Abhijit V. Banerjee - What the Economy Needs Now

What the Economy Needs Now

Edited by
Abhijit Banerjee, Gita Gopinath, Raghuram Rajan and
Mihir S. Sharma

JUGGERNAUT BOOKS

KS House, 118 Shahpur Jat, New Delhi 110049, India

First published by Juggernaut Books 2019

Anthology Copyright Abhijit Vinayak Banerjee, Gita Gopinath and Raghuram Rajan 2019

Copyright for the individual pieces vests with the respective authors.

10 9 8 7 6 5 4 3 2 1

The views and opinions expressed in this book are the author(s) own.
The facts contained herein were reported to be true as on the date of publication by the authors to the publishers of the book, and the
publishers are not in any way liable for their accuracy or veracity.

P-ISBN: 9789353450311

E-ISBN: 9789353450335

All rights reserved. No part of this publication may be reproduced,
transmitted, or stored in a retrieval system in any form or by any means without the written permission of the publisher.

Typeset in Adobe Caslon Pro by R. Ajith Kumar, Noida

Printed at Manipal Technologies Ltd

The opinions expressed in this book are those of the authors and editors, and do not necessarily represent the views of any institution they are or were affiliated with.

Contents

The fourteen chapters in this book contain individual notes from thirteen economists. Each of these notes addresses one particular economic issue or sector that needs attention from the government. These notes represent the economists own views, not that of any party or institution.

Some of the papers analyse these problems in considerable detail. So, to make it easier for all readers, the editors have provided a brief statement of the problems that need to be addressed before each paper discusses them in depth. In addition, each chapter ends with a summary of the suggested solutions.

The introduction, Why Strong, Equitable and Sustainable Growth Is Vital for India, serves also as an overview of the agenda we propose.

Finally, there is an afterword that identifies eight particular reforms to deal with the eight biggest challenges India faces.

India is one of the fastest growing large economies in the world, having grown at an average of almost 7 per cent for the last twenty-five years. There have been many notable reforms over this period most recently, the cooperative fiscal federalism that brought the goods and services tax (GST) into being; the enactment of the Indian Bankruptcy Code; and the dramatic dis-inflation of recent years, partly as a result of a move to an inflation targeting regime.

While all of this is commendable, we should not be satisfied with this. India is still one of the poorest countries in the G-20, and poor countries ought to grow faster because catch-up growth is easier. Also, the benefits of growth in India have been distributed extremely unequally, with top incomes rising much faster than the rest. We have seen new environmental challenges in the form of sharp increases in both local pollution levels and carbon dioxide emissions that, if unchecked, threaten to stall or reverse progress.

India is also not creating enough jobs: even though data on employment in India are both low quality and controversial, the recent news that 28 million applied for 90,000 low-level railway jobs suggests we are not satisfying the demand for jobs (Singh 2018). Unfortunately, we are not well-positioned to follow the export-led growth path that allowed many Asian countries to climb out of poverty. Despite abundant cheap labour, we are not part of many global supply chains. Even as global firms seek to diversify away from China so as to reduce political risk, India is rarely seen as an obvious alternative.

Given Indias continental size, it need not follow the export-led path. It will, however, have to ensure that growth generates jobs and incomes across the skill spectrum, in the process:

• Creating semi-skilled jobs for those currently underemployed or unemployed and those who are seeking to leave low-productivity agriculture even while enhancing the productivity of agriculture itself and the earnings of the agriculture-dependent population.
• Increasing labour participation of women. India has one of the lowest female participation rates in the labour force, down from 35 per cent in 1990 to 27 per cent in 2017. It is one of the few countries where this ratio has fallen. This limits the talent pool that the economy can draw upon, even as it constrains the life choices of women, many of whom, the evidence suggests, would like to be working.
• Spreading jobs and economic development from the coastal states to the interior, as well as to Kashmir and the North-Eastern states.

There are tremendous possibilities for reforms that will take us towards faster and more equitable growth, as this report will lay out. However, we have to allocate scarce resources carefully to make sure that there is enough investment in sectors such as infrastructure to create jobs. Indias aggregate fiscal deficit (state plus Centre) is still close to 6.5 per cent of GDP, higher than almost any in the G-20, and not significantly lower than levels that existed five years ago. However, our investment rate has fallen sharply in recent years. Despite that, our external financing requirement (as measured by the current account deficit, or CAD) increased appreciably in early 2019, increasing vulnerability. Moreover, to the extent that India grows while being more reliant on domestic demand than were other Asian emerging markets, it needs a much greater focus on macroeconomic stability than they did. For all these reasons, it needs to prioritize government spending better, focusing on filling clear investment gaps and protecting the vulnerable. It also needs to increase revenues by making the tax system more progressive both in taxes levied and through more effective collection from rich non-payers, by bringing more people into the tax net and by charging users for government services where appropriate.

A key factor in spurring growth will be reforms that alleviate supply side constraints on growth and job creation. We have to enable both the industrial sector and the service sector to operate at larger scale. This involves embracing highly overdue labour reforms including allowing for a rich menu of contracts with workers that allows for more possibilities than just permanent workers and short-term contractual labour in firms. Such additional contracting possibilities could give workers more job security, give firms the incentive to train and invest in their skilling, even as it gives firms more reason to scale up. Similarly, cleaner title to land, as well as a land acquisition process that protects the seller while simplifying acquisition, will reduce the cost of developing land, a critical need if we are to create jobs. A more predictable and smoother regulatory environment which prunes redundant or unnecessary regulation, carefully sets regulations in new areas necessitated by our development and enforces regulations effectively and impartially will create a much better environment for business. We must also improve the capabilities as well as strengthen the independence of our regulatory institutions.

Scale is also key for productivity growth which, in turn, is essential for India to expand its share of world exports. The ongoing reorientation of the United States away from dependence on China provides India with a great opportunity to position itself as a viable alternative for cheap sourcing of goods and parts. But this would require macro and industrial policy reforms of the kind outlined above, which