Inflation not a bad thing! Highlights of Abhijit Banerjee's take on economy

Abhijit Banerjee, who recently won the Economics Nobel Prize, along with Esther Duflo and Michael Kremer, spoke to Rajesh Kumar about the concerns facing the Indian economy; here are the highlights

Indian- American economist Abhijit Banerjee, along with wife Esther Duflo and Michael Kremer, recently won the Economics Nobel prize for their work on randomised controlled trials, or RCT.

Banerjee and Duflo have been in India for a few days promoting their book, Good Economics for Hard Time’s: Better Answers to Our Biggest Problems. 

Business Standard’s Rajesh Kumar caught up with Banerjee and discussed some important issues facing the Indian and global economies. Here are some highlights of the insights shared by the Nobel laureate:

Inflation not bad: Given that we have downward-sticky prices, inflation is not a bad thing — it keeps labour demand up. With inflation targeting, the pressure on support prices has something to do with demand slowdown.

Trade war will help: Amid a trade war between the US and China, we may be better off; that’s going to help. There is slowdown that is already happening — the Chinese economy is slowing. The US grew extremely fast for a couple of years; it is going to slow automatically. So, that to me is already predicted. Now on top of that, whether we will see further slowing depends a bit on the US elections.

Interest rates a problem: We had very low real interest rates. Now, they are much higher and that is a big problem, now that we are in a kind of a demand deficit, it is harder to revive anything by cutting interest rates a little bit. 

Govt sector a happy spot: The government sector has been the one happy spot in the economy. Deficit has grown, in part as a response to that.

Tax-to-GDP a concern: We can’t live with the tax-to-GDP ratio that we have; we know that. We need taxes.

If labour is cheap, will capital come? That’s not what we see. We anticipate certain groups are going to get hammered. Because we don’t see it, we can anticipate that certain groups are going to get hammered. We should take preemptive action. 

Credibility is key: We need a mechanism to make it clear that when the government promises X, it gives you X. Credibility is central to this.

Support price duality: Support prices were kept flat. The govt actually first took it away and then came back to compensate.  I don’t think that’s the best process. Support prices drove terms of trade for a while and they decided not to do that. 

Jobs and risk appetite: When you first go to a city, you don’t know if you will find a job, so you will be risk-averse. But if you have basic support, you might move and take that risk.