Nobel winner Abhijit Banerjee and former RBI chief Raghuram Rajan on India’s economic challenges

Building blocks.
Building blocks.
Image: REUTERS/Rupak De Chowdhuri
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In October 2018, thirteen of us, all economists, got together in the hope that, as the country gears up for elections, we could start a conversation by identifying a set of policy ideas that might help inform party manifestos and policy visions. While our views stretch across the spectrum from right to left, we found surprising agreement on the challenges India faces and reforms it needs now. Two of us sifted through the set of ideas, picking what we felt were the top challenges and proposals to address them.

As we see it, rethinking government is key. Government capacity is limited. We need to target it better while trying to enhance it. Stability in government policy is important so that our farmers and firms can plan better, and markets can play a more effective role. Cooperative federalism—Centre and states working together and learning from each other—is essential.

Here are the eight top challenges India faces, and proposals to deal with each:

  1. The massive aggregate fiscal deficit of the states and the Centre combined leaves fewer, costlier, resources for private investment. We should aim to hit the FRBM suggested 5% of GDP by 2023—but not through creative accounting or off-balance-sheet transactions. Instead, we must increase revenues, through both better compliance and more progressive taxation, and target spending better. State deficits have grown, partly because markets assume that the Centre will bail out overextended states and therefore do not charge them higher interest rates. To incentivise better behaviour, any state’s borrowing above agreed limits should be funded through special bonds that are explicitly free of any federal guarantee. A Centre–state council modeled on the successful GST Council could supervise fiscal federalism.
  2. Three sectors that are distressed today are agriculture, power and banking—despite massive past government intervention, and often because of it. For example, periodic export bans and large-scale imports to keep food inflation down have radically moved the terms of trade against agriculture, while reducing the farmer’s ability to plan. Cheap or free power to farmers has depleted the water table to the point of disaster. Farmers do need assistance. However, the instruments used—loan waivers, inflated MSPs without adequate procurement and input price subsidies—often exacerbate the problem. In addition to enhancing investment in new technologies and irrigation, a government move towards lump-sum payments to farmers with holdings below a certain limit, in the spirit of Telangana’s Rythu Bandhu scheme, will be an improvement.
    Similarly, distressed state-owned power distribution companies stand between power producers who want to sell more and consumers who want more reliable power. The solutions are well known—better metering, less distorted pricing of both power and energy inputs, and the use of new, cleaner technologies for distributed production and decentralising distribution. All these require rethinking the government’s role, as will any sustainable solution to banking sector distress.
  3. We need a better business environment—whether to create the jobs for those leaving agriculture, urban schools or our universities, or to ramp up our woefully inadequate exports. We need to learn from states’ experiences about what works in areas like land acquisition, industrial regulation, provision of power and logistics and environmental clearances. A Centre-state productivity council can be useful for this; such a council could revive the idea of special economic zones where coordinated land, environmental clearances and transportation infrastructure are available on a “plug-in” basis. Such zones, not necessarily targeted at exports, may also be used to experiment with reforms such as changes in labour laws before an all-India rollout, to provide the evidence needed to build consensus for them.
  4. Sustainable growth requires more effective but less burdensome regulation. Our cities are choking and climate change is upon us. Municipalities need the powers and funding to deal with these challenges, which means more decentralisation. In other areas, we need more centralisation: for instance, a new and technically beefed-up environmental regulator, combining powers that are currently with multiple bodies, setting fees based on careful analysis of trade-offs and enforcing them.
  5. Government has to provide for benefi ts, but is not always best suited to deliver them. To reduce the implementation burden and free up its ability to take on new challenges, government should move towards cash transfers. As a first step, beneficiaries of all specific government subsidy programmes should have the choice between cash transfers and benefits in kind.

Many of our challenges also have to do with enhancing the capabilities of our people.

  1. We need more skilled personnel in government—at higher levels in technical areas like digitisation, trade negotiation and environmental regulation, but also at lower levels outside the larger cities. More lateral entrants, merging into the permanent civil service, are desirable near the top. At lower levels, too many young Indians waste years taking competitive exams for government jobs that most will never get. One alternative that will give them skills and work experience is a multi-year paid government internship at salaries comparable to entry-level market wages (much less than what the government pays) for those under twenty-six to work as support staff in government offices or public sector enterprises where needed. Performance on these could help entry into permanent government jobs—though political pressure to make these internships permanent should be resisted.
  1. The Right to Education Act focuses on input requirements for schools that have little bearing on learning outcomes, which have deteriorated alarmingly. Learning must be our central focus, with all schools, public and private, responsible for delivering a minimum level of basic skills to every child. Bringing those falling behind up to par through remedial teaching will be critical.
  2. We must address the coming explosion of noncommunicable diseases, which will require engagement with front line providers. The vast majority of these have no formal qualifications, but the evidence suggests they can be trained and pushed towards practising better medicine. Since they have the patients’ ears, the health system should use them better rather than ignoring them.

Excerpted from What The Economy Needs Now by Abhijit Banerjee, Raghuram Rajan, Gita Gopinath, Mihir Sharma and others, with permission from Juggernaut Books. We welcome your comments at