Demonetisation, GST, lockdown sans relief dealt body blow to Indian economy — Raghuram Rajan

At ThePrint's OTC, the former RBI governor said if huge levels of debt and financial distress hold back the economy, it will be a lost decade for growth.

File photo of Raghuram Rajan | Photo: PTI

New Delhi: Demonetisation, poor implementation of the Goods and Services Tax (GST) and the implementation of the Covid-induced lockdown without providing relief to people, leading to the migrant crisis, have dealt a body blow to the Indian economy, former Reserve Bank of India governor Raghuram Rajan said.

Speaking to ThePrint’s Editor-in-Chief Shekhar Gupta during a virtual Off The Cuff interaction, Rajan termed these three events the three “jhatkas” (jolts) to the economy, which hit just when it was recovering after the global financial crisis.

Rajan said that the government will need to provide cash transfers to poor households as well as support small firms to mitigate the impact of the pandemic. He pointed out how loss of jobs and livelihood will lead to many Indians becoming impoverished and how the potential growth of the Indian economy has been hurt due to the pandemic. He was also sceptical about the Finance Ministry saying India will see a V-shaped recovery.

“Most people are saying that India could see a V-shaped recovery…that relies on the economy not being damaged. If it is damaged, it takes much longer for it to come back,” Rajan, who is the Katherine Miller Professor of Finance at Chicago University’s Booth School of Business, explained.

“In India, because of the limited spending done by the government to protect households and small and medium firms, there is a lot of distress that we will have to deal with going forward,” he said. “Households which had earlier climbed the ladder into the lower middle class are now slipping back into poverty.”

The growth potential of the economy is more subdued, he said. “I would not worry about this year’s growth forecast at minus 10 per cent. What we should be worried about is the longer-term damage to the growth trajectory. We should be prepared to refloat the economy.”

The Indian economy contracted by a record 23.9 per cent in the April-June quarter and is forecast to contract by 10 per cent in the full year.

No serious growth-enhancing reforms since 2004

Rajan pointed out that India entered the pandemic with an already weak economy, and that the measures announced by the government so far are relief measures in nature.

“We could do more in terms of relief to households and target MSMEs with support. Taxpaying MSMEs could be given some relief via tax transfers back to them. Demand is weak…it compromises firms who are dependent on this demand. They may close and the jobs will be gone and then supply is constrained,” he said.

Rajan also lamented that India has not undertaken growth-enhancing measures since NDA-1’s tenure that ended in 2004. He pointed out how most of the reform measures undertaken by subsequent governments were mainly redistributive in nature. “GST and the insolvency and bankruptcy code have been brought in by the current government but it has not come together to give the private sector the impetus to invest,” he said.

“We saw 8-9 per cent growth ..We should have extended those reforms to enhance growth. Our only sensible strategy is to continue opening up and rely on a strong export-led push given that domestic demand is going to be weak in the foreseeable future,” he said. “I think it’s really important, including for our national security, that we get our economy back on track and as soon as possible, ” he added. “We must focus on ensuring we are not held back by huge levels of debt and financial distress when the economy is able to run again. Otherwise, this will be a lost decade in terms of growth,” he predicted.

Rajan explained that the sharp accretion in foreign exchange reserves does allow India to take risks on the fiscal side, but a strong rupee may hurt exports.

Demonetisation ill-advised,  strong institutions needed

Rajan also pointed out that demonetisation was a shock to the economy as it was accompanied by inadequate availability of currency.

“Demonetisation was ill-advised. In hindsight and in foresight, you should have had enough cash in the ATMs and with banks to pay money. We had printed some money, but it was not enough,” he said. “The expectation was that it would take place with enough preparation if it had to be done… The idea was to print everything before it was done…if there was a political decision to do it. The only way it could be done in reasonable time was to print large currency notes,” he said.

He stressed the need to allow institutions to remain robust and do their job. “India has many strong institutions. We should respect them. They should be allowed to do their job. Only when they do their job, we can be a first-world country. When we undermine them, we become a third-world country,” he said.

Speaking of his tenure as the RBI governor, Rajan said he was not put under pressure to favour anybody. “In both the UPA & NDA regimes, I never got a call from anyone in the govt for favouring a promoter. There was a respect for RBI and its integrity that kept the political establishment from trying to influence it,” he said.

Government not serious about privatisation

Rajan minced no words when talking about how he feels the current government is not serious about privatisation. He added that this is evident in its inability to meet budgeted targets or selling one state-owned firm to another in a bid to meet the targets.

“There is no intent to let go of the public sector. In the midst of the pandemic, the Nifty is hitting the 12000 level. If you were serious about privatisation, you would have prepared these entities and let go when the price was good,” he said.