What strikes you most about Raghuram Rajan is not his academic brilliance, open mindedness or honesty of thought, but how he blends all of these with simplicity of expression and disarming humility. Currently Distinguished Service Professor of Finance at University of Chicago Booth School of Business, Rajan is an alumnus of IIT-D, IIM-A and MIT. Before he became the 23rd governor of the Reserve Bank of India (2013-16), he was chief economist with the International Monetary Fund and chief economic adviser with the Government of India. In his forthcoming book ‘I Do What I Do: On Reforms, Rhetoric and Resolve’, Rajan reflects on his RBI stint exactly one year after the self-imposed period of silence. In an exclusive interview with TOI’s Sidhartha and Surojit Gupta , Rajan discusses key ideas in his book, what he thinks of demonetisation and why he is optimistic about the Indian economy. Excerpts:
In the book you’ve clarified your stand on demonetisation which you conveyed to the government orally. Your stand was that the economic costs would outweigh the benefits. Now that this week’s RBI report has revealed that 99% of banned notes are back in the system, what is your reaction?
- In order to become a more developed country, India has to get people who owe taxes to actually pay them, and this ranges from income tax to various kinds of indirect taxes. Certainly, the government’s move to try and reduce the amount of black money in the economy through various measures is an important one. But as for demonetisation itself, there are really two or three questions. One, of course, is that we have seen the costs of demonetisation upfront, and they are substantial. Let us not mince words about it – GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money – over Rs 2 lakh crore and maybe approaching Rs 2.5 lakh crore. Then there are the other costs – the hassle cost of people standing in line, the printing cost that the RBI says is close to Rs 8,000 crore, the cost to the banks of withdrawing the money, and the time spent by their clerks, by their managers and by their senior officers doing all this, and the interest being paid on all those deposits, which earlier were effectively an interest-free loan to the RBI.
- I think the people who mooted this must have thought that some of it would be compensated if money didn’t come back into the system. The fact that 99% has been deposited certainly does suggest that aim has not been met. However, the government can investigate the deposits, and some of it may turn out to be black money but it does imply that a greater effort is required and could also mean – and this is something a number of commentators have pointed out – more harassment for the general public that has honestly deposited money that was lying for one reason or the other in various accounts. So that benefit – if it comes – let us see at what cost it comes.
- The other potential benefit was that electronic transactions would go up. And if you look at electronic transactions, you see that there was a blip-up when demonetisation happened but it has come back to broadly the trend growth line. One area where there has been substantial take off is transactions done on the Unified Payment Interface, and that’s a positive for the economy. The question is, would it have happened anyway because UPI was at an early stage when demonetisation happened, which just pushed the process forward? And that leaves the last aspect, has this been an important signal about the need for tax compliance? And there the jury is out. There is some data to show greater tax inflows (I think the Economic Survey says it’s about Rs 10,000 crore) but how much is because of demonetisation and how much because of natural growth is unclear at this point.
- So, I think all said and done, it would be fair to say the intent was good. But certainly at this point, one still cannot in any way say it has been an economic success. But again, as I said, only time will tell.
Do you think demonetisation hit rural areas the hardest since it was done in a hurry?
- Like any monetary economist, I would say that if you are taking 87% of the currency out of circulation, there will be a tremendous impact on the areas that use cash. It is probably fair to say that demonetisation has had the largest impact on the people who transact informally, of which many might be very poor. And again we see some sort of anecdotal evidence of this but we have to wait for a better measurement. Unfortunately, given the way we measure GDP, these are people who are probably not going to be counted that much. The GDP measurement will overlook the stress on these people, and we will only indirectly see this, for example, through the kind of stresses that micro-finance institutions are experiencing because they deal with many of these people.
- As the economy gets remonetised, hopefully some of them will bounce back but there are also people with very thin buffers. Some informal firms may have closed down because of the kind of stress they experienced and we will have to, over time, see how we can measure and get a full understanding of the impact of demonetisation.
- I think the view of any monetary economist would be that you first print the money and then do the demonetisation, and I don’t know what the rationale for doing it when it was done is. I am not party to that decision.
Did you have any inkling that it was coming?
- I was party to the conversation, as I have already said, on the costs and benefits of the case but not on the date. Separately, we were moving to a new set of notes, not related to the demonetisation exercise necessarily, but as part of a move to a set of newly designed notes. Of course, the accelerated printing of the 2,000-rupee notes did make us better prepared for an eventual demonetisation without a specific date having been fixed.
Does that mean even the RBI was not fully kept in the picture as to when demonetisation may happen?
- I left the RBI in September 2016, and as I have said in the book, at no point during my term was the RBI asked to make a decision on demonetisation.
You served under two governments, the NDA and UPA, and have written in your book about the good understanding you had with the political leadership. Did you find one government more decisive than the other?
- I can’t comment on specific relations with governments – that would be inappropriate and a betrayal of trust. I met frequently with finance ministers and regularly with the prime ministers of both governments. I had cordial relations with both governments.
You’ve talked about the fine line the RBI governor has to tread and in fact described your role as that of a national risk manager. What are the pulls and pressures from the government?
- The duty of the central bank and other regulatory bodies is to work together under the overall direction of the elected representatives of the people. You cannot go off in a separate direction. There are some areas where you have a duty to warn, to persuade, to sometimes say no, and that is something I have talked about in the book. As Dr Y V Reddy talked about in his book, you may be against a certain move and you think it is improper but ultimately after making your arguments, it is the government which has to decide. You cannot be a fifth column inside government, undermining the legitimate right of the government to decide.
Is there a more effective way for the government to dig out black money without hobbling the system?
- One has to start by saying that any method will have a certain amount of uncertainty associated with it. There is no perfect method. However, I think one option – which the government is currently trying to implement – is to reduce the room for black money by making it harder and harder for people to invest that black money. One way to do that is the broader use of Aadhaar in any financial investments because it gives the authorities a sense of what your entire wealth holdings might be. This is something that we don’t get today because you have bank accounts that may not be linked to the same PAN number. So by moving to an Aadhaar-based system, you can get far better compliance on the flows. Of course what is already hidden stock – whether it is gold or currency – is harder to identify through this but at least you stop the flows or make the flows harder which, in the long run, is what you need to do to tackle the black money problem.
To what do you attribute this consistent demand for lower rate of interest, now even from the current chief economic adviser?
- This tension exists in every country which is why you don’t ask the finance ministry to set interest rates; you delegate it to a central bank. The whole idea of an inflation committee is really to give it a structure by saying, ‘Dear government please tell us what you want in terms of inflation and even go ahead and appoint three experts who you think are sensible and take appropriate decisions’. And let them join with RBI people and let the collective determine what the interest rate should be.
You’ve included a speech in which you talk about the number of bad loans made in 2007-08. Do you think it was lazy banking that led to defaulters such as Vijay Mallya?
- As I mentioned in the book, it was a period of irrational exuberance in India. A lot of projects had succeeded and this made bankers willing to take on new projects with higher leverage and less promoter equity. There was also poor assessment of projects and, undoubtedly, some corruption. Now, the regulator is not a commercial banker and can potentially raise concerns about whether appropriate assessments have been done, but the regulator really comes into the act when the losses start showing. One of the issues I pointed out in one of my speeches was that credit growth by public sector banks had been slowing down since 2014, way before the strong balance sheet clean-up was initiated, and this because banks were seeing the problem on their balance sheets. To some extent, it was necessary to force the clean-up and the recapitalisation so that they could move forward. And clean-up does not mean liquidate the asset but put it back on track with the right capital structure.
- Now, I do think that there has been a lot of hesitancy in various quarters, among bankers and, to some extent, in the authorities to speed up the pace of clean-up for fear that some of the people who perpetrated the mischief will go scot-free. We should separate the two issues. From a national perspective putting assets back on track and letting them be revived is extremely important. That creates jobs, it creates growth. Separately, we have to beef up the quality of investigation so that people who made away with money that didn’t belong to them are caught quickly and brought to justice. Those are two separate issues. Just because there is some fear that the promoter has misappropriated money doesn’t mean that his factory or his power plant should have a stigma. Take the power plant away, do what is necessary to put it back on track, bring in new management if necessary and deal with his shenanigans separately through the investigative authorities. Try and ensure that anytime the bankers make a concession in order to bring a plant back to life they don’t face the threat of an investigation.
Every finance minister says India should have large global banks. What is your view on bank consolidation?
- There are several issues here. One is the quality of management in public sector banks needs to be raised. There are some very good public sector bankers but there are some not so good ones, and it is not necessarily at the top that the problem lies. New capabilities are also needed in the middle management. The argument for mergers may be that good banks can uplift less good banks. I feel mergers are always better done at a time when the banks are relatively clean and the management can spend time on the merger process, which is never easy, especially if banks have strong cultures. So, to bring together a bank, for example, which has largely been in north India, with one from the east will bring together cultures that will take some time to adjust to each other. What is important is to ensure that you don’t double the problem by bringing the wrong banks together. The second concern expressed at various gyan sangams is whether the banks are in fact all following the same strategy. And, unfortunately, so long as strategy is determined in North Block, it will always be the same. So one of the moves that this government has taken, which has to be taken to its logical conclusion, is to appoint boards that are more independent, which are more capable and cut the strings between the boards and the government. The joint secretary in the ministry of finance should not be able to summon a board member or a CEO.
After the departure of NITI Aayog vice chairman Arvind Panagariya, there is talk that people who come from abroad aren’t as dedicated to serving India as homegrown folks and that the government should be careful about appointing such people in important posts. Your views?
- There are people who think, sometimes fairly, that those who come from abroad jump to positions that they themselves would like. They question their capabilities and say, ‘Oh they don’t know India, and therefore will make wrong decisions’. I think that there are circumstances where an intimate knowledge of India is necessary in order to make the right decisions, and there are certain circumstances in which you can make the right decisions only because you are not trapped in a mindset that resists change. I think anybody who is sensible and who comes from abroad will take the wealth of experience that exists in their colleagues, their subordinates, their superiors and make decisions based on that.
- As I said in the book, I never actually decided things on my own. I used to ask my colleagues to contribute and invariably the decisions that came from discussions at senior management meetings were better than what I individually might have taken or hopefully what they might have taken without my inputs. I think we should take the best capabilities there are and make use of them.
- Obviously we come in because it is fulfilling to do something for the country. I think national sentiment in people living outside is as much as in those living in India. Many of us want to give back which is why we are willing to leave our cushy positions in academia or elsewhere and make the adjustment which is not easy and take the criticism that always emanates in these situations while trying to do the best job we can. Let me also add that sometimes there is a notion that we are fair-weather friends, who come when times are good and leave as soon as our leave expires. I didn’t leave when my leave expired; there was absolutely no issue about extending my leave, if necessary. I left when the government and I could not agree on terms for me to stay on. In that sense, the notion that we come to India for our sabbaticals is just not an appropriate criticism.
- I say this because there was a column in a newspaper a few weeks ago which seemed to suggest that I went back even though the government asked me to stay because the University of Chicago was not willing to extend my leave. I think the appropriate answer to that is we never reached a point where the government made me an offer to stay on.
Did the government offer you a shorter term?
- There was no offer on the table. That’s fair to say.
How do you see India’s economic performance?
- I am very hopeful. I think the government has done some very important things such as the goods and services tax reforms because politically a difficult task has been done. This is one situation where the dividends will pay off in the longer run even though there might be short-term disruptions. It will also help in curbing tax evasion in addition to uniting the country as a single market and reducing transactions. This is a major reform.
- The immediate concern is that private investment hasn’t picked up and, as a result, jobs haven’t been created to the extent that we need. In an emerging market the biggest source of jobs is construction. I think it is fair to say we need to do more here. We need to ensure that some of these reforms that have taken place – the real estate Act, GST, and so on – are also met with moves to enhance investment so that the country can make use of what the Economic Survey calls a sweet spot. There is a very good external environment and it is something that we should take advantage of now. Unfortunately, with private investment not picking up, so far we haven’t. I would say three big places we need to work hard on are cleaning up the banks and putting those projects that are languishing back on track to the extent possible, and then recapitalising the banks to ensure that they have the money to lend when growth picks up. Second, in the power sector, we have to be fairly careful that going forward we don’t have more distress. The reforms required by UDAY have to be accelerated, and discom losses have to be brought down faster.
- The third element that is extremely important is agriculture. We need to increase productivity in agriculture and also reduce the gap between what the farmer gets and what is paid by retail buyers. This means improving the quality of markets giving farmers access to productivity tools and insurance. All these we have been working on for some time but I always said the problem in India is not that we don’t know what to do. It is that we should have done it yesterday or last week.
Will you be interested in coming to Parliament like your friend Jayant Sinha?
- Actually, I am very focused on writing and research right now. And I don’t believe I have any sort of political aptitude. I am happy where I am.
(This article was originally published in The Times of India)