Esther Duflo and Abhijit Banerjee, who shared a 2019 Nobel Prize in Economics with Michael Kremer, shown answering questions during a press conference at Massachusetts Institute of Technology on October 14. Photo: AFP / Scott Eisen / Getty Images

Nobel Laureate Abhijit Banerjee has expressed concern over the state of the Indian economy and observed it was on the verge of a major recession. He said the government should focus on stimulating demand.

While taking part in an event organized by Indian Express newspaper along with wife Esther Duflo, Banerjee said, “We are extremely close to a tipping point of a major recession.”

Banerjee said the lack of demand was the most critical problem in the Indian economy and it should be revived even if it means higher budget deficit and inflation. “The only recipe to revive growth is to increase consumer confidence,” he added.

Regarding the government’s recent move to cut corporate tax in order to spur investment in the private sector, he said, “I do not think that is what’s going to save the economy right now. The corporate sector is sitting on a bunch of cash, actually. It isn’t using it for a good reason: that there is no demand.”

He pointed out that the slowdown in India’s real estate sector has caused distress in villages. The sector had “played a role in connecting the urban and rural sector” as it employed young men from villages. But the current slowdown has forced them to go back to their villages.

India’s gross domestic product has been on a downward spiral for six consecutive quarters, finishing at 4.5% in the September 2019 quarter. Private consumption, which contributes about 60% to the gross domestic product, is growing at 5.7% in 2019-20, much below the rate for the previous financial year when it grew at 8.1%.

The National Statistical office has now forecast that India’s gross domestic product growth will hit a 11-year low of 5% in 2019-20, down from 6.8% in the previous year.

Its data further revealed that deceleration in growth will also be witnessed in certain key segments such as agriculture, electricity, gas and water supply, trade, hotels, transport, financial, real estate and professional services.

Some sectors, including mining, public administration, and defense, showed minor improvement.

The economic research department of the country’s largest bank, State Bank of India, has gone a step farther. It has cut its projection for gross domestic product for FY20 to 4.6%, based on current available trends, against 5% projected earlier, even as it assessed that India could be now staring at a sub-6% growth for two successive years.

The bank’s research team said agriculture and allied activities are likely to grow at 2.8% in FY20, against the previous year growth of 2.9%. Services activity will grow at 6.8% this year, pulling the overall economic growth up, but this, too, is a deceleration from 8.1% in FY18 and 7.5% in FY19.

Also read: India facing growth recession: Ex-RBI chief

Earlier India’s former central bank governor Raghuram Rajan said the country was facing “growth recession” and listed various recommendations to help the ailing economy out of the ongoing slowdown.

He called for decentralization of power, focus on rural poverty alleviation and stimulation of private spending. Rajan wanted the government to carry out reforms to liberalize capital, land and the labor markets. He also urged India to join free trade agreements judiciously, to boost competition and improve domestic efficiency.

Rajan observed that the Narendra Modi government was functioning in a very centralized manner and a small set of individuals from the prime minister’s office was making all the decisions.

Also read: India facing ‘great slowdown’, says economist

Another economist, India’s former chief economic adviser Arvind Subramanian, in an academic paper said the country was going through a “great slowdown.” Subramanian served during Narendra Modi’s first term from October 2014 to June 2018 and now teaches at the Harvard Kennedy School in the US.

“Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit,” Subramanian said in a draft working paper for Harvard University’s Center for International Development. He co-authored the paper with John Felman, the former head of the International Monetary Fund’s India office.

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