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Raghuram Rajan says India losing its economic way, fiscal deficit ‘conceals’ a lot

Speaking at Brown University, former RBI governor Raghuram Rajan said demonetisation and GST were the straws that broke the Indian economy’s back.

File photo of Raghuram Rajan | Tomohiro Ohsumi/Bloomberg
File photo of Raghuram Rajan | Tomohiro Ohsumi/Bloomberg

New Delhi: The Indian economy is in a “worrisome” situation, with slowing growth, a fiscal deficit that “conceals” a lot and rising levels of debt and distress, former Reserve Bank of India governor Raghuram Rajan has said.

Delivering the O.P. Jindal lecture at Watson Institute, Brown University, on 9 October, Rajan said there are signs of deep malaise in the Indian economy.

“India is losing its economic way, in part because it is centralising power without a persuasive economic vision. We risk wasting the demographic dividend,” he said.

India’s economic growth slowed to a six-year low of 5 per cent in the quarter ending June 2019, prompting the RBI to lower the full year 2019-20 growth projections to 6.1 per cent.

“Growth has slowed down considerably. The fiscal deficit is large, leaving little room to do much about growth,” said Rajan, pointing out that investment banks’ projections indicate that there isn’t “going to be a rebound in the very short run”.

Also read: India’s fiscal deficit seen jumping to 3.7% this year after stimulus to economy: Fitch

Fiscal deficit may be higher

Rajan said the actual fiscal deficit may be much higher than the combined fiscal deficit of states and the Centre at 7 per cent.

“Revenue projections are very optimistic by most counts. What is less noted and something that the auditor general flagged is that a lot of borrowing is going on through off-balance sheet borrowings,” he said, adding that borrowings of the Food Corporation of India should be thought off as a part of fiscal deficit.

He added that the actual combined fiscal deficit has been pegged at 9-10 per cent by global investment firms.

Also read: Indian economy needs structural reforms & behavioural change, not macroeconomic jargon

On demonetisation, GST & rising NPAs

According to Rajan, the fiscal deficit is also under pressure because of a rise in contingent liabilities.

Rising non-performing assets (NPA) mean banks will need more capitalisation. In addition, healthcare schemes like the Ayushman Bharat will require greater allocations in the budget.

“We don’t account for them well in the budget, but they hit future budgets,” he said.

Rajan attributed the current economic slowdown to a fall in investment, consumption, exports and the NBFC crisis, but pointed out how demonetisation and the goods and services tax further compounded the economy’s woes along with a lack of reforms.

“The sequence of demonetisation and GST was essentially the straw that seems to have broken the Indian economy’s back because it came at a point when the Indian economy was already relatively weak,” he said.

India demonetised high value currencies of Rs 500 and Rs 1000 on 8 November 2016, but failed to remonetise the economy with the new legal currency immediately, leading to a massive cash crunch that forced many small businesses to shut down. This was followed by the implementation of the goods and services tax in July 2017, which caused further disruption to businesses.

Rajan said demonetisation was misguided in concept and created “a lot of pain in a short period of time for the poor informal economy”. He concluded that it was not an economically well thought-of idea.

Rajan pointed out that the recent cut in corporate taxes has been beneficial but uncertainty in terms of changes in the tax regime becomes a dampener for firms.

“We have a habit of going back and forth. The level of FDI hasn’t changed much despite reforms,” he said.

Rajan was also critical of the export ban on agricultural commodities because of price rise in local markets.

“Poor farmer gets hurt by price fall due to export ban. We choose the customer over the farmer because onion prices matter a lot in elections,” he said.

Also read: Rising consumption, enough loan demands — economy is looking up, says Nirmala Sitharaman



  1. We should give a deep thought to what he is saying, are we really experiencing in a our day to day life if yes then we should respect his views otherwise just ignosre ,whatever he has said is with his vast experience and knowledge please respect him and his view point.

  2. Raghuram Rajab always holier than thou! Never tell the world the mess we are in as the result of UPA mismanagement and free for all ! RBI’s inability to detect the deep rooted flaw in detecting massive bungling in the bank’s working and all these under his watch! Present RBI governor a unglamorous personality has done wonderful within short period!

    • Mr Madhukar Nikam: When you pontificate with great bravado:

      “RBI’s inability to detect the deep rooted flaw in detecting massive bungling in the bank’s working and all these under his watch!”

      you forget, like your fellow gaurakshak Rajvir Singh who also rants, vents and vomits here that Dr Rajan’s tenure as RBI Governor lasted from 2013 to 2016. NPAs started in the 2006-2008 time frame when the economy was sound, there was demand for large infra-structure projects and banks had excess liquidity. Indeed, not only in India but also in much of the developed world, banks were bogged down with excess liquidity and chased potential borrowers. And banks diluted their due diligence activities when lending to potential borrowers. Although the RBI has a representative in the boards of most Public sector banks, this person’s role and powers are very limited and he cannot influence the lending decisions of banks.

      You go on to extoll the virtues of current RBI Governor Shaktikanta Das. Das is a BJP appointee and like the PM, his knowledge of economics is probably close to zero. Das is a pliant puppet in the hands of the Gujaratis and the Nagpur intellectuals who run the country. Indeed, people like you should be worried that qualified economists like Dr Rajan, Dr Patel, Dr Arvind Subramanian etc. have dumped the Modi government. When economic quacks like Anil Bokil of a bizarre outfit called Arthakranti advise the PM to demonetise and the PM trusts this idiot more than a qualified economist, not only will you see the highly qualified quitting the country but also an economy in doldrums.

      But then, for bhakths like you, Modi can do no wrong and every problem that the country is confronted with has been created by the Congress. But, even if that diagnosis is correct, the problem is that the qualified persons who can fix it won’t work anymore for the Gujarati graduate of Delhi University.

      Pathetic !

  3. How many NPAs were doled out under Rajan’s watch? Had he done his job at the RBI better instead of strutting around the country giving political speeches, he would have more credibility.

  4. When economic measures are deployed 2 factors have to be borne in mind:

    1: Timing;
    2: Sequencing.

    The PM initiated demonetisation in Nov 2016 & GST in July 2017. A rational policy maker with a modicum of understanding of the global economy and India’s domestic constraints would have realised that:

    1: Oil prices were low – $ 46 in Nov 2016 (ref: bit.ly/2OE5vSi)
    2: China’s economy was stagnating at 6.7% (ref:bit.ly/2zL3Q7a)
    3: Growth in India was robust – 7.6% (ref:bit.ly/2xfmsP8)

    In other words, the time was opportune for India thru schemes such as Make in India etc. to grab a bit of the market from China. But this opportunity was completely squandered by the liquidity crisis created by DM.

    Exacerbating matters, in a country already reeling from DM, the BJP deployed another poorly designed and badly executed policy viz. GST.

    DM kicked the economy to the floor. But GST, great in theory, was so badly timed and sequenced that it kicked someone already on the floor.

    Dr Rajan is right. 2 self goals were scored.

  5. Government chest thumping it’s Midnight GST rollout, BUT not many seem to acknowledge that the 56 inches stalled discussions and was a pain for over 10 years…I.e 10 years of productivity lost forever!

  6. Did Demo and GST contribute to present slowdown ? YES, But they are not the only factors. Slowdown is partly structural with consumption at saturation levels. To revive consumption money has to be put back into pockets of middle class, hence reduce Income tax. GST has contributed immensely in making the informal economy formal. This transformation will face resistance but it makes our ta regime much more simpler and efficient. Just Forget about deficits for a couple of of Budgets and increase the spending. Do not worry if the deficit goes upto 4%, But reduce the lending rates sufficiently . Get new labour and land laws and make the system Digital. FY 21 to FY 28 will mark an enormous economic boom in Indian economy hence that boom should create wealth in all sectors especially in manufacturing and Research.

  7. Our budget is like a black box 📦. No one knows what’s there including the Finance Minister and the entire team. Current CEA is a joker and if he opens his mouth stocks will fall 2 lakh crores guaranteed.

  8. When was the RBI Governed, then what he did? If that much warry about our economy then why giving speach in other countries, better give speach in our country news channel, he can earn money also.

  9. This guy and chidambaram are the sole reason for the NPA mess and still some people are waiting for their words

    • Well, instead of attacking Dr Rajan or Mr P Chidambaram personally, why don’t you attack the economic arguments he advances ? Demonetisation was done against the advice of then RBI Governor Rajan. Indeed, the all knowing Gujarathi who took this decision preferred to take the advice of a quack in economics called Anil Bokil of a bizarre outfit called ArthaKranthi (www.arthakranti.org) that dabbles in economics. Indeed, not a single person who advised Modi before he took that harebrained decision was an economist. But then, I understand that rather than speaking to qualified economists like DR Rajan or Dr Urjit Patel, the BJP prefers the advice of cranks, Hindutva spouting weirdos, Vedic scholars, the likes of Baba Ramdev & Anil Bokil and other nutcases when running the complex economy of a country like India.

      Timing and sequencing are critical when making decisions in economics.

      Didn’t study basic economics perhaps Mr Ajith?

      • Don’t bring your nonsense by targeting others, even before DM, NPA was a problem. This guy Rajan is responsible for it. DM allowed economy to be formalised though it ill affected also. But more than DM, it is increased NPA, NBFC crises affecting the economy as

        • Your rabid, fact-free rant is testament to not only your ignorance of basic economics but also an even more serious inability to get something as simple as your dates right. So here come the facts, the dates and the economic analysis.

          2006-2008: Almost all NPAs occurred during this period. Reasons: Growth was strong, the economy was strong and banks had high liquidity. In other words, banks needed to get rid of their idle money not accruing any interest and there was a lending binge. This was the situation globally, and not just in India. Large amounts of unproductive idle money in bank coffers actually chasing borrowers. Banks did not do their due diligence and the genesis of the NPA problem lies here.

          Dr Rajan was not in India at that time and was actually Chief Economist at the IMF from 2003 to 2006. He cannot therefore be blamed for the lending that took place at that time.

          Dr Rajan was Governor of RBI from 2013 to 2016 until PM Modi replaced him by Dr Urjit Patel.

          The reasons for the NPAs cannot be pinned down to the single variable I mention above. In addition, slow growth after 2006, collapse of the global financial sector in 2008, lack of due diligence by banks during lending, malfeasance, corruption, fraud and forbearance i.e. optimism that the projects would right themselves all have an explanatory role,. Equally important is the slow decision making process in the government, both during the UPA and the NDA regimes. Worsening the situation is the judiciary which steps in and delays recovery when defaulters go to the courts.

          It may be argued that the RBI has always had a representative in the borads of the banks. But this person is not qualified to assess the viability of projects, risk tolerance of the banks, recovery options and so on.

          Mr Rajvir Singh: Economics may not be best suited for gaurakshaks like you. Better scoot back to your RSS shakha or go back to your itchy groined gaurakshak friends rather than ranting rubbish here.

    • Hogwash !!!! Rajan deserves credit for initiating efforts to clean up the banks’ balance sheets and brought to light the mammoth NPA problem.

  10. The public discourse on the economy is still not as candid and free as it ought to be, but no serious potential investor is unaware of what the true facts are. If you had to choose between a reincarnation of Mr Thengadi and Dr Rajan as India’s economic czar, who would it be …

    • Sangjis will say that RRRR (Rockstar RaghuRamRajan) was the RBI governor during whose term inflation was at around 20% , Mallya was given all the loans and all the NPA issue was created by him. They are trying to link all this to him because he was at the helm during that time. But we should not agree to all that. T we all know that Manmohan singh was the PM and he forced RRRR not to follow his brilliant ideas and super imposed them with his own which was the reason for all the above things. Also Chidambaram with his plan to make some money for his friends and himself didn’t allow RRRR to work properly.

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