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We Are In Phase Of Creeping Protectionism And MGNREGA Is Still The Best Bet In Rural Areas: Nobel Laureate Abhijit Banerjee

Abhijit V. Banerjee, Professor of Economics at Massachusetts Institute of Technology, received the 2019 Nobel Prize for Economic Sciences. How well his ideas fit into India’s economic growth amid the volcanic challenges are debated in his book--Good Economics for Hard Times-- which he co-authored with Esther Duflo. He touches upon more politically contentious issues like trade, inequality and the universal basic income for those who are left out of the economic growth story. In a free-wheeling conversation with Manish Kumar Jha of BW Businessworld, Prof. Banerjee comments on India’s healthcare, the privatization, fiscal support, and the complex matrix of Direct Benefit Transfer Scheme. He asserts that the Indian economy could be competitive should “we open ourselves to trade”. Excerpts:

Photo Credit :

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Despite warnings, India did not focus on its healthcare infrastructure, resulting in a complete collapse of the healthcare system during the second wave of the pandemic.  While the Indian government wins global goodwill with its vaccination programme worldwide, the Union Budget provides $4.75 billion on healthcare and vaccination for the country, which will get stretched further owing to the severity of the second wave. How do you assess the situation? 

Abhijit Banerjee: There is a short-term issue which is procuring enough vaccines. There is a long-term issue which is the healthcare infrastructure—pumped oxygenation in every CHC/Wellness Center/District hospital for example—which will take some time, especially where there is a power shortage. This was flagged during the first wave, but relatively little got done. Now as the second wave may be plateaus we need to return to this, but we also need to move urgently on the vaccination.


How much and how can the government transfer money to those at the bottom of pyramid? In India several welfare schemes plus a direct cash transfer to beneficiaries is the model. Many welfare schemes never reach the intended owing to corruption, as my investigation in Bihar shows. So, what should be done? What should be the threshold of the direct benefit transfer scheme, amidst the worry about the fiscal deficit?

Abhijit Banerjee: 

I agree with the government that setting up new schemes takes a while and it is at the beginning that the leakages tend to be the biggest. So in rural areas using MGNREGA is still the best bet.

The government should just announce that people can have 150 days instead of 100, so that the people don’t have to worry about running out of days if there is another wave. The urban population is much more of a problem—but for example Tamil Nadu is now giving cash to every family through the PDS system, which could be a strategy to use for urban areas.

However, that will still leave many groups uncovered--especially the temporary migrants to cities who have no PDS access, but also older people living alone who are surprisingly numerous in our data may not be able to do MNREGA work and many others. To deal with this the government needs to involve NGOs and other local players (municipal governments, panchayats?) to identify left out groups and find ways to help them.


I would propose setting up a fund which takes proposals for such projects from NGOs and others and makes quick decisions. Some money will no doubt get misused, but avoiding leakages in a crisis is less important than trying. 


Abhijit Banerjee Receiving Nobel Prize for Economic Sciences in 2019


We saw some good indicators in April like a record GST collection, record exports and FDI and recovery in the GDP, if from a low base, but we also saw record job losses.  So, would you say the economic recovery in 2021-22 is largely a statistical illusion, given the low base?

Abhijit Banerjee: It is not an illusion. The economy was recovering for real—as one would expect after such a huge down-shock—indeed when I was asked a year ago, I did say that I didn’t expect the shock to be permanent and that there are natural forces for recovery. But I (and other optimists) could have all been wrong—economic predictions are often a dicey business.


Many argue that the fiscal target is irrelevant during an extraordinary situation such as this and that the government should rather focus on a large enough stimulus package ‒ and we are still talking about one per cent of the GDP. What is your view?

Abhijit Banerjee: I agree even 2% of GDP seems perfectly reasonable—to put that in perspective the US is planning to run a deficit of more than 20% of the Federal budget for the next decade.


What is your thought on privatization of assets such as Bharat Petroleum and many underperforming public sector assets, including those in the defence sector? India’s 50 ordnance factories are a heritage of the British era and most are redundant, unproductive and a huge liability. So, we end up importing defence equipment. Even so, no disinvestment is planned in these so-called ‘strategic assets’.  Do you think with such lacklustre reform will India emerge in her quest for  $5 trillion economy and get its due place in geo-economic space? 

Abhijit Banerjee: My general sense is bafflement. 

This government is willing to take such big political risks to pursue what it believes in, for example with the farm laws. Why is it so slow to take on a much more obvious case of pure rent protection?

What is your thought on consolidating and privatizing the public sector bank? Do you think our banks are relevant in 21st Century? Dangerous NPAs and furthering tightening creates credit crunch and that does not serve the economy well. How do you look at?

Abhijit Banerjee: I do see the reluctance to privatize banks as a bit of a special case. The worry is that they are too big to fail so the government is always ultimately liable for the deposits of the savers—and therefore privatization might just increase the government’s risk exposure. Or at least that is an argument for not just selling the bank to the first bidder. But it has to be done—they are over-staffed, and as our research many years ago had shown, their decisions processes favor excluding new and young firms, and mechanically renewing loans to existing clients, even when they are heading to disaster. The net result is acute credit constraints among small firms and massive NPAs.

Indian Public sector among the highest NPAs in the world( non performer)


Most Indian economists tend to oppose market friendly ideas –like they did in 1991 against the opening of economy and concept of free market and even the technology like –computers. Reason given that the Socialist orientation of the Old School dominates this argument. A breakthrough technological project like bullet trains is seen as diversion of resource as argument mostly goes as Indian still lacks basic.What model of growth should the Indian economy adopt in your view? 

Abhijit Banerjee: I think the case against the bullet train is not based on anti-market ideologies alone. I though tend to think that we need to trust the market to work for many things. For example, we are in phase of creeping protectionism.  This is mistake--the 1991 liberalization did not kill all the industries as many feared. But the bullet train is public money and then we have to ask what the best use of public investment is—that should not be based on the coolness factor alone.


Has agriculture reform brought any significant dividends?

Abhijit Banerjee: It is too soon to tell.


Still, largely, our growth model is based on domestic consumption unlike the export- orientation of major economies in Asia. Do we have a strong export policy to back up? Also, we are not competitive in global supply chain. Where will the sustained economic growth come from?

Abhijit Banerjee: We can be competitive if we take the chance and open ourselves to trade. That is what 1991 showed.