New Delhi: India is “barreling down” the path to disaster with its decision to cut taxes for the rich and making unnecessary public investments that could “explode government debt”, economist Abhijit Banerjee said, days before being awarded the Nobel Prize in Economics.
In a lecture at the Watson Institute in Brown University last week, Banerjee said the Indian economy is in a “crisis”, with growth slowing sharply and consumption falling for the first time in several years. The government’s response, he added, was only making matters worse.
“You cut taxes for the rich, you make public investments that are not required. All it does is hurt the income distribution and make government debt explode, often ending in a full-blown meltdown. This is what happened in Latin America. India is doing well on this time-honoured path to disaster,” he said.
India cut corporate tax rates for firms to an effective tax rate of 27 per cent, aimed at reviving investment in the economy, but many economists have argued that these measures will not help boost consumption that has been flailing.
Collapse of investment, consumption
Banerjee pointed out that both investment and consumption have totally collapsed and public borrowings account for 9-10 per cent of GDP.
“National sample survey data for 2017-18 shows that people on an average are poorer than what they were in 2014-15,” he said.
Average consumption expenditure at current 2018 prices fell from Rs 1,587 per person per month in 2014 to Rs 1,524 in 2017-18 in rural areas and from Rs 2,926 per person per month in 2014 to Rs 2,909 per person per month in urban areas, he pointed out.
“Average consumption going down in four years is something that has not happened in many years. This is extremely serious,” Banerjee said.
Banerjee was of the view that putting more money in the hands of the people by raising wages under the Mahatma Gandhi National Rural Employment Guarantee Scheme and raising prices for farmers are short-term measures that can help revive growth.
He also advocated a lax monetary policy regime and letting the rupee slide. “And since it’s an NDA government, we can pray,” he said.
‘Power concentrated in PMO’
Banerjee, like former RBI governor Raghuram Rajan, was critical of the entire decision-making process being concentrated in the Prime Minister’s Office.
He also voted for strengthening institutions that have weakened in the tenure of the Narendra Modi government. He said the government’s way of handling “pesky” institutions was to either change the law or appointment of people who will agree with the government.
“Institutions went from hyper active to zombies. This is part of the reason why investment has plunged,” he said.
“It is important to not act against people who look like they were contradicting the government,” he said, adding that the government should demonstrate it has sufficient proof before acting against anyone and should be more open to criticism.
He also suggested selling off public sector banks rather than trying to fix them.
This is not the first time that Banerjee has been critical of the Modi government. He has openly questioned the rationale behind demonetisation as well as the government’s handling of unfavourable economic data.