Modi is an effective economic reformist, a more social liberal than one would have expected: Paul Krugman

Yes. You see this in US Politics. It's very obvious. This has happened in many countries over time. We have a famous book by Thomas Piketty on wealth concentration. It is not irreversible. We do find that we have had progressive movements, reform movements. If there is sufficient energy in the reform movement, then you can turn it around. So, we can be hopeful that extreme inequality can be reduced.

Look at Latin American countries. They have become less unequal in the last 15 years. They have had significant reform movements in their own politics.

What's your view about India from outside?

It is paradoxical. There is still immense poverty. It is still very backward. On the other hand, the dynamism is on a degree that would have seemed inconceivable few years ago. The amount of wealth and the number of sophisticated people encounters (in India) in media and academics, in business in remarkably high. So, it looks like a country on its way up and given its size that can change the whole world.

In terms of PPP, India is the third largest economy in the world. Do you think it is okay to describe India as an economic super power now?

Yes, I think. Although you need to be a little right there. The standards to be a super power keeps on rising. India is still considerably smaller than China and the US. It's not on the same scale. In some ways India is where Japan has been for some time—a very important economic power but not quite in the first rank and it is probably going to stay in that position for a while. People would want to take India's views on everything, from international trade policy to security policy very seriously.

President Donald Trump claims tariffs will create jobs. His critics say tariffs will destroy more jobs than they create. What’s your view?

I would say no to both. In the end the total number of US jobs will be the same regardless what he does on tariffs. The main impact of the tariffs he's proposing is probably going to destroy a few jobs, rather than create them. You gain jobs in steel but you lose them in auto sector. The important point is that he's got a vision that he can recreate the manufacturing-centered economy and tariffs are not going to do that. Tariffs won't even do much on trade deficits.

Even in Pittsburg, the steel capital, there are 10 times as many people employed by hospitals as they are employed by steel mills. We are a service economy now. He cannot change that. He can only disrupt the existing business.

Prime Minister Narendra Modi is focusing on Make in India. When we talk about service economy, how does it pan out?

It is different at different stages of development. If you look at world as a whole, manufacturing employment is still rising. Poorer countries are still in the shift from agriculture to manufacturing. It is only at much higher levels of per capita income that they have this shift from manufacturing to services.

India has not so far had manufacturing-led export boom, but instead a service-led export boom. So, it makes sense almost more sense than anywhere else to talk about shifting it to manufacturing here. India still needs to get into the manufacturing game.

The problem with service-led growth is especially for a developing country like India is also the view that we are on the wrong end of the technology cycle that may not create the huge number jobs that for the millions of hopefuls who join the queue every year

That's why India needs to move more into manufacturing. Manufacturing is a natural place to employ. India has got to move millions of other goods jobs.

Can India become a manufacturing hub like China? With competition from low cost manufacturers like Bangladesh and China.

China is becoming increasing high cost. Chinese wages are rising. China is no longer low cost. China is rapidly losing ground in apparel to Bangladesh. So, for everyone who thinks that the world will run out of opportunities for export has turned out to be wrong.

What is your sense of export subsidies that Indian government is providing? The US has taken India to WTO that exports subsidies don't work.

We need to be careful. I have not immersed myself on those cases.

Is free trade actually a reason for growing inequality in large developing countries like India?

The evidence is mixed. I think we can state this in case of Mexico. It does look that in Mexico, the initial impact of liberalisation was increase in inequality (in 1980s). Then it began coming down. China become unequal but that is because it moved from communism to rapid capitalism.

Can you summarise the defining trends in the world economy in the next two-three years?

We've had a very good run for 5 years of solid recovery advanced growth. US has to slow down, Probably, from 2.5 percent to 1.5 percent. Can we do that without hitting some kind of bump in the road? What I worry about is that we don’t have a lot of shock absorbers. Interest rates are zero in Europe and about 150 basis points in the US. If we hit some kind of credit crisis, some kind of bubble that bursts that we don't see, we won't have a good response. So, the predictable part of the story is what we have been labelling as good growth, the unpredictable part is what if we hit a bump in the road and then nobody knows how we would respond.

Most of countries are reducing corporate tax rate. Do you approve of this trend?

We have been reducing corporate tax rates. I approve of reducing the headline rate. US had a high headline rate of 35 percent, which was high by rational standards. Now, we have an effective rate, which was around 15 percent which was very uneven because some companies could find ways to exploit the loopholes. We should have had a reform that simultaneously lowers the headline rate and raises the effective rate, which you can actually see in some of the European countries.

You have been a fierce critic of President Trump? Precisely what is wrong with his policies, other than his aggressive style?

The US was running significant budget deficits. The US government, as we like to say, is a giant insurance company with an army. What it basically does is it spends money on social insurance programme for the elderly. We are still an ageing society. So, we actually need more revenue now. He has managed to make the health policy less effective and more expensive.

His worst policy is bit environmental. We are going to have a lot more health issues related to pollution. Donald Trump is doing his best to turn America into Delhi, in terms of air quality.

You have been tracking Modi's policies for the last four years. What are your views?

He has been little bit radical. Demonetisation was a foolish policy. India was more resilient to the policy than I feared. Overall, he seems to be a competent economic manager. He has been trying to do something about the rural poor. So, the direction is in the right place. He falls into the category—I have a personal category of people—who disturb me on my social instincts, a Hindu nationalist, not something a more tolerant world would want to see. But, he has been an effective economic reformist leader. Reminds me in peculiar ways of Shinzo Abe of Japan. He is also a great nationalist. He is also in some peculiar way a social liberal, supporter of women in the workforce. I wish there were perfect leaders out there. Most of them are mixed bag. There are certainly some good things to say about Modi.

Modi's policies seem to be tilted upon the poor and the women. To that extent, will you describe him as a social liberal?

The problem is that he doesn't fit the western categories. But, he seems to be more of a social liberal than one would have expected from other pieces of the package.

Have your views about Modi changed from the time he took office?

To be honest, I did not pay a whole lot of attention.  We did not pay enough attention to India until recently when India has been too much off the radar screen. India's rise as a semi superpower has caught up by surprise and now we do need to pay attention.

What is your sense of government's role in business, public sector banks, industries? You think they should get out of them?

There are some things that the governments run well and some things badly. In most places government-run healthcare is the most efficient way to do it. Government-run manufacturing has been a disaster everywhere. Banking is an intermediate case. Japan's postal banking has been a good system. I don't have a good sense of the Indian system. We know that 30 years ago, way too much Indian economy was directly run by the government. But that doesn't mean that none of them should be.