NDTV: Hello and a very, very warm welcome to this, the first of a four-part series of Town Halls on the Post-Pandemic world. This is actually a very special discussion for me, it’s the first time I have interacted with six absolutely exceptional people, four of whom are Nobel Prize winners, Paul Milgrom, Abhijit Banerjee, Michael Kremer, and I also thank Raghuram Rajan and Kaushik Basu, two people who many say could soon be Nobel Prize winners too, and I believe that. And in a final exclusive programme, we have a very special interaction with the one and only Amartya Sen. Our overriding focus for this series of Town Halls is to ask, after this pandemic Budget, what comes next? Where is India heading? What lies ahead for all of us in the next few months and a year or two. To get the most in-depth views possible we spoke with each person, individually, in separate unique conversations. This is not designed as an argument but a learning process, I have learnt a lot by it. The conversations are wide-ranging covering a whole host of subjects, from this Pandemic Budget and its focus, to the hopes and fears for the future, to our farmers and the coming privatization of banks, to trends in global and India’s democracy. In our first part today, we will be looking at some key issues for our country, including India’s amazing Post-pandemic rebound that is being widely forecast and of course many, many more key issues will come up in this show. We have lots and lots of ground to cover, believe me.
The immediate question is of course, are we looking at a much, much better year ahead?
Will India see a Post-Pandemic Rebound in our economy?
In fact, most analysts expect a big comeback in a V-shaped rebound for our economy and the global economy as well. While the Indian economy fell much more sharply than most other countries the rebound in our economy is also expected to be higher than other countries, India is expected to grow by over 11% according to both the IMF and the Economic Survey, which is almost twice as high as the average growth rate of around 6% for all developing economies on average. That’s a huge and welcome relief for our country, at a time when so many people are unemployed and factories are running at well below capacity because of the pandemic.
The forecast that India will have a V-shaped rebound means that despite falling 7.7% in the pandemic year, the economy will bounce back to be just over the pre-pandemic levels. The economic comeback for India is really, really significant, and a GDP next year will be about 2.5% above 2019, that’s pre-pandemic. That implies we will begin the catch up with other developing countries, though it will be only slightly short of their growth over the two years, placing them almost 4%, 3.75% above 2019 levels. So, we’re just below that.
Raghuram Rajan, thank you very, very much for joining us. I know how busy you are. I think you’re busier even during the lockdown, the COVID period seems to make you even busier. Did you think you have eight months or 10 months to, you know, lockdown, I can relax?
Prof Raghuram Rajan: Well, people find you at home, right? It’s easier to find you when you’re locked down. Yes. So, it’s been busy. Unfortunately, every day looks like the previous one. So that’s the downside.
NDTV: But you are keeping fit?
Prof Raghuram Rajan: Sure, yes. I guess that’s one thing you have to try and focus on, eat better, and maybe do some exercise. But so far, so good. But I would really love to be free.
NDTV: But I must honestly say you are looking really fit. So, you’re obviously doing something right. Maybe you should be in lockdown forever.
Prof Raghuram Rajan: Oh, God forbid.
NDTV: Coming to the Indian economy where are we heading and what next? Now, the extent of the rebound that’s being forecast for the Indian economy is impressive and it’s really needed. How do you see our economy in the medium term, will this positive post pandemic bounce back, will it be really strong? What do you think?
Prof Raghuram Rajan: So, the good news is that if, again, if the virus keeps going down, India will have a very strong year this year, a year of rebound. Yes, we won’t go back to where we were if the virus hadn’t happened, but we will certainly make up some of the ground, the lost ground from last year’s terrible performance. The question is what happens after that? What happens in 2022, ’23, ’24, and there most people expect we go back to a very slow rate of growth, the 4 or 5% we’ve had before the pandemic. And that is untenable for India, given the many needs we have for jobs, for growth and so on. And including geopolitical. We have problems at our border, we’d better get economically bigger if we are to deal with some of the problems that emerge on our border, including our ability to spend much more on defence.
NDTV: Can I bring you in Professor Kaushik Basu, thank you very, very much for sparing the time to join us. I know how tied up you are. I know everybody uses lockdown as an excuse. But I know you are actually genuinely busy for once in your life. Thank you for joining us.
Prof Kaushik Basu: Thank you very much.
NDTV: Before we start, I do have one favour to ask you. Could you lean slightly to your right, I do want to see Rabindranath Tagore behind you. Now you’re talking. Thank you very much indeed. And more strength to your elbow.
Prof Kaushik Basu: That is just what is needed at this stage
NDTV: Kaushik, would you agree that it is absolutely imperative that we must have this big upturn in the economy, any slippage and we are in deep trouble? Not even the slightest, but we really need 11% plus.
Prof Kaushik Basu: I am personally worried. So, this is just a plunge of the year 2020. And people are talking about a V-shaped recovery, which I think it will be V-shaped, but only because once you’ve plunged so far deep, there is no other shape of recovery possible. So, it has to be V-shaped that you’re coming out. So, we will come out with a V-shape. But still, from the IMF’s forecast, it’s not a huge coming out. It’s a small coming out.
NDTV: Abhijit Banerjee, it’s great to see you again and we are all looking forward to hearing your views about India and what comes next, the good, the bad, and the ugly, whatever you want to say. Thank you for joining us.
Prof Abhijit Banerjee: Thank you for having me and very good to see you again.
NDTV: Thank you for sparing the time and remember we do have to have that promised nimbu pani soon, right, with Scottish nimbus of course.
Prof Abhijit Banerjee: Yes. Indeed.
NDTV: Abhijit, it is really encouraging to see the forecasts of a big recovery of our economy this year, a V-shaped bounce back, with a higher growth than most other countries. Do you agree with these forecasts?
Prof Abhijit Banerjee: The IMF does this all the time, I think in the middle of the year they were predicting 2% growth in 2020, and that of course turned out to be minus 8%. We wrote about this in our book that there is an IMF study of how bad their predictions are, so I wouldn’t hold my breath on 11%. Could be 11%, could be 7%, could be something. But the reason why that’s important is that the government should not put too much faith in its own Budget numbers. It should be prepared to take it on the chin, that it’s going to be, you know, the growth doesn’t happen. I wouldn’t tighten the reins, stop spending. The real worry is that in India, this is why I don’t love talking about the Budget. The Budget is an aspiration and then things go wrong. You can always choke off spending, you just don’t spend the money. The money doesn’t show up, you don’t get the expenditure.
NDTV: And looking ahead, what should the government do now, how should it respond, for example, if our growth rate this year is a little lower than the projected 11%, noticing a, not quite achieving that? What policy options should the government have on standby?
Prof Abhijit Banerjee: We sort of know that, that you know we have on-demand programs like NREGA but, in fact, when the money is not there the on-demand part of it falls through, and this year was a classic example of it. The demand was much bigger than people wanting, but it fell through. I think what the government needs to do is be mindful of the fact that the growth may not happen, but if you start tightening in the middle of the non-growth and if the non-growth is a result of a demand shortage at the low-end of the income distribution, then that’s going to be counter-productive. So, I really want the government to be willing to say, ‘Okay fine the IMF said that, we said that, but if it’s not there, it’s not there. We’re going to keep spending money’ and I realise that means acquiring more debts, etc, etc. The government is reluctant to do that, but it has been one of the other ways in which the economic survey is very clear that it’s sort of now much more willing to say we can handle taking more debt. This is something we’ve been saying for a long time, people who’ve been keen to get the government to increase demand have been saying for a long time, that the fiscal propriety is a bit over-blown, and that maybe we should relax a little bit. But I’m glad that the government has gone in that direction. It has relaxed. It has said explicitly that it’s not going to worry about it as much. I think that’s right. But I think they should stick to that view that it’s fine, rather than in a middle of the year when the growth is not happening, if you start cutting back because you think that the budgetary pressures are going to…you’re going to get the consequences of the budget multiplier may go playing the other way.
NDTV: So, Kaushik, you have written that we need to focus not only on the crisis caused by the pandemic but on the entire period, nearly 10 years before the pandemic
Prof Kaushik Basu: Prannoy, my real worry is, things began to happen before last year. And if you look at India’s growth data today, the trouble is in India, as soon as you point to data, people get so ideological, that you’re on this side, or you’re on that side. And I should tell you frankly, in fact, as a preamble I should tell you that I’ve got political differences with some of the things that the government is trying. But I, throughout, expected that the economy will do well. And so, it comes to me as a big surprise. And there have been a couple of good policies. Like for instance, the GST, despite the very poor implementation, was a good policy. The Insolvency and Bankruptcy Code, that was Arun Jaitley’s doing primarily, was good policy. So, there were good policies. But here’s the growth figure that I will point to, which just sums up my concern. 2016-17, the financial year, India’s growth rate was 8.2%. Very good growth. We felt good about that. The following year, that growth dropped to 7.2%. The following year, to 6.1%. The next year to 4.2%. And the current year is speculation of course, but minus 8 to minus 10%, is what most people are saying. Four downward steps, that is over a five-year period, stepping down each year worse than the previous has never happened in independent India. That, to me, is the crux of the problem. And something which should receive a lot of attention.
Prof Raghuram Rajan: This is an area that you know really well about. There is some concern about the rising level of Bad Debts that Indian banks are currently carrying in their books. Some call it a potential bubble. That’s a word you made famous many years ago. Now that bubble is probably an exaggeration but Bad Debts or NPAs, Non-Performing Assets, is a major issue. How does India fix that problem?
Prof Raghuram Rajan: The first thing is, clean up balance sheets. Balance sheets, even before the pandemic were clogged with high levels of debt. And certainly, bank balance sheets were clogged with bad debt. I believe that we have postponed this problem a little bit right now with all the moratoria, the forbearance, etc. But postponing the problem doesn’t mean it goes away. And my sense is, at some point we’ll have to tackle it head on. And that’s really the question, do we have the discipline to tackle it head on and clean up the balance sheets, to restore the possibility of longer run growth? And we’ve, in a sense, suspended the IBC, the bankruptcy code, we’ve given a lot of forbearance, that has to change, we have to flip it over. And we have to find ways for example, for small and medium enterprises, to restructure their bad debts, to go to the bank and say, here’s a deal and allow the banks to accept deals. There are losses on all sides, but that way the small and medium enterprise can go forward. That is what we need to do in order to clean the balance sheets.
NDTV: For this to succeed, once again, everything is so dependent on proper implementation. The Budget proposal of a special bank to handle the problem of Bad Debt, needs to be sure the process is carried out without favours or any political influence, right?
Prof Raghuram Rajan: Now, we’ve proposed a bad bank. Again, the details are deliciously vague, we don’t know. A bad bank, which is largely in the public sector, will be ineffective. But a bad bank, which is only in the private sector, may have some issues also. So, design is really important here. And I hope the mandarins in the Finance Ministry are at work trying to figure out the design, which will make it actually deal with the problems we have. So, we need to clean up in the financial sector. It can happen, requires enormous effort and energy that should have started yesterday, certainly should start now.
NDTV: But I must say that I want to take a moment to enjoy myself and embarrass you by saying that it’s all your fault. The year before you left, GDP grew at 8%, then you left and GDP went down to 4%. Aren’t you ashamed of yourself?
Prof Raghuram Rajan: Yes, I wish that cause and effect was so clear. But it’s not.
NDTV: For now we shall replace cause and effect with clear, solid correlations. But it is true that there have been a lot of major policy changes after you left?
Prof Raghuram Rajan: Well, I hate to keep coming back to this. But it was the demonetization, which sort of disrupted what was a process of strengthening growth. And of course, we have revisionist histories of demonetization. But the reality was, India was coming back at that point after the global recession. And that disrupted the flow. And unfortunately, other things have built up on that disruption. And we haven’t fully ever come back.
NDTV: Abhijit Banerjee you have often pointed out that Indian governments have to think big and think bigger and that we don’t think and act on a large enough scale. Scale matters and we need to recognize that especially as a large nation we need to have projects on a large scale.
Prof Abhijit Banerjee: Yes, that’s what I am talking about and also when China went for world-class education, we talked about it a lot but, then we put small amounts of money with lots of strings. You know, a friend of mine was the Dean of Tsinghua. He was basically told that your job is to go hire people. There are lots of bright people of Chinese origin or Chinese citizens who are working. Offer them salaries that are competitive and bring them home and Tsinghua, in some technical fields, is now number two in the world. They’ve stunningly improved. If we want to be world-class, we really need to have an agenda of, ‘Okay, we are not going to think of the pennies today and does this fit into the particular regulatory framework and who’s going to control it, how many people will approve. We really need to do what Tsinghua and the Chinese government did, which is tell the Deans that they essentially have a blank cheque to hire good people and then you can do it. There are so many Indians of great talent and I am sure we could get a bunch of great people to come and work in the All-India Institutes or wherever we want to have quality. But it’s really a matter of then revamping the entire system, separating them out, giving them a certain amount, a lot more autonomy than they have. Telling them if you want you can pay whatever, global salaries. Then I think it’s not that hard to do it as China has shown us. But I think that we are pusillanimous often.
NDTV: Moving ahead, India’s revival cannot be seen independent of a global revival. How much does India’s revival depend on the world economy reviving, the Global Economy? Will the global economy bounce back or will it only crawl back to higher growth rates?
NDTV: Let me ask you Raghuram Rajan, you follow not only the state of the Indian economy very closely, but the state of the world economy relative to India. Currently, you are in America, America is going through a major change with the new government, Biden has come in. So, there’s a kind of parallel debate going on. Is Biden spending too much? Will growth to America bring inflation? What’s your view on that? Too much spending, too little spending, are we going to go into inflation, are we going to get growth? All the tradeoffs are being debated right now.
Prof Raghuram Rajan: Right, so let’s start with the virus, which is where everything should start today. We are seeing second and third waves through Europe and the United States. The US seems to be bringing down this wave, finally, the second wave. But again, everybody’s watching to see what the variants do. Because the variants are more virulent and more resistant, in some ways, to the vaccine. So, the hope is that the pace of vaccinations being rolled out will eventually overcome the spread of the virus. And that we will have much stronger economic activity starting in the second quarter onwards. Europe is now in a recession. Both the last quarter of last year and the first quarter of this year are going to be virtual write offs because of the sort of lockdowns that are happening there.
NDTV: And just looking ahead, in the short term, will demand pick up, because that’s important for our exports as well? Do you also feel that there will be a sharp revival of the economy in India? In the US and in India, do they interact a lot?
Prof Raghuram Rajan: In the US, I think this quarter is going to be weak. But in both areas, there is a tremendous amount of pent-up savings. Just like we’re seeing in India, those savings come back, those savings are here, people who haven’t spent during the lockdowns, who’ve got also transfers from the government. Even though incomes fell, transfers went up, because the government spent a lot, and therefore enormous amounts of pent-up savings are going to come in. So, the second, third, fourth quarter of this year are going to look much stronger. And that’s the hope. Of course, the virus can upset everything by producing a new variant, which is more virulent.
NDTV: If we can bring you in here Professor Paul Milgrom, thank you so much for joining us.
Prof Paul Milgrom: Well, thank you so much. Pleasure to be here.
NDTV: Have you ever been to India?
Prof Paul Milgrom: Yes, although it’s been quite a few years since the last time I was there. And mostly I was just around Mumbai and I didn’t get out and around very much. I was working with TELCO back then, you know, what’s going on in telecom industries, so a business trip.
NDTV: In the course of this programme, among other subjects, we are going to be discussing democracy in India and around the world. I just wanted to point out that in your next US Presidential elections in 2024, you’re going to have two Indians contesting against each other, Kamala Harris versus Nikki Haley. There you are.
Prof Paul Milgrom: There you go. Thank you
NDTV: Professor Paul Milgrom, one overriding factor that is deeply worrying for developing countries, including India, and that is the huge asymmetry in the global distribution of innovations. The rich countries tend to grab most of the best products, we have seen it with new green technologies. Now unfortunately we are seeing an unequal distribution with vaccines too. The rich countries are getting more than their fair share of vaccines, while vaccines are just not reaching the poor nations, there are more than a hundred countries that have not got the vaccine yet.
Prof Paul Milgrom: Yes. So, well, those are two different things, the vaccines and the green technologies. So, about the green technologies, in order to benefit the world, we have to reduce emissions everywhere. We’ve got to get carbon emissions down across the whole world, so the drive to co-operate there will be greater. Although there’s also a free rider problem, that is, if some country doesn’t participate, they benefit from everyone else’s carbon emissions. And they harm everyone else by their failure. So, the difficulties of negotiating that are significant. Hopefully the world will come together on that. On vaccines, it’s so painful to see what’s going on with vaccines. On the one hand, this is not the last pandemic. Unfortunately, we’ve known for a long time that pandemics were coming. This one is really bad, and hopefully the next one won’t be as bad. But the need to invest in plants to produce these vaccines, there’s got to be a return to that. And the rich countries are naturally going to gain some advantage from that, but the poor countries are just, right now, I think everybody, it seems so unfair the way the poor countries are getting much too little. So, exactly how we can maintain the incentives for the rich countries to invest in the production facilities and the research we need, and yet to treat people around the world fairly, there’s a real tension there that needs to be resolved. And, this is not the last pandemic, and we need to be thinking about how we’re going to do this in the future.
NDTV: I can see you feel very strongly about that. That sort of came straight from your heart.
Prof Paul Milgrom: Oh, it does.
NDTV: Professor Michael Kremer, thank you so much for joining us. It’s a real honour to have you and I know how busy you are. Thank you very much for being with us.
Prof Michael Kremer: Oh, it’s a pleasure.
NDTV: Michael Kremer, there is a global inequality in the distribution of vaccines, with the rich countries appropriating most of the vaccines. So far over 100 poorer countries have not received the vaccine. What can be done to rectify this inequity?
Prof Michael Kremer: I think that some of the discourse around this often casts things as a zero-sum game. People talk as if there’s a fixed supply of vaccines. And it’s a question of who’s going to get them first. And, I think that that type of discourse is actually, can be counterproductive politically. Because if you’re thinking about a democratically elected leader, they may have concerns for international solidarity, but ultimately, they’re accountable to their population. And I think that when it comes to matters of life or death, and to matters of such huge economic consequences, hundreds of billions of dollars of GDP every month, we have to be realistic about what we can ask politicians to do. And I think it’s much better, instead of asking the politicians, look, I think we should ask politicians, I don’t want to say instead of, I think we should ask politicians to show international solidarity, but it’s much easier and much more realistic to say, pledge money to build the factories, or to do the trials so that we can get more out of existing capacity, rather than to say there’s a fixed number of doses, and you have to give up your doses so somebody else can get them. We might see some token efforts, a few percentages of you know, Norway is admirably doing something. But it’s a small percentage of even Norway’s doses, and Norway is a small country. I think, better to ask the rich countries for money. And for finance, to maybe put more capacity in and to do new trials to get more out of existing vaccines, and to find, COVAX, for the most, most vulnerable and for the health workers in low-income countries. But it’s probably not realistic to have, I mean, it might be moral and ethical. But just as a matter of political realism, probably not going to get fully equal distribution around the world by asking them to give up doses.
But let me get back to the pipe analogy and the wait analogy. Imagine it’s going to take with the existing pipe, the existing supply, it’s going to take two years to vaccinate everyone in the world. Now imagine we could reduce that to one year, if we put in more capacity. Well, for the people who are last in the queue, you’ve just reduced the wait by one year. For the person who is first in the queue, well then, you’re only reducing the wait by half a day or something like that. So, increasing more capacity is itself something that promotes equity. I think that’s something that hasn’t been properly appreciated.
NDTV: While the focus recently has been on the economic slowdown caused by the pandemic and then came the Pandemic Budget. In fact, there were many worrying signs before the pandemic; what was worrying, in fact, was that India’s pre-budget underlying economic problems were serious.
Kaushik, can we return for a minute to what you have written extensively about and you touched upon it earlier, the underlying issues of the Indian economy slowing down before the pandemic.
Prof Kaushik Basu: Put the pandemic aside. Though, again, I want to point out that with the pandemic, India has dropped to the 163rd in the world. So, we’ve done worse than other countries, and other countries which have had the pandemic hit much bigger than us, India didn’t get a hit as big, so it’s downward. But even if you put it aside, over the last five years from 2016, every year has done worse than the previous year, which has never happened before. The first thing we should do is look at the data, dissect it. And for the sake of the country, bring in the best minds. And India has great strengths. There’s a lot of talent in the country. And we have to capitalise on that as we go ahead.
NDTV: Yes, absolutely. That’s very clearly and well put. So, what are the factors that are crucially important now do you think?
Prof Kaushik Basu: Yes Prannoy. So, let me first tell you, on the economic policy front, though I feel we have to go beyond that, which is very difficult, because on that there very often is not hard data, like you get in economics. Let me first stay for a moment with a couple of economic indicators. A very important one, which is probably causing the growth slowdown, textbook economics, is investment rate, the fraction of the national income that is being invested, you’re building machines, you’re building roads, ports, etc. Now that, in 2011-12, capital formation as a part of GDP was touching 40%, which India was looking like East Asian countries, and India was performing like East Asian countries. And I have to give tribute to this, this stepping up, took place in 2003 and 2004, that investment really went up. That’s when the investment went up, it continued to climb and reached just short of 40% of GDP. We are now down to 31.7% or something. So, it’s been a steady downward drop in investment. And if you’re not investing sufficiently, growth gets damaged.
NDTV: And there are major implications of our growth being damaged, can you point out to what some of these implications are?
Prof Kaushik Basu: This is recently NFHS, that puts out data based on a survey across India. They have not studied the entire country, but 22 states plus Union Territories, together 22 of them, for which they’ve given out data. And for the first time, over a five-year period, 2016 to 2019, their last survey was 2015. 2015 to 2019, in these states, a majority of the states for which they have given data, there has been stunting, which means, children below the age of five they have become slightly shorter. Of course, this is not happening to the richer people’s children. This is not happening even to the middle class, not even to the lower middle class. But this is an indicator of the poorest sections of the country suffering. So, these five years, from 2016 to now, a lot of data coming in. And the first thing we should do, if we love the country, in fact, that’s the first thing, is to look the data in the eye and not look away. This has happened. For whatever be the reason, diagnose it, dissect it and begin to change. And that’s the way we should approach what is ahead of us.
NDTV: Let’s next move on to focus on how much stimulus does an economy need, how much is too much and could lead to inflation? So, the question we are going to ask is, is the current stimulus for India’s economy enough, will it be enough to revive our economy?
One question that the pandemic economic crisis has raised is whether globally, has fiscal stimulus of the economy been more effective than monetary stimulus? One of the things that Ruchir Sharma, author and now Contributing Editor for the Financial Times, has spoken about and has presented very clear data on, is India’s fiscal stimulus which has been low but our monetary stimulus has been high. Our fiscal stimulus has been 2.2% of GDP during the pandemic year, which is less than half of the 4.47% fiscal stimulus that other developing countries have done. But India’s monetary and credit stimulus has been much higher, at around 13% of our GDP compared with other developing countries which have had only a monetary and credit stimulus of 3.5%.
But in the final analysis, India’s economy fell by 7.7% or 8%, while the rest of the developing nations GDP fell by only 2.4 on average.
Raghuram Rajan, India focused largely on a monetary and a smaller fiscal stimulus during the pandemic, but our growth rate fell sharply. Does that indicate that India needed to have a greater fiscal stimulus, and that our monetary and liquidity stimulus didn’t work so well, it really failed to boost the economy as much as we’d hoped? Fiscal versus monetary.
Prof Raghuram Rajan: Right. I mean we have to play with the cards we are dealt right. We came into this crisis with a very large fiscal deficit. And so, the ability to spend incrementally much more from that was limited. Of course, many of us have been saying there’s more room than you think. And you can create more room by having a credible plan for fiscal consolidation once the pandemic is over. But if you don’t spend enough right now you risk permanent damage to households, to the small and medium sector, etc. I mean, to the government’s credit, there has been some credit to the small and medium sector from the banks, because of the government guarantees. That may actually turn out to be on the fiscal books, eventually, if those guarantees are called on, if the small and medium banks cannot pay. It would be important to ensure that the banks that have made those loans also bear some of the costs, it’s not a complete pass through to the government. But that’s a problem down the line.
NDTV: Exactly, as you say that’s a problem to be decided and rectified in the future. In the meanwhile, many poorer sections and low-income households currently are suffering badly and need help now. What can be done for those people?
Prof Raghuram Rajan: I think the issue that needs to be looked at, at this point, is how are our households doing? Are the poorer households now that, as I understand it, the free grain is off the table now? Are they surviving? How are they surviving? What more needs to be done to keep them, keep their body and soul together? That’s, I think, a central question. Because it is still going to be a few months till the economy comes fully back. And then the question is those jobs which went away, are they going to come back in the same measure. The CMIE, as you know, and others, have said something in the region of between 14 and 18 million jobs have disappeared. So, what about those people? How are they keeping body and soul together? In the rural areas, they have NREGA, which presumably will be called upon if there is a need. There is no similar system in urban areas. And that is a worry as we go forward. Certainly, that worry becomes less as we recover. But how are those households going to manage?
NDTV: It’s really important that you point out this issue and the strength of your words will, I hope, make our authorities focus on this immediate issue and this immediate crisis that the poorest and most vulnerable are facing as we speak. In addition, there are longer term implications for these families who are in now, what can only be actually a critical condition.
Prof Raghuram Rajan: The other central question we should be asking is, what about education? We’ve had kids out of school for now a year. Many of these kids have no access to laptops, etc. They have no ability to keep up online, even if their schools were teaching online, which many aren’t. So, when you spend time out of school, obviously your learning deteriorates. You forget what you learned. And now when they go back, what is the plan? How do we bring them up to speed? Many weren’t doing that well in school in the first place. And now, that they’ve fallen so far behind, will have no interest in school whatsoever. Are we going to see a massive dropout rate? If in fact we don’t spend on carefully and effectively bringing them back. And so, this is where it would be important to see the state governments, which is a primary source for education, ramp up. And the Center has to support them. Unfortunately, that’s one place in the Budget where I think we need to probably do more.
NDTV: Michael Kremer after the pandemic what kind of government stimulus tends to be most effective, the best in boosting an economy?
Prof Michael Kremer: If you look at what countries are spending to deal with the consequences of the vaccine, not the vaccine, of the disease, it dwarfs what they’re spending on vaccines. So even from a narrow fiscal point of view, this makes sense. And if you think about this from a broader point of view, whether you think about human health, whether you think about the livelihoods destroyed, whether you think about the education that’s been interrupted or the families that can’t see each other. This is just something that should be a top priority. And so it’s you know, this is a case, economists often say, bBe very careful how you spend the money.’ This is a case where we’re saying, ‘spend the money, it’s worth it’. And, you know, we may need it to deal with the existing epidemic, we may need it because we’re going to have new strains where we need protection, or we may need it for booster shots. But you know, this could have enormous, enormous benefits. And it’s very unlikely to be a bad investment.
NDTV: Abhijit, coming again to the need for a demand stimulus, is that the key to reviving our economy and for achieving this projected V-shaped bounce back?
Prof Abhijit Banerjee: I think demand is the issue. And demand has been very low partly because incomes have been low, partly because people have also panicked and they’re holding on to whatever savings they have because they’re not sure how long this will last. So, they’re unemployed and they don’t know when they’ll get their jobs, therefore, they’re not spending. You know if you have Rs. 5000 in the bank and you don’t know it’s going to be 3 months before you can find a job or not, then you don’t spend. So, I think where the spending is slow especially is among the low to middle incomes category. You know, you see people are beginning to buy cars again, but not so many bicycles. That’s very much the pattern that we see and it seems to me that there is a real worry that the mass market goods are not going to have enough demand.
NDTV: One factor that is of concern about the impact of the Budget, while the focus on spending more on construction of infrastructure is widely agreed to be a really good positive step, but there’s a lag effect with construction and infrastructure and the impact on boosting the economy may take a little while, so the real benefits will be felt only in the medium and long term, not so much in the short term, and really, the vulnerable and poor families need help now, not in the short term as you said.
Prof Abhijit Banerjee: I think construction, as you said absolutely correctly, this kind of construction especially which is ambitious, long-term, we’re going to create hubs for textiles or automotive or other things. Those are not, they’re not things that you do in a day. To make a good plan you’ve to acquire land, you’ve to think about the interlinkages, the roads that go in and out of those things, the airports. Even just thinking about exactly how you’re going to do will take some time. In the meanwhile, money won’t be spent, and if money is not spent then that doesn’t do anything. So, my fear with this kind of supply-side approach is more that it’s really not designed for a demand crisis. So, I see the model, I see that if this was construction, if the government says I’ll start construction tomorrow, I think that would have real consequences. That would also be maybe a waste in the sense that you don’t want to necessarily just throw money at things. So, it might’ve been better to actually give people some earnings, some urban, NREGA or something, just some form of earnings, quickly, temporarily maybe to revive the economy, and then get investment going and do the long-term plans at the same time. That’s not the way the government has gone.
NDTV: One of the issues that has come up is that, okay India is going to go in for construction and supply-side stimulus and that’s good. But as you mentioned earlier the size and scale of what India does on anything like construction is just not large enough, compared to say the scale of projects in many other countries.
Prof Abhijit Banerjee: Yes, I mean we say we do supply-side, but when China does supply-side it’s ten times relative to GDP per capita, it is ten times as big. It’s just they’ve always been more willing to just take a big gamble. In the end, we take very small gambles. And those small gambles we’re always very careful to check off all the boxes, but that means that the supply-side boost is not that great. It’s not going to be so much. It’s more a sign that this is what the government wants us to do, and maybe it’s a useful signal to send to markets and the markets liked it. But I don’t think it is the case that this is going to be a massive reframing of the Indian infrastructure scene. It’s always going to be a kind of a wrinkle on what happens in the private sector. We really always rely on the private sector. When the private sector moves, we move. When it doesn’t, we move very slowly, and I think we really need to focus on the private sector investing. So, I think whatever the government does, I think the money for the SME sector etc, for more credit to them, is not a bad idea.
NDTV: Paul Milgrom, may I just come back to you once again on vaccines for poorer countries. You had talked about it and I want you to complete your thoughts on that. Looking ahead will we actually learn from this unfair distribution, first to the rich countries and only later to the poorer countries? Will we learn from that?
Prof Paul Milgrom: Oh it does. The truth is there are limits to capacity as well. There are going to be people who, it’ll take a long time to get everybody vaccinated. And there’s always going to be people who go first. I think that in any kind of society that people who are connected or at an advantage, or somehow, somebody’s going to go first and somebody who’s going to be last. But the way it’s distributed internationally, right now seeing it is just very painful. Like you see people dying and, you’ll see pandemics, raging, and destroying the economies of countries. And yes, this is not acceptable. This can’t be a pattern for the future.
NDTV: So it’s really hurting the poorer countries, maybe we’ll learn some lessons from what we have done wrong as well as where we have succeeded in handling this viral shock to the global system. We hope that we learn some lessons from it.
Prof Paul Milgrom: I hope so, too. I don’t think we’re going to fix it in this pandemic, but again, I don’t think this is the last pandemic, unfortunately.
NDTV: Raghuram Rajan we wanted to get back to how dependent India’s recovery is going to be on a global recovery? In turn, is the world economy dependent on a revival of the US economy? So eventually is India going to be dependent on the world and the world on the US economy reviving?
With the new Biden administration and a complete change in economic philosophy of the Democrats as opposed to the Republicans, and Trump in particular, there is going to be a major change in the stimulus to the American economy now.
Prof Raghuram Rajan: The debate in the US right now is about these 1.9 trillion packages that the Biden administration is putting together. You know, as Larry Summers puts it, the output gap, that is the difference between what the economy could produce and what it is producing, is about $600 billion. So effectively, the Biden administration is putting more oomph, about three times the size of the output gap into the economy, which then leads some people to say, “isn’t this too much.” Of course, on the Left, people are saying this is just necessary to get the economy back to speed, you never really got it back to speed after the global recession, in 2007- 2008. Let’s spend this time.
NDTV: There are clearly huge benefits of spending and transferring money to the poorer families. Yet like everything in economics there’s a downside to this 1.9-billion-dollar Biden stimulus package.
Prof Raghuram Rajan: And more conservative, or at least center of the road economists including people like me, are saying, look, look, wait a minute, you don’t want to exchange one problem of deficient demand for another problem, which is roaring inflation. And inflation would mean higher interest rates, higher interest rates would mean a collapse of the financial sector, asset prices, which today are looking bubbly, really bubbly. And so, let’s not translate one problem into another, keep some in reserve. Plus, there’s necessary spending, on infrastructure, things like that. So why give people more free cheques if in fact, it’s not well targeted, and instead focus a little more.
NDTV: So are you saying that if they do go ahead with the full 1.9 trillion in practise, and maybe even a little more, there is a chance of another collapse in the next two or three years in America? If that’s true it could really affect India a lot.
Prof Raghuram Rajan: So here’s the scenario. Right now, interest rates are really low. And it’s priced as if they’ll stay low for a long time. When interest rates are low for a long time, any kind of financial asset price goes up, because you’re discounting dividends over time. So many of these tech companies, which are producing no returns, but there’s a hope that they will generate returns into the future, they are being valued a lot. And so in that sense, if interest rates go up, that discount rate at which you discount the future goes up, and therefore asset prices have to fall. Now, the question is, is that simply households feel a little poorer, because those prices have fallen? Or are they levered institutions holding some of those assets, and therefore they now start transmitting the problem to the rest of the economy. In 2008- 2009 it was the latter, these institutions like banks, some insurance companies, some money market funds, were holding instruments that collapsed in value, and then they transmitted that problem to the rest of the system. In the US today, I think the banks are fairly okay. Some of the regional banks are hit by the pandemic, but they are fairly okay. It’s more a collapse in stock market prices, which then transmits to the rest of the world. Remember, one of the reasons the rest of the world is buoyant is because investors have departed the US and Europe because prices are really high, and transmitted that to the rest of the world, no matter what the quality of the economy and what the future looks like. So the fact that the Sensex is at an all-time high in India shouldn’t give us too much confidence because it’s happening everywhere else. This is not just India, it is Brazil, it is everywhere else.
NDTV: That’s all we have time for in this first in our four part Town Hall series. We shall take a short break now, back in only 24 hours, actually a little less. Thank you for being with us and hope to see you for our second Town Hall with these great minds. In the second Town Hall we’ll be looking at the farmers crisis, what is the key issue, what are the key solutions? We’ll be also looking at the clarity that this pandemic-Budget has. And we shall just go just a little bit in-depth to the word Privatisation. This is first time the word Privatisation rather than disinvestment, divestment has been used in a Budget. So, bye for now. See you at the next Town Hall.