Nobel laureate Abhijit Banerjee on Monday suggested that the government should consider bringing back the wealth tax given the kind of inequality present in India. “In general, more redistribution makes perfect sense to me,” he said at the Kolkata Literary Meet, according to The Telegraph.
He, however, added that he does not expect it to happen right now. “I hear all the vibes about a tax cut for the middle classes,” said Banerjee. “I don’t think that is where the leverage points are. To be honest I am less worried about budget deficit, it’s never been what it claims to be…. I think government can do better.”
Finance Minister Nirmala Sitharam is scheduled to present the Union Budget on February 1. The wealth tax was first put in place in 1957. However, the Narendra Modi government had scrapped the wealth tax in 2015 because of a high cost of collections and a low yield. Total wealth tax collected in 2013-’14 was only Rs 1,008 crore. The wealth tax was replaced with an additional surcharge of 2% on the super rich with a taxable income of over Rs 1 crore annually.
The Indian-American economist said India could be passing through a phase of recession but there was no way to know it. “We are just picking up the symptoms,” he said. “The statistical apparatus is incapable of capturing short-term data on the informal sector.”
“If you ask me, could we be in a recession? There is nothing in data that says we could not be in a recession,” said Banerjee, according to IANS. He, however, cited the example of sale of two-wheelers, which have been hit by a slowdown . “It is the informal sector that buys the two-wheelers,” he added.
Banerjee said the first reaction to an economic problem like demand slowdown was to cut corporate tax. “To me, it’s like we are in a time warp,” he said. “We do not see where we are. The corporate sector is actually sitting on cash and not doing much with it because there is no demand. We have a mindset of making policies, which are based on some model of economics where all the dynamism is to be provided by the rich. This doesn’t seem to be true.”
The economist said that the priority of the government should be on refinancing the banking sector, but warned that it will take time to yield results. “The banking sector is in doldrums,” he said. “It needs huge funding by the government. The Centre should also look at infrastructure sector funding.”
The growth rate of the Indian economy has plummeted over the last three years. In the second quarter of 2019-’20, the Gross Domestic Product recorded a six-year-low growth rate of 4.5%. The government has predicted that India will grow at just 5% for 2019-’20, the lowest in 11 years. Meanwhile, retail inflation rose to a five-and-half year high of 7.35% in December 2019. The government had in September last year slashed the corporate tax rate for domestic firms from 35% to 22%.
Banerjee also favoured the central government’s move to privatise public sector undertakings like Air India. “I would love to sell out the prestigious PSUs,” he said when asked on the Centre’s disinvestment plan, according to The Indian Express. On Monday, the Centre said it was for planning to sell its entire stake in Air India. The move has been criticised by Congress leaders Kapil Sibal and Sandeep Dixit as well as Bharatiya Janata Party leader Subramanian Swamy.
On Muslims and migrants
The professor of economics at the Massachusetts Institute of Technology said “the fringes of the ruling party” was trying “to demonise a population”. He said in India, like in the United States, the minorities were not anywhere close to being dominant. “I don’t think there is any real fear that there is going to be a Muslim takeover of India,” he said, according to The Telegraph. “Whenever these fears are stoked, you could imagine a context when these are two equal groups, and you worry about the other group becoming too powerful. This is just not realistic here… [it] is constructing a narrative that has no basis in reality.”
Banerjee said there was no evidence that migrants depress low-income wages. “People have this idea [migrants will take away their jobs] because they have learnt economics in high school,” said the Nobel laureate. “One of the dangers of learning economics at high school is [that] you learn it half way. So you learn that there is a supply curve and a demand curve. And when the supply curve moves, more people come in and the price goes down, (and) wages go down. What people forget is that when people migrate they don’t live on air. They buy stuff. So you know it also moves demand.”
Banerjee said “economic migrants” are enterprising people. “They tend to actually add a lot to the economy,” he added. “...When a lot of people come, you end up in a slightly different job. You become the manager for these people, the newcomers; you start a restaurant to feed them. So, people actually reallocate to absorb them.”