Weeks after Finance Minister Nirmala Sitharaman hit out at Raghuram Rajan for presiding over the “worst phase” of the Indian banking sector, the former RBI Governor Thursday reminded her that two-thirds of his tenure as the head of the central bank was under the BJP government.
“I had just over eight months in the previous (Congress) government and I had 26 months under this (BJP) Government. So much of my term (as RBI Governor) was under this government,” Rajan told CNBC in an interview. Rajan was asked about Sitharaman’s comments in New York earlier this month where she said that Indian public sector banks had the “worst phase” under former Prime Minister Manmohan Singh and Rajan.
Rajan, who is also a distinguished professor of finance at the University of Chicago, hastened to add that he doesn’t want to get into a political debate on the issue. “Let me not get into a political back and forth. The reality is, there is a clean-up that we started, which is underway, which needs to be completed fast. The recapitalization has been done, but it also has to be done in the non-bank financial sector which is ceasing up and you need to clean-up, get the financial system going again if you want stronger growth,” he said.
Rajan, who was Governor of the Reserve Bank of India (RBI) from September 5, 2013 to September 2016, had criticised the Government’s management of the economy. During a lecture at Brown University, Rajan had mentioned that in its first term, the Narendra Modi government had not done better on the economy because the government was extremely centralised and the leadership does not appear to have a consistent articulated vision on how to achieve economic growth.
Finance Minister Nirmala Sitharaman later hit back, saying the “worst phase” for India’s public sector banks was when Prime Minister Manmohan Singh and Rajan were at the helm of affairs. Sitharaman said that although she was “grateful” to Rajan for having carried out the asset quality review of banks, it was important to look at how banks ended up inheriting bad loans.
“I’m taking a minute to respond… I do respect Raghuram Rajan as a great scholar who chose to be in the central bank in India at a time when the Indian economy was all buoyant. It was in Rajan’s time as Governor of the Reserve Bank that loans were given just based on phone calls from crony leaders and public sector banks in India till today are depending on the government’s equity infusion to get out of that mire,” she had said.
In the interview with CNBC, Rajan said the seeds of the problems were sown in “euphoria” before the 2008 global financial crisis. “A lot of investments were made and those slowed down. Those created the bad loans which we needed to clean up. And we started the process of cleaning up,” he said.
“There are people who say why did we clean up, we could have gone on. We simply couldn’t have gone on because banks were stopping lending because their balance sheets were getting clogged with non-performing loans. So, you had to force the recognization and recapitalization to set them back on track,” the former RBI governor said.
That job, Rajan said was “half-finished right now”. “It has to be finished,” he said. “Now, could it have been done faster, absolutely. We needed to do it faster but we are where we are. We need to clean up but also clean up new risks that have emerged for example in the non-bank financial system. If we don’t do, the financial system is going to be an overhang over the economy.”
On economic growth, Rajan said the country was witnessing a substantial slowdown. “The peak in 2016 was 9 per cent growth in one of the quarters, in the first quarter, now it is down to 5 (per cent). There are people who have raised a concern about whether 5 is really 5. The reality is, there has been a substantial slowdown,” he said. “I think 5 is bad enough. So, you have to do something about it because 5 doesn’t get jobs given we are adding 1 million people to the workforce every month.”
“India needs far stronger growth but it is not going to come from tinkering. It really needs another generation of reforms. Good news, the government has political strength and the power to undertake those reforms. Bad news, [it] hasn’t done so so far,” he said.
(With inputs from PTI)