The Middle Classes Have Become Hollowed Out: Nobel Laureate Prof. Abhijit Banerjee

Dr. Abhijit banerjee In Conversation with BW Businessworld's Manish Kumar Jha

• ‘There is a Realignment of the Market, to Deal with the Increase in Inequality, as a Result of the Pandemic’
• ‘I Think Getting Back Jobs for the Middle Classes and the Lower Middle Classes and Injecting Liquidity (into the Economy) Will Help’  
• ‘Let’s find industries to be competitive where we have a reason to think we can be competitive.’

Nobel laureate Professor Abhijit Vinayak Banerjee passed through the capital amidst fears of a third wave of the pandemic, a creeping inflation baited by rising prices of petroleum products, rampant job losses across India and a shrinking market for non-essentials. On an exceptionally clear afternoon in August, Manish Kumar Jha of BW Businessworld sought him out in the capital during a visit to India and picked his mind on the state of the Indian economy, India’s privatization programme and the need for centres of excellence in academia. 

Through that free-wheeling conversation, Professor Banerjee, now Director, J-Pal and Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology asserts that rise in prices of consumer products could be the fallout of a “realignment of the market” as it adjusts to the growing inequality among consumers. He advocated injecting more liquidity into the economy. He did not consider the Indian economy to be “unusually closed” in the perspective of the developed West or China. He advocated nurturing industries with export potentials and in letting the “rupee slide” to promote Indian exports, among other things.  Excerpts:

Manish Kumar Jha: The June data indicates that inflation is rising. Both the  wholesale prices index and retail prices are rising, stoked no doubt by the steady increase in prices of petroleum products.  Has the Indian government been able to come out with the right policy in this situation?

 Abhijit Vinayak Banerjee: The government has made a choice. The advantage of the petrol cess is that it does not need to be shared with the states. So it focuses fully on the petrol cess as a way to raise revenue. I think we don’t fully understand why inflation is so high.

But there are two things. I think some of it is cost-push, like you said petrol prices are going up and that’s a consequence of raising the cess. The government has decided that the petrol cess is going to be a big part of the revenue. It has something to do with the Centre-state politics, because I think the cess is all Centre’s. But I think probably some readjustment of prices is also happening. 

People are realizing that the market has shrunk. Few people can afford products and I think there is some adjustment of prices. Look, we can either lower prices or expand the market. So, if people are not going to buy (these products) in any case, then (the manufacturer) may as well get the people who can pay more. I think there is some conscious readjustment of prices. So many companies are announcing that they will raise their prices of say, power, or this or that. 

So some of it is, I think, repositioning in the context of high inequality, where the rich have been mostly, relatively unaffected in their consumption but the poor or the middle classes are really hurt. Many of them have lost their jobs. So, I think there is also some repositioning of the market. This is all speculated. We don’t have the data, but it’s quite possible that there is realignment of prices. 

‘The Middle Classes Have Been Kicked’

The middle classes have become hollowed out. Many of them have lost their jobs, or their sons have lost their jobs and were supporting their family or their daughters have lost their jobs and were supporting their father. I think it’s this belt tightening. So anything that’s a little bit more optional, is being dropped. So that means, that maybe a lot of people are not very price elastic any more. Cut the prices or they’re not going to buy. If there is a five per cent cut in the price, they’re going to buy. 

So you might as well raise the price and the people who have lost money will not buy. To my guess, that’s what’s also happening. There is a realignment of the market, to deal with the increase in inequality, as a result of the pandemic. The middle classes in particular have been kicked. In India that has been the weak consumer market. The rich could buy, but the rich buy global products, then there is the Indian middle class who buy, you know, the domestic products and that’s where I think, there is a thinning out, which could have led to either a lot of lowering of the price or the raising of the price, depending on whether you think the pricing activity is high or low.

Manish Kumar Jha: Right

Abhijit Vinayak Banerjee: (The middle classes) are already tightening the belt. I have seen it in my brother’s household. They have let their driver go. It is clearly a belt tightening going on. When you won’t get these optional products to being bought, you might as well target the rich and raise the price.

Manish Kumar Jha: Right. So the government’s policy interference in a situation like this has a limited scope. The government is holding onto their fiscal deficit target. You have talked about ‘free spending’. The Indian government has mostly spent on a few infrastructure projects, which is not sufficient at all. What should the government do now?

Abhijit Vinayak Banerjee: 

I think getting back jobs for the middle classes and the lower middle classes and injecting liquidity (into the economy) will help.  Demand will go up. And when demands goes up, businesses will sell. Small businesses, medium businesses are hurting because they really don’t sell in the international market. They sell in the domestic market. Most domestically processed businesses sell to ordinary people. I think they would benefit if the government is free spending.

Manish Kumar Jha: About 55 per cent of the Indian GDP now comes from domestic consumption. Domestic consumption alone could certainly not lead to a double digit growth. We do not seem to have the focused export policies that other emerging markets do.   How, in your view, could India move ahead and secure that double digit growth?

Abhijit Vinayak Banerjee: You know, in a global comparison, we are now a very big country and we are reasonably open now. The share of trade in the GDP is kind of lower in China than in India, if I’m not wrong. So the bigger the economy, the less open it will be, because it’s a market for everything. People are buying Indian produce, whatever it may be ‒ you know ‒even a laser printer. So, you can produce everything in India and we’ll see that a little bit of that.  

We are much more diversified as a result, than a smaller economy. If we compare ourselves to Ghana, which is roughly the same ‒ a lower middle income country ‒ Ghana’s is a much smaller economy. They import and export more because they can’t really scale production to the level at which it pays off. So you can’t produce everything in Ghana. 

The USA and China are both actually very closed (economies). 

You know eight per cent of the US GDP is trade ‒ it’s not huge. Why? Because the US is huge. A lot of what is consumed (within the US) in any case, is not just the product but the service with the product. So sales, marketing is often more than 80 per cent of the value of the goods, or the final delivered price ‒ 80 per cent of it (the value of the product) might be, you know all the services ‒ marketing, advertising etc. So when you say eight per cent of the GDP,  it means a lot of the products, or the base products might be imported from China into the US, but then the marketing, selling etc. is most of the value of the product. India, by that matrix, is also a very big economy. India is very big.

Manish Jha: But sheer size only! 

Abhijit Vinayak Banerjee:  Sheer size! Sheer size means trade is going to be a smaller part (of the GDP). It’s one of the most stable…If we take the European market, also Europe as a whole, it’s very closed. The US is very closed. China is very closed. In that sense, we are not unusually closed. So, what that means is ‒ dependence on domestic demand. The bigger the economy, the greater the demand. That’s always the case. So, I wouldn’t worry too much.

I think the mistake we’re making is, we are not creating new export industries. In some ways, maybe we should be letting our currency slide a little bit. We are relying on remittances and FDIs and basically financial investments to keep the rupee up. The rupee is very stable, around Rs 70-75 (to a dollar). Maybe we need to slide it a bit more to generate more exports. We are not doing a lot of export promotion.

Manish Kumar Jha: But we do not have a strong export-led policy. Because the surplus money which we want, will only come through added values if we sell our product overseas.

Abhijit Vinayak Banerjee: That’s correct. But I think the point I’m making is useful too ‒ that we are not particularly closed ‒ we are relatively (closed).  I mean, we can be more open. I’m all for not using discretionary tariff policies to restrict (trade), because that leads to inefficiency and corruption. I think we can be mostly willing to be open. And I think there is some advantage in focusing on some specialized products where we give protection. 

I don’t know the factories. There is some advantage in targeting, based on the very clear theory that we think we have a real advantage in these products. But it will take us five years to get there. But then, we should have a very, very, clear, explicit theory of why those products have been selected for expansion. You have to be very clear on why you are protecting (your chosen industry). Protection is kind of needless without an understanding of why we are protecting them. So what’s happening is that people who are being inefficient, also get protected. 

I think we should focus on industries where we have a real scope. We can protect them and promote their exports. But we need to be very clear on understanding what and why we are doing that, rather than just “isko kyoin dikkat ho raha hai (why is this industry in trouble) ‒ I give them some benefit”. That’s a way to get inefficient industries. 

If you let those industries sink and then, like in 1991, we were in panic, but nothing awful happened. By 1992, the GDP was back up and after that, you know we never had this complete wipe out of industries. So I think we should be more confident. If we want to do some trade intervention, we should speak to the industries which we really think are promising, and do it on a basis that we understand. 

India's Per Capita Income at no 145 in the World(in USD) 

Let’s have a public discussion that this, this and this industry should be invested in. Actually we have a good case for investing more. If we just invest more, we will be able to create good products which we can sell, but it has to be done.

Manish Kumar Jha: But in our country, such an argument will not be on the merit of economic benefit. The argument will have populist and political undertones bereft of sound rationale. How do you look at this?

 Abhijit Vinayak Banerjee: That’s my point. The argument shouldn’t be that this industry is having problems. It should be that this industry is having problems, but in the long run, this industry is very promising. It has to make the case that we are a good company to produce this, for some reason. For example, if it’s a product that uses a lot of petroleum, we have one of the world’s highest petroleum prices, let’s not imagine that that’s one of the industries where we are going to be competitive. Let’s be clear, that’s not an industry where we can be competitive. Let’s find industries to be competitive where we have a reason to think we can be competitive.

Manish Kumar Jha: Here again, there’s a no clarity on economic policies among the leading political parties. The ordnance factories are a classic case These are 41 large factories across India. These are mostly defunct. They have a lakh employees and a huge asset base that needs to be tapped. What we do is buy the same equipment they manufacture from the international markets. We talk about privatizing Air India. I recently met a Congress leader, who said, ‘We oppose the privatization of Air India’. There is a huge dichotomy here within the Opposition party.

Abhijit Vinayak Banerjee: I don’t know why anybody would oppose it. Air India, in my view, shouldn’t exist. It’s never been competitive. I don’t know why Vistara couldn’t be our national carrier. If we want to have a good one, let’s have a good one.

Manish Kumar Jha: The idea is that we could use these government players to the last mile in a crisis …

Abhijit Vinayak Banerjee:  Yeah, but in a crisis we could also have a chartered plane. There are enough chartered planes in the market. So pretending that we need them (the national carrier) for a national emergency, is a false narrative. Look, we lose what ‒ about Rs 50, 000 crore each year on Air India?

I have zero sympathy for Air India’s survival. I don’t think it serves any sort of purpose. In fact, I take no pride in Air India.

Manish Kumar Jha: So, if you have to advise the government, especially on these sick and loss-making industries, say the ordnance factories, which are also a strategic asset (only on paper though) ‒ what would you tell them?

Abhijit Vinayak Banerjee: The ordnance factories are a more difficult one, because you might repeatedly get in the wrong crisis of suppliers.

Manish Kumar Jha: No, they don’t even fulfill the production order even after the secured nexus. Their quality is mostly chequered. They are completely dysfunctional. 

Abhijit Vinayak Banerjee:  I understand that the case for ordnance factories and the case for Air India are different, I don’t think we have any strategic reason to invest in Air India. But there is some strategic reason to invest in the ordnance factories. The fact that we do it so badly is the reason to not do it. But I think the argument is not the same for Air India and the ordnance factories. The argument for the ordnance factories is that, we are really not using this capacity, we could even deploy it for something else, which is land that the different factories are sitting on in West Bengal for instance. 

So let’s give that land and that productive capacity to some other industry and maybe they’ll use it better. I mean there is no reason to have a deformed industry. That’s different from the case of Air India, where there is no case in my view, for having a national airline, in the first case. 

 ‘I Think You Have Excellence When You Have Excellent People.’

Manish Kumar Jha: You have been part of the best ecosystem for research in the US. What worries me is that in the crucial aspect of innovation, research and development, I hardly see any debate in this country. Our competitiveness is lacking in terms of producing advanced technologies. During the brief Indo- China economic standoff, we found that the Indian electronic industry could  not even make critical components for television. 

Is something lacking in the ecosystem in academia that impedes the quality of research?  How can we do better?

Abhijit Vinayak Banerjee: Interesting question. I don’t know how easy it is.  Innovative policy in most countries has not been a great success. And I want to start by saying that I don’t have a great sense that there is something obvious we can do, whether we are innovating, or whether we are duplicating what other countries have produced but within a lower cost. Having a very strong engineering workforce is critical. And this doesn’t have to be original. It doesn’t have to be brilliant. It just has to be ‒ yeh problem hai, solve kardiya! 

We don’t have a single university in the top 100 in the world. And you know, we aren’t getting there. China has gone from having none to having many and they did it in front of my eyes. A friend of mine was involved in it. So in a sense, China is now making a mistake. China is becoming more authoritarian and as a result some of the people who are really talented are thinking, ‘I’ll leave, if I say something against the government they’ll put me in jail or something.’

Manish Kumar Jha: But China has laid the foundation so far. Things are popping up.

Abhijit Vinayak Banerjee: Yes, they have laid the foundation. What is really important is that they have invested massively in extracting global talent.

Manish Kumar Jha:  It is interesting that you talk about China. I’ll give you one example. We have had an ecosystem of fighter jets and jet engines for the last 30 years. We had a licence to manufacture the Sukhoi.  We could not take advantage of it. And China is making it now. China has leap-frogged in many dimensions. So somewhere, our academia and R &D is under complete government control and is dysfunctional.

Abhijit Vinayak Banerjee: It’s not that China’s funding of the university came from the government, because China’s universities are in the private sector.

Manish Kumar Jha: What about the USA in terms of basic innovation?

Abhijit Vinayak Banerjee: Going back to China, China’s success was not about private universities. Now there are more private efforts but 20 years ago there were no private efforts. They were all public universities. Tsinghua and Beijing had public universities.   

So it was these universities that the government decided to upgrade. They gave them a cut-off to hire talented people and give them a certain space to do research, without a lot of state intervention. And as I said, I really think China is now making the mistake of losing talented people or workforce.

I think in India the private universities are trying, but for them also, the initial financial push for creating a world class university which involves hiring 20-30 people and paying them a global salary, is just impossible. No private university here has the money to hire 20-30 people and 20-30 people are not enough.

Manish Kumar Jha: But the government also gives grants to the universities here but they are no such centres of excellence.

Abhijit Vinayak Banerjee: But there is not enough money. The government pays at the UGC scale. Some private universities don’t take money from the government. When they pay, they still don’t have the money to pay that kind of fees (that attracting global talent demands). Nobody has the money in the system. 

In China, they said that we will give a very large amount of money to some universities over the next five years to hire five, 10 or 15 people a year, for five years, and then you have 30-40 people who are outstanding. They have hired foreigners, American, British, wherever (good) people are available. They are willing to hire anybody. They are willing to hire and provide astronomical salaries to people from abroad. 

The idea was that if you go cheap you can’t ever get there. You need to have at least one or two, but 20-30 people of the highest quality. And if you don’t get that then you never get started. And that’s how they got Tsinghua into the top five (universities in China). That was only possible by hiring the best people available and paying them not just astronomical salaries, but also giving bonuses based on publications and in the top journals ‒ $ 5000, $10000 for publication. 

We need money to do it. We never had the money, so we don’t talk about excellence. That’s the only way we could get excellence. Money has become too important in this conversation, but if I look at it with my economist’s hat on, I see that I don’t see anybody having the financial capacity to aim for excellence. 

Manish Kumar Jha: Centres of excellence is what I meant. High quality original research is missing in India, largely in the universities and that is true for JNU, DU, the IITs. Why is there such a sizable gap in advanced research and technology in India in comparison with the developed world? Will it hamper our growth potential as a emerging nation? 

Abhijit Vinayak Banerjee: The best people in India are very good. Few of them are scattered around many, many institutions. I had the advantage of working with many people who are all of top quality. Your own work becomes much better, you know, if you have one or two very good people working in a corner. You get lucky sometimes. Sachin Bose managed to do it sitting in Dhaka University. So there are people who can do it.

There is a mathematical physicist called Ashoke Sen in Allahabad. He’s outstanding. He is in a very specialized field. He can be one of the world’s leaders. But if you want people working in big fields, you really need 30-40 people of quality in one place. We just couldn’t have that. We have one or two very good people. In any institution, there are one or two excellent people. I’m not saying there are no excellent people, but what I benefited from was the excellence of my colleagues ‒ my students ‒ that’s what drives real quality.

So, that’s the key. We need to have excellence at scale. We have a few people who are very, very good. In every field, you have one or two people, four people who are scattered around the whole country. Maybe in the IITs, IISCs, there is one at the Tata Institute and that’s not enough. We need to have 30-40 people of excellence in one place.

MIT economists Esther Duflo and Abhijit Banerjee win Nobel Prize | MIT News | Massachusetts Institute of Technology

Manish Kumar Jha: Yes, that’s not enough. I’ve spoken to many key people, and they’ve failed to bring their theory into the applied side of it. I mean that is the problem part of the scientific and engineering activities in developing technology for industry. 

Abhijit Vinayak Banerjee: 

To me that’s less important, I think you have excellence when you have excellent people.

Manish Kumar Jha: We had a great deal of leading information technology, say in artificial intelligence,  but we could not convert that technology into making drones. We are buying drones from Israel.

Abhijit Vinayak Banerjee: I understand that. But I think we can never have enough people who are given enough money, not too much direction. Somebody will give the money ‒ you can hire ten people in you lab ‒ ten fabulous people.

Manish Kumar Jha: The money for research could be funded by the government, but should be autonomous in approach.

Abhijit Vinayak Banerjee: Yes, but completely unguided by anybody. The NIH doesn’t tell you what you can do. Once you get the money, you do what you want.

Manish Kumar Jha: For example, the DRDO is fully funded by government, but hardly comes up with any meaningful technology. It is led by the government, funded by the government, protected by the government.

Abhijit Vinayak Banerjee: It shouldn’t be intellectually led by the government. That’s the problem. Intellectually it has to be with the individual. It cannot deal with the country, that’s where China is now making a mistake. Guidance will come from talented individuals with wild dreams who go and do what nobody else has done. And you have to just support them, tell him that you are talented. With ten colleagues, I’ll give you millions of dollars and I’ll wait. I’ll give you five years and I think one out of five of them will produce something outstanding. Then you have the stamina. 

That’s what the Chinese did, right? There is a stamina there to say that ‘we won’t rise in the ranking in the first five years, we are going to rise in the ranking in twenty years and we will be on the top’. There has to be a long term perspective!

Manish Kumar Jha: You have been talking of MGNREGA. The government has increased the fund by Rs 40,000 crore. That is not sufficient at all.  I spoke to people on the ground in Bihar. People at the bottom who need jobs, don’t get them, when they need them; it is based on supply side of welfare.There are some dichotomies in the scheme. How do we take it forward? 

Abhijit Vinayak Banerjee: I’ve written about this before. MGNREGA was designed (such that if) the crop is destroyed in this area ‒ it’s not easy to expand in this area ‒ you can expand on a macro-level. I think that the government has promised people 150 days wages. So the reasons why people are somewhat hesitant is suppose, (the apprehension that if) I use my 100 days now and then there’s a third lockdown, uske baad kya karenge (what do I do next)?

So I think if the government gives people assurance, they can have up to 150 days (of work). They won’t need to use 150 days. People will find something to do. There will be confidence. If I use up the 90 days now, and there is another lockdown, I still have more. Now I think that in these months, MGNREGA is not big. This season always has jobs for people, because it’s monsoon. 

So, I don’t think this is the moment to expand MGNREGA, to be honest. But they could promise people that if you want it, you could have it.

Manish Kumar Jha: Sir what could we do to bridge the skill gap and create more jobs? There are concerns that the data published isn’t fully correct on job losses. Government agencies also have disparities in their data. Your comment? 

Abhijit Vinayak Banerjee: I think the government should aim for data transfer. I don’t think we are doing well. So people don’t believe any of the data. I think we’re much better off using a certain amount of independence. 

You know, the government is surely right in saying that none of the data is of high quality. They have been saying it for years. The NSS (National Sample Survey) somehow doesn’t match anything else. I think that’s completely true. I think the NSS has its own problems, but selectively removes data ‒ this round is okay, and this round is not. This is really problematic because then the confidence (in the data) is gone.

This is not acceptable. Whatever the methodology is, what we do is compare with the past NSS and the current NSS. As long as the methodology is stable (it’s fine). If it keeps changing, then we can’t compare. It’s not that the data generally is true. It is some slice of the truth. It is never fully complete. It always has its deficiency but I don’t think that we should start with the idea that if the data analysis is not perfect, let’s throw it away. 

And selectively throwing it away is dictatorial. We really need to avoid this. It’s an extreme act and we should only do it if we have the documentation that the data is not good.

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