This year's Nobel Economics Prize co-winner, Kolkata-born Abhijit Banerjee was vocal in his criticism of the Indian economy at a talk held at the Watson Institute of Brown University recently. While highlighting the state of the poor in India, he emphasised on the significant drop in consumption levels.
Despite being corrected for inflation, the average consumption levels, which have been decelerating for the past four years, have not helped the Indian growth story, Banerjee said, while noting that the economy has been treading on dangerous grounds.
The National Sample Survey reveals that average consumption expenditure in rural areas fell from Rs 1,567 per person in 2014 to Rs 1,524 per person in 2017-18 (after correcting for inflation). Average consumption expenditure in urban areas fell from Rs 2926 per person in 2014 to Rs 2909 per person in 2017-18.
This clear drop in consumption levels implies a rise in poverty level experienced by an average person, Banerjee says.
His talk delved into how stalled liberalisation, archaic labour laws, banking issues, land acquisition problems, disastrous education sector and so forth should have hindered the Indian economic growth a long time ago. But the Indian economy did well and poverty levels saw a significant improvement.
Banerjee attributes the decline in poverty levels from 40 percent in 1990 to 15 percent now to labour migration and a relatively closed economy. Export of labour to regions with real estate boom and the flow of money into the economy helped the fledgling Indian economy take off.
Problem of income distribution
Tax cuts for rich and upsetting income distribution, read corporate tax cuts, more often than not result in full-blown economic disaster like the Latin American economy.
Banerjee and Duflo had, in their book, 'Good Economics for Bad Times' wrote about how blind economics missed the explosion in inequality all over the world, the increasing social fragmentation that came with it, and the impending environmental disaster, delaying action, perhaps irrevocably.
The duo's Poor Economics is a commentary on how society has reduced the definition of poverty to a set of cliches and the need to understand the concept holistically.
The failure of institutions
In his talk at the Brown University, the Nobel laureate, who has dedicated his life's work to understanding poverty, talks about how institutions play important roles in deciding the economic growth.
This is his narration for India's institutions: “The UPA II introduced institutional reforms like the National Green Tribunal, Land Acquisition Act, Right to Information Act, Tax Authorities, Autonomy for Courts and so forth in an attempt to aid and abet the growth of the economy.”
“They, however, introduced the reforms too late into their second regime. The institutions were well within their gestation period and yet to show positive outputs when the 2014 Lok Sabha elections took place.”
“When the NDA took charge with a resounding mandate, they reversed the policy of decentralisation initiated by the UPA II, thereby landing a severe blow on the economy. These new institutions eventually ended up serving as another layer of bureaucratic red-tapism under the beck and call of the Prime Minister's Office (PMO).”
“These zombie-like institutions coupled with demand side deterrents like notes ban, GST implementation and monetary policy have had a detrimental effect on the economy.”
“Demonetisation, in fact, landed a severe blow on the country's poor taking disposable income out of their hands without affecting the rich in a similar fashion.”
Banerjee and Duflo had studied the effects of different economic policies on the poor and the possibility of applying successful policies elsewhere.
Their institution - Poverty Action Lab - which later came to be known as Abdul Latif Jameel Poverty Action Lab, or J—PAL, encourages research on poverty and diffuse the findings among policy makers.
In fact, their systematic and scientific approach to study poverty across 40 countries with the help of more than 240 scholars earned them the coveted prize this year.
Importance of institutions
In his talk at the university, Abhijit highlights the importance of institutions in strengthening the economy.
Firstly, decentralisation by reducing PMO's interference will strengthen institutions for the better.
Secondly, head hunting high profile individuals with the help of government agencies will seem politically motivated and dampen investor sentiments. Doing the same after proving the economic offence to the general public while ensuring that Caesar's wife is above suspicion will however, work in its favour.
Thirdly, motivating the media to pursue the truth in a transparent manner and accepting criticisms is important.
Banerjee also asks the Indian government to make it clear to the investors that they have a realistic plan make the economy work. Blindly waiting for miracles to work in unlikely to boost investment.
