Former Reserve Bank of India governor Raghuram Rajan has contended that the introduction of demonetisation and the Goods and Services Tax (GST) were the two major events that held back India’s economic growth last year, PTI reported. Speaking at the University of California in Berkley on Friday, Rajan maintained that the seven per cent growth rate is not enough to meet the country’s needs.
“The two successive shocks of demonetisation and the GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up,” Rajan said while delivering the second Bhattacharya Lectureship on the Future of India.
“What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really really been hard blows…Because of these headwinds we have been held back,” he said in Berkley.
Commenting on the rising Non-Performing Assets (NPA), he said the best thing to do in such a situation is to “clean up”. It is essential to “deal up with the bad stuff”, so that with clean balance sheets, banks can be put back on the track.
“It has taken India far longer to clean up the banks, partly because the system did not have instruments to deal with bad debts,” Rajan said.
Rajan has been at the receiving end of the government’s ire in the past with the NITI Aayog blaming his policies for the economic slowdown. NITI Aayog Vice Chairman Rajiv Kumar in September said that it was a “false narrative” to say that note ban was the cause behind declining growth rate. “If you look at the statistics on growth rate, in the post-demonetisation period, the growth rate came down not because of note ban but because there was a declining trend for the last six quarters. Every successive quarter, the growth rate had been coming down. Starting from last quarter of 2015-16, the growth rate had come down for six successive quarters. So, this was just simply a continuation of a trend and not because of a shock due to demonetisation as it is being claimed,” Kumar said.
Excessive centralisation of power in the political decision making is one of India’s main problems, Rajan said during his address. “India can’t work from the Center. India works when you have many people taking up the burden. And today the central government is excessively centralised,” he said.
Rajan had earlier weighed in on the seething differences between the central bank and the union government vouching for the bank’s autonomy. Rajan had said, the central bank is like a seat belt in a car, without which accidents happen. Pitching for respecting the institutional autonomy of the central bank, he said RBI has the liberty to say no if the government pushes it to be lenient. The disagreements between RBI and the government came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defend central bank’s independence would “incur the wrath of the financial markets”.