility. 

“I think what I have done is announced a bunch of money available for proposing good schemes for reaching the poorest people and let states innovate,” he said.

Two contentious suggestions

In discussing how to ensure people excluded from schemes of the government got cash, Banerjee suggestions included Aadhaar-based PDS and community cash transfers.

The economist said India needed a machinery to get money to peoplwho are not covered by government schemes like NREGA and Jan Dhan Yojana.

“In the last years of the UPA, but also embraced by the current government, was the idea that Aadhaar would be made national and therefore be used for PDS and other things. Aadhaar-based PDS meant you would be eligible for it wherever you are,” he said.

“That would have been wonderful to have right now and saved a lot of misery,” Banerjee said.

Multiple reports have, however, said that the Aadhaar-PDS link did not necessarily solve the problem of leakages or exclusion and, in some cases, made it worse. Read more here , here and here .

Banerjee also India could learn from Indonesia’s experience of giving cash transfer through a community decision-making process where the community decides who is needy and choose people for the transfers.

“We worked with the Indonesian government on exactly this a few years ago and found that it doesn’t do any worse than the centralised targeting if you don’t get captured by special interests.”

He said they found “people make judgements about what is appropriate in a much more locally nuanced way.”

When Gandhi pointed out that in India the dominate caste could end up shaping who gets the money, Banerjee said, “I would rather place extra money to allow for that than try to figure out who are the deserving people.”

The economist said he didn’t disagree that there would be “elite capture of some form or the other” but it was a good policy during an emergency situation.

Banerjee said it was necessary for funds to be available to local authorities to bridge the gap in getting benefits reaching people who are left out of government schemes.

He said it was better to take a chance that it could go wrong rather than not taking any chance at all because that “would definitely go wrong”.