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Govt Needs to Address Demand Issues to Arrest Slowdown, Says Economist Abhijit Banerjee Day Before Budget

Kolkata: A day before Finance Minister Nirmala Sitharaman presents the Union Budget in Parliament, Nobel Laureate and economist Abhijit Banerjee said the current slowdown in economy can be attributed to the shortage in demand.

When asked for his thoughts on the upcoming Budget, Banerjee said, “I have nothing particular to say. Everything seems to point to a demand shortage driven slowdown. Investment is down because there is no demand for the products. Imports are down because there is no demand. The direct taxes down because earnings are down. If this diagnosis is right, we need to do something about demand.”

The finance minister faces several challenges — from the current slowdown to the fiscal deficit and the rise in unemployment.

In response to a question on his suggestions on how the Budget should deal with addressing key areas, such as fiscal deficit, Banerjee said this is not the time to worry too much about the deficit and the inflation targets.

“I think the government has created a bunch of new programmes that can be used to pump some extra money into the hands of the poor,” he said, urging for no new schemes. “Also, some way of encouraging more housing purchases and automobile purchases (rather than a tax cut for the middle classes) might be useful since those two key sectors are ailing.”

Banerjee said some more public investment in infrastructure would be welcome. “We need to start the virtuous cycle of more money in the hands of the infrastructure companies, more low-skilled jobs, may be some loan repayments getting the banking sector out of its doldrums,” he said.

When asked what the government led by Prime Minister Narendra Modi can do to bring the limping economy back on track, Banerjee said the deficit needs to be reduced in the long run.

“We need a landing plan that is pre-announced so that the world knows it will come down (another reason why middle-class income tax cuts are worse because they are hard to reverse. Better to give short-term subsidies for housing and automotive sectors). In the medium run, we need more revenue and a wealth tax can be very important, as well as dealing with inequality. A radical thought: Restore the higher corporate tax rates may be?” he said.

The government on Friday revised downwards the economic growth rate for 2018-19, to 6.1% from 6.8% estimated earlier, mainly due to deceleration in mining, manufacturing and farm sectors. The country’s GDP growth for the second quarter of the current financial year fell to 4.5% (a six-year low).

Official data released on Friday showed that the government’s fiscal deficit touched 132.4% of the full-year target at December-end mainly due to slower pace of revenue collections.

In actual terms, the fiscal deficit or gap between expenditure and revenue was Rs 9,31,725 crore, the data released by the Controller General of Accounts (CGA) showed.

The government aims to restrict the gap at 3.3% of the GDP or Rs 7,03,760 crore in the year ending March 2020. The deficit was 112.4% of 2018-19 Budget Estimate (BE) in the corresponding period.

The Indian-American innovative MIT economist, his wife Esther Duflo and Harvard professor Michael Kremer jointly won the 2019 Nobel Economics Prize “for their experimental approach to alleviating global poverty”.

Born in Mumbai, Banerjee was educated at the University of Calcutta and the Jawaharlal Nehru University (JNU). He received his PhD from the Harvard University and is a professor at the Massachussetts Institute of Technology (MIT).

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Source: News18