The economic crisis India is facing due to the coronavirus pandemic and subsequent lockdowns is “probably bigger” than the 1991 balance of payments crisis, which resulted in the country liberalizing its economy, said Nobel Prize-winning economist Abhijit Banerjee. In an interview to HuffPost India, Banerjee, who is the Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology, also warned that India’s gross domestic product (GDP) could go down by 10-15%.
Banerjee, who shared the prize last year with Esther Duflo and Michael Kremer, also called for increased spending on anti-poverty programmes, and suggested that the government shed all concerns regarding macroeconomic instability and go for printing money to tide over a limited fiscal space.
Speaking on Friday, as India extended its ongoing lockdown by two more weeks, Banerjee said that increased testing is a way out of a cycle of total lockdowns, which, he warned, would be damaging and difficult to enforce if prolonged. “Given that there is uncertainty, the right thing to do is to predict where the new upsurges might be, and test, test, test, test, test,” Banerjee told HuffPost India.
Banerjee, who has been critical of credit rating agencies in the past, also asked the government to ignore any threats of a sovereign rating downgrade by them and go ahead with increased spending by way of fiscal easing.
“I would ignore them and do what it takes [for the economy],” he said.
Edited excerpts from the interview.
Ordering a total nationwide shutdown with little planning has turned out to be damaging for the poor. You recently said that India’s government hasn’t done anything close to enough for the poor, referring to the government’s financial relief package.
If you [look at the] state of the migrants in the news reports, they’re sort of stuck in this place where the social services are really not prepared for them. And this is because we have a system that is largely resident-based: [for instance] you get a ration card in your home location. Migrants make money, send it to their homes and they often will not have a ration card where they are. They really have no presence in the eyes of the state. So the state should proactively arrange for the migrants to be taken care of; it basically has to be at that point [where] just anybody who wants can come and get some help given the layers of screening [put in place during the lockdown].
Migrants are just a subset of the people who are in a place where they didn’t plan to be. [Of course] some states have put in additional efforts but the system [as a whole] is not keen towards [extending help] to a huge migrant population [that remains stranded] [And] there’s a bunch of other people who are basically excluded because they were never part of the system and they need to be included, so you have to just change the basis of the system. Say that, look, anybody can get help, and you’re going to be generous with that; but this is not how the system has operated up till now.
Do you have an estimate on how much the government should spend to cushion the economy?
I don’t have an independent view on this. I do feel that if the government needs to spend money on anti-poverty programmes, it should spend it and not worry about it. My sense is that right now the government’s ability to spend money is quite limited.
Two things that are relatively obvious is supporting the poorest and refinancing the banking system
Both the centre and states have announced a variety of cash transfer schemes but millions could be left behind as targeting would be difficult. Writing along with Amartya Sen and Raghuram Rajan in The Indian Express, you had expressed concern about the “narrowly targeted” income support schemes. Isn’t a universal basic income a better option during an economic emergency?
This is a time when the people who are likely to be excluded are actually the people who are often going to be the most needy—so people who are migrants who just lost their earnings and were not on any list. I think doing what we can with the existing list by going quasi-universal and including everybody who’s on any [available] government list and give them something.
We should first start with the migrants—who remain one of the most put-upon people—who are probably not going to be covered by most schemes so let’s put this new scheme for them which is a temporary scheme funded by local government. Then I think in the medium run this should teach us that we need to have a machinery for sending everybody cash.
I would say we are not incredibly well-prepared for that, and trying to make that the only instrument right now seems to me to be a bad idea, but in the medium run this should convince us that it is a useful thing to invest in.
“The real issue is there is huge uncertainty. And given that there is uncertainty, the right thing to do is to predict where the new upsurges might be, and test, test, test, test, test”
The Centre for Monitoring Indian Economy reports that unemployment has risen to about 21.1 %. Most of the damage will be inflicted on the huge informal sector. The International Labour Organisation (ILO) estimates that about 400 million informal sector workers in India could sink into poverty. That’s a staggering number. Do you agree with this assessment?
I think it entirely depends on how quickly the economy recovers. I find this conversation about “sinking into poverty” is a little bit tenuous. Because this entirely depends on the economic recovery.
It is not because they had a huge amount of savings they were above the poverty line; they were above the poverty line because they were making enough money and if the economy revives they will again make enough money. I think that one should be realistic about what was driving their current economic well-being.
Unless we make a series of policy mistakes which prevent the revival of the economy, there is no reason why the economy couldn’t recover fairly quickly. Presumably there is going to be a demand shortfall, but if the government wanted [to], it could deal with the demand shortfall by injecting demand [into the system].
Do you think a V-shaped recovery is possible next year?
Yes, if the government takes the right steps to make sure that there is no demand shortfall in the economy. I’m not saying anything that I have not said before—I have been saying repeatedly that this government should be much more concerned about a demand failure and therefore much more willing to spend.
Epidemiological models are largely unreliable and hence we cannot correctly predict the course of the virus. A model is as good as the data that feeds into it and presently we don’t have good data. How can the government make a sound economic policy response if they are relying on uncertain models?
It cannot. I think that is the reason for being relatively conservative. It is not clear where the disease is going to show up [next] and therefore I think being sort of proactive in testing is something that we haven’t really done. Population-based testing is critical so that [we don’t rely on] our models to tell us what’s going to happen.
I think there is clear evidence of a slowdown [in the spread of the disease]. But we don’t know exactly what that is hiding so I think all of that means that the lockdown bought us some time. It stopped things in a way that we had time to look around. If the pandemic is really going to hit India [in the coming weeks], then I think we are at the beginning [of the curve] because the number of people affected is tiny relative to India’s population. Either there is some reason that we’re lucky and the pandemic just doesn’t spread in India because we have no good theory of why this would happen.
But in [states such as] Maharashtra and Gujarat, there has been robust growth in the number [of confirmed cases], so it’s not clear yet if there’s anything special about India. [I think ] there’s nothing special about India, we are waiting for it to hit us [in a way] that [the pandemic] is going to grow much bigger. It’s [also] possible that there is something that we don’t yet understand [about the pandemic] that is going to prevent this from happening.
The Indian Council of Medical Research’s (ICMR) model predicts that by July 26, India would have successfully eliminated the virus. But the model treats the entire country as a single unit and does not factor in either population density or the fact that hundreds of thousands of migrant workers internally migrated after the lockdown was announced. If the government’s economic decisions are based on this model’s predictions, there are significant risks.
Yes, that’s right. But I wouldn’t spend too much time fighting over whether the model is right or wrong. I think what we know for sure is that there is enormous uncertainty and the correct solution is to be conservative about interpreting any results that we find in the models. It is better to assume that the model could be off by an order of magnitude in either direction: so if we have pretty optimistic predictions [coming out] of the model, then probably [we are headed] in the direction of a bigger disaster.
Now in that case the [right] thing to do is to prepare for it by—I think it is presently being mooted—allowing for a relaxation of the lockdown for now so that people don’t lose their entire appetite for being locked down. Plus, we have to start reviving the economy by keeping our eyes wide open by using a whole range of techniques for population-based testing—which does not mean going for random testing but ramping up testing in areas which have connections to areas [that saw population mobility]. For example, the migrant worker’s internal migration.
We must have an intelligent understanding of where the risks are most likely and then committedly go for testing people who are not asymptomatic. The big, big point I’m trying to make is simply that I don’t think it’s useful to be wrangling over whether a model is right or wrong. The real issue is there is huge uncertainty. And given that there is uncertainty, the right thing to do is to predict where the new upsurges might be, and test, test, test, test, test.
We should really be thinking of a much, much more expanded testing. So I think the priority of the day is not to argue over whether the government is right or wrong, but that we should assume that we could be wrong, and if you’re wrong then it could be disastrous. Therefore we should proactively test. And if you’re wrong and we are lucky and the testing is useless - Fine. We will be safe and we will be happy.
The upside of testing is much bigger than the downside.
Evidence from some countries indicates that there is risk of a second wave of infections. Can we go through a second or even a third round of lockdown?
It will be damaging and difficult to enforce. Therefore testing on a very large scale is a way out. We are kind of getting to that point so hopefully we’re going towards less lockdowns and more widespread testing.
So intensive testing is a way out of a cycle of lockdowns?
I think what intensive testing will do is actually identify where to put the lockdown. If we have to go for another lockdown, we can tell people that Look, right now we’re going to lift the lockdown but we’re going to test a lot in areas that are already hotspots. If the infection is spreading very fast, we will have to lock down again. This way, at least people know the game plan and know what’s coming at them.
The government is not spending as much as it would like to do because of a higher fiscal deficit. You have said that the government should go for printing money. But former RBI governors Raghuram Rajan and D. Subbarao have cautioned against such a move citing macroeconomic instability.
I will say what I have said on this. I think the risks are very asymmetrical. Even given the current money supply, if the GDP falls a lot, there will be an inflationary pressure when the economy revives. If the entire supply chain collapses, there will be inflationary pressure and then the currency will depreciate. What we should do is to proactively work to restore the supply chains because I can’t buy if I don’t have any money and you can’t sell if I don’t have any money. Putting money in the hands of people is a way to restart the economy.
So I’m not convinced because [I think] we will have macroeconomic instability either way. You cannot avoid it by sitting on your hands, because it will actually make it worse.
One theory behind the government’s reluctance to spend more is the fear of a credit rating downgrade. Just this week, Fitch Ratings, one of the Big Three credit rating agencies, warned of a sovereign ratings downgrade if the Indian government went for fiscal easing. Isn’t it unethical on part of the big ratings agencies to stop the government from extending financial help to its poor during an economic emergency?
I have so little to say in favour of the global rating agencies that I’m not going to be the person who’s going to defend their choices. I don’t feel India has ever been close to a default. We’ve done whatever it took to keep our credit ratings: we took money from the IMF, we opened up the economy. I don’t feel there is a particular reason why we should be paying any attention [to the ratings agencies.]
It is true that the rating agencies have enormous power and that they shouldn’t have this power. Also, the lenders seem to be having this bizarre way of going back pretty fast to the country that has defaulted. So this whole rating agency thing is to me one of the major distortions in the world.
So should we just ignore them?
I would ignore them and do what it takes [for the economy].
Is our present economic crisis as big as the 1991 balance of payments crisis?
Probably bigger. GDP could easily go down by 10-15%. Look, we have no idea what a lockdown of this size does. It depends entirely on how smooth the recovery is. It’s been two months, so even if GDP goes down by 10% and recovers fast then it’s going to be a small proportion of GDP. But if [economic pain from the virus] goes on for a longer period of time and the interventions needed for the economy to recover fast are not made, then it could be very big.
I think it all depends very much on the choices we make now.