A year after the “cooling off” period – from the time he stepped down as RBI governor in the first week of September 2016 – Raghuram Rajan has released his latest book I Do What I Do, a collection of his speeches as head of the Indian central bank and his occasional write-ups, with a postscript taking into account the changes since then. The book, published by Harper Collins, was released in Chennai Tuesday. Rajan, who is back to teaching and research at Chicago University’s Booth School of Business, spoke to The Indian Express a little before the launch. Excerpts:
You have written in your book that prior to demonetisation, you and the RBI had outlined its potential costs and benefits and that the likely short-term economic costs would outweigh the benefits and what would happen if preparation was inadequate. Who did you give it to — the PM, the finance minister?
I can’t specifically say who. I would say anybody who was involved in the demonetisation decisions were informed of it.
Did you mention the disruptions that demonetisation would lead to, and the time needed to do such an exercise — three months, six months? What was it that you and the bank mentioned in terms of damage to the economy, disruption?
Let me put this more as a broader issue. Any monetary economist would say that when you withdraw the currency from the market to the extent that they are being used in transactions, that would have a chilling effect in economic activity, especially the activity that cannot migrate to other modes of transaction like credit cards… So you have to ask which kinds of activities were subject to this and typically they would be the more informal activities, the mandis, vegetable sales. And also we have to do more studies on this to see where this has exactly impacted, but certainly what you would want in the ideal conditions is to replace the entire money stock that you took out that was being used for transactions — again, not all was being used for transactions — so that transactions don’t suffer. So overnight you want people to be able to access the money.
Is it true that you suggested that let’s not withdraw Rs 500 notes, but rather only Rs 1,000 notes?
Yes, but I don’t want to comment on the details. I think if you had a choice, you would want to do the currency that is higher in denomination. An extreme example is the 500-euro, which nobody uses for transactions except drug dealers, and so that would be easy to demonetise. The more the currency is used for transactions — a denomination is used for transactions — the more you have to be very ready to replace it.
One of your predecessors as RBI governor, Y V Reddy, had said after demonetisation that he would have gone on leave — a statement that he later said that he regretted. Had you been in office in November last year, what would you have done when the government decided to withdraw high-value notes?
I don’t want to comment on the hypothetical. Since I was not subject to that decision, I don’t want to state this is what I would have done. I will just say Dr Reddy is a fine central banker and a lot of us take our cues from him.
You have often spoken about the independence of the central bank in your writings. Many commentators have pointed out the institutional damage to the RBI owing to demonetisation. What’s your assessment?
I think it’s important to also look at what is legally within the purview of the central bank. There was a demonetisation exercise that was conducted in 1978, and as I understand that was brought in through an ordinance, and therefore the RBI didn’t have to essentially acquiesce to it. It was done independently of the RBI, so there are ways the government has of doing what it needs to do. And so, to that extent, I think this is one of those issues where it can be done without you acquiescing. There is also capacity within the RBI Act for the government to give directives to the RBI. Now, in general, the government doesn’t do this because it vitiates the independence of the RBI, and you prefer the RBI do these things voluntarily. But again, I want to emphasise that this is not an area where the government has had in the past to take the permission of the RBI. Read | If demonetisation decision is exposed, country will ask what inputs went in: Raghuram Rajan
Look, I would rather ask the question – to what extent do decisions get informed by good economics? That is what we would all want. And to that extent if any decision turns out exposed — to not have had the right effects for the economy — as a country, you want to ask what were the inputs into that decision.
You have spoken in the past, and also written in the book, about efforts by the bureaucracy to whittle down the RBI’s powers, and how the RBI risks becoming dangerously weakened as successive governments and finance ministers misunderstand its role. Is that still your impression, or has it changed?
Well this is something [that] if you look back at the RBI’s history, you realise that right from the beginning from when it was constituted, there has been a constant back-and-forth between the RBI and the finance ministry — or what what was the then finance ministry — about powers. And whether this is a constructive sort of conflict, or whether it is an unhealthy sync for time and effort. I think in general, my sense is that it is wasteful of time and energy, and it is better to have a clear sense of what the RBI does and respect it than to have this constant back-and-forth. Now, some of it comes from a misunderstanding of who the RBI governor is. And sometimes the ministry wants to see him just as another regulator when in fact, as a central bank governor, he also controls effectively the 380 billion of reserves, as well as the lender-of-last-resort function, as well as the ability to affect monetary policy. All of which mean that the RBI governor is not just another regulator. Ultimately he is under the broad governance of the elected representative of the people but he is also meant to have an independent voice if he sees risks being thrust on the system. No bureaucrat has that role of monitoring the risks in the system and saying that you guys are not doing what is appropriate. So if you treat them as a bureaucrat, and if they behave as a bureaucrat, you may end up with an outcome which is not beneficial to the nation. And so my point has been that we need to recognise the genuine independent role that the RBI governor performs. He is not an independent power but he has a role and you should respect that role.
You have also said that you didn’t want convert RBI into a fifth column criticising the government. But many have also pointed to the fact that other central bank governors such as Janet Yellen of the US Federal Reserve or Mark Carney of Bank of England haven’t strayed much from monetary policy or related things. As RBI governor, where do you draw the line?
You have to be very careful in equating what Janet Yellen does with what a developing-country central banker does. Janet Yellen doesn’t have a development or reform agenda and it is a much more developed system. In an emerging market, you have to talk about the progress of the system itself. Now that said, Mark Carney has got enormous amount of flak for speaking about Brexit and about the consequences that it would have on the UK economy. And again, people will prefer that he should not speak. But as a risk manager to the country, it is his role to speak out. So in general, if you look through all the speeches, you will find there is nothing where I am speaking about bharatnatyam or yoga or other parts of our culture. It is all about how various aspects of actions contribute to national economic growth or not. And in none of them, if you look at the words that are uttered, is there a direct criticism of the government . I think if the RBI governor is strongly critical of a government move which he thinks will undermine the country, then again he has the Dr Y V Reddy option. But he cannot convert the RBI into a fifth column opposing government policies. So I think you have a right to warn. I warned often about the fiscal deficit, I thought government actions were appropriate in reaction, and I hope that my voice contributed to keeping us on that path. It would be even better if it didn’t need to contribute that we were already set on that path. Our macro-stability is one of the few things that has stood us in good stead.
So in all these things, you have to be relatively careful. You have certain responsibilities. The one place where I actually felt I had to speak out was on the issue of a tolerant environment for Indian’s growth. If you look at the speech, it was never criticism of the government. In fact, a week later when I met a government minster, he said that this is exactly what I have been saying. But in an environment where, in our very diverse country, if there is a sense of intolerance, I think it impedes our economic progress and it is very important to reinforce not so much the current situation but our historic tradition of being tolerant, which is what I did in that speech.
A year later, the narrative is again about tolerance. I think in the coming years, India’s greatest strength as it makes its place in the global economy is that it has already achieved what many countries are trying to achieve — an environment of openness, free speech and tolerance. And if we were to lose this, we would lose what is our greatest strength and in an economy going forward where innovation, human capital contribution of the highest order is going to be where value is added. In order to foster those kinds of activities, people have to have a sense of freedom which they don’t have in some of the advanced countries in the world. The fact that we have achieved that with a modest level of per capita income is a strength that it would be really misguided to lose.
Are we at the risk of losing that at this point of time?
If you look at the strength of our institutions, for example the Supreme Court judgment on privacy recently, it reaffirms our faith that the core of India is stable, strong and tolerant, and that we will retain this going forward. But that doesn’t mean we should be complacent and not be aware of the potential dangers to this core. So, I think eternal vigilance is the price of liberty. So we should be vigilant.
The new NITI Aayog chief, Rajiv Kumar, before taking over, had said in a column that foreign influence in policy-making was going to wane. Is the system intolerant of outsiders?
I don’t want to comment on the specific comments of Rajiv. He is, I thought, a good friend of mine. But on the broader issue of foreign returnees, it was Deng Xiaoping who said I don’t care whether it’s black or white as long as it catches mice, and we should adopt the same sort of view towards the various sorts of experts that we use. There is a question of defining what it means to be foreign. Does having a degree from Oxford make you foreign? How many years do you have to be abroad to be foreign? Some people are saying you have to be 10 years in India before being considered Indian. I think this a futile sort of dialogue. Don’t necessarily open your door to everybody who comes from abroad, saying this person brings gems of wisdom. At the same time, don’t reject everybody who comes, saying this a fifth columnist or they don’t understand India. There are some issues where maybe they have, looking from a distance, a reasonable understanding. It’s not that all those who are making policy have lived in a village for the last 25 years and understand where the majority of Indians live any better than somebody sitting in San Francisco. So there are some issues on which ground realities are very important, and it is important to be able to talk to people who understand those realities and sometimes even experience those realities. Not all those who live in India have that experience. At the same time, where a different mindset can be used in dislodging existing practices… maybe sometimes, somebody who comes from outside, and is willing to disrupt, may be useful. We have to see what the situation is and what is needed rather than either pay automatic obeisance to foreign experts or reject them out of hand.
Is there something you regret looking back, or regret any of the actions as central bank chief? Are you still open to a public role in governance, policy-making?
If I regret something, I tend to mull over it when I go to sleep. I have never had a problem going to sleep. I think I said in my farewell letter to the RBI staff that if the country needs me, I am available. But I am not hankering after any role. I have a great job, I am very excited about some of the research and writing I am doing, and so I am perfectly happy.
You had said that one of the problems in India is that there is excessive euphoria and excessive pessimism. So if you strip that, where do we stand at this point in time on economic growth, governance and the way banks are being run?
I think there are very important things we need to do quickly – cleaning up the banks, recapitalising them – and let’s not subject banks to yet another scheme before they get cleaned up. They need to focus and they need to be given time to do it. Second, there are some areas – stalled projects, the power sector especially, where UDAY [scheme for discoms] needs to be. We have reduced the interest rates for these discoms but reducing the line losses, raising the tariffs so that the discoms are healthy, [is] extremely important for the power sector going forward. So, this is where some of those attempts to re-negotiate power agreements with some of the renewables is a little worrisome. We need to set that sector back on track, because power for the country is going to be a very important factor going forward. And the third is skill building. Absolutely critical in this country. Right from basic education – why are we not doing so well – right up to vocational training, skill building for industry. These three, I think, if we can get it right in the next couple of years, set the process going, I think there is no reason why we can’t get back to 9-10 % growth and that should be our aim.
You had flagged the persistence of crony capitalism in India despite some of the reforms. Has India managed to address that?
I think it’s a process by which we get away from it. And as we build more institutions like GST, and as Aadhaar is used more effectively, and identifying some of the discrepancies in the financial system, and as the Bankruptcy Code is used effectively, I think we will see this diminish.