The twin balance-sheet problem, GST and demonetisation have contributed to slowdown, says Raghuram Rajan, Former RBI Governor. Talking to ET Now’s Supriya Shrinate, Rajan says today the big worry is that growth has fallen considerably and we need to accelerate the pace of reforms so that growth picks up as well as conveying to the business community there are no surprises that are waiting.



Edited excerpts:



“I do what I do”? I thought your kids did not like it. What was in your mind about this title?



My wife liked it.



She did..



We were looking for a title and she has always been a good sounding board and I had something like sort of RBI Days and all that. She remembered this statement and it came from one of the monetary policy press conferences. I should have started saying “My name is Raghuram Rajan” and stopped but I said “My name is Raghuram Rajan” and then I realised that I lost the Bond cue. So what do I see next? Now if I actually say something on monetary policy, it may move the markets, so I did not actually say something. And I ended up lamely saying “I do what I do” and you know at some level it is tautological. Of course, you do what you do because at some level it also suggested a degree of freedom which I had from both the governments I served under to essentially do the reforms.



So you have been away for precisely a year and you have not spoken of India. Have you missed speaking when every word had weight?



Well actually that becomes a huge responsibility because you have to constantly weigh each word and as I said in one of the remarks in the book, not just weigh each word but weigh what it would sound like if taken out of context and that is an enormous burden and it is easier to just disappear and not speak at all.



Have you really disappeared?



I speak in the international circuit and to international audiences.



The kind of curiosity this book has generated shows people like you disappear. But let us talk about the issue at hand and that is demonetisation. You have chosen to put it on record in the book and which is why I am going to first clear the air on this. You say you were not a party to the decision on demonetisation, the government says the decision to demonetise was taken six months before it actually happened whereas you left just two months before the 8th of November. Where does the truth lie because somewhere along you say, you were asked to give your opinion and then what followed next?



So first, I think everything I say about demonetisation starts with the intent of cleaning up black money is extremely important. Second the reason I wanted to make clear how the RBI is positioned on this was because I was responsible for leading the RBI at this time and there have been statements made to parliament about RBI’s role in this process. I wanted to make it absolutely clear that we did give advice and this was the nature of the advice we gave, of course without going into the details which is private communication between the government and the RBI.



Now that said, as I said in the book, a committee was set up and the committee debated what had to be done etc. etc. now at no point was the RBI and ultimately RBI had to given the process that was followed had to give a decision of whether to go right or not we were not asked that came much later nor do I believe a date was set for this process at least not in explicitly in the committee otherwise I would have come to know of it. There was preparation going on for the possibility and that is what may have happened six months before.



When you say preparation was going on, I am also given to understand by what you have written that you cautioned the governments against what demonetisation could do and even if the government flagged off those concerns, quoting from your book again you had prepared a list of what needs to be done so that risks could be mitigated. What was that preparation?



Now you are asking me to going into the details of the note.



I am asking you what is the level of preparation that should have been taken?



Let me just leave it at the following which is that if you ask any monetary economist how to get a demonetisation which does not cause economic disruption, the response you would get is be ready on day one with all the transaction currency that you are replacing -- that does not mean a 100% but it means to the extent that currencies is being used for transactions -- be ready to replace all that money on day one as otherwise you will get economic disruption.



86% was demonetised. Like you said, the role that you played was more advisory. You were not part of the decision making. You have also said there was nothing on the table that the government put in which is why you return. Can I ask you a candid question? Did you leave because of demonetisation?



No. Again, as I said there was no decision taken in my view at that point. I left as I said because we did not come to an agreement on the terms of my continuing. In other words, there was no contractual offer on the table.



I will come back to the exit a little later on the show but would demonetisation have happened under Governor Rajan?



It is a hypothetical question. It is very easy to offer an answer which puts yourself in the best light. I will just point to Dr Reddy who has offered an answer which was that I think he said he would first go to hospital and then he would resign. Look, he is a clever central banker.



If demonetisation was pushed down the throat of RBI while you were there, would you have quit? You cannot put Dr Reddy you have to put yourself.



No, I am not putting Dr Reddy I am just saying that it is not fair to answer that question simply because you cannot understand it unless you are in that spot. Let me give you the answer in a different way. Any civil servant or any regulator or any central banker to the extent, forced to undertake a policy which they do not believe in, basically should not be sabotaging the policy from inside because ultimately it is the elected representatives of the people who have the right to decide, what you have as an option is to leave.



It is best to opt out then stay within and oppose it from there.



You should not in my view oppose it because you are sabotaging the system. If you do not believe the Commonwealth Games is a good expenditure of government money, you do not stop the process and undermine the process because then we will be left without a Commonwealth Games.



You opt out.



You say I do not believe in this. I do not think it is right and I use the only technique I have which is opting out.



Let me just talk about demonetisation. 86% of currency demonetised overnight, Rs 15.44 lakh crore in value, 99% of that has made its way back in the system. Now, that we have the figures before us and we are not talking in any hypothesis of any kind. We have the numbers before us in black and white. What purpose has demonetisation served and what is the cost that we have incurred?



It is fairly clear that there has been costs. These costs are upfront. We have already seen the printing cost that the RBI has come out with. You know there must have been substantial cost incurred by the banks in receiving the currency and sending it back and the time it took as well as the distraction to top management in those. You know that GDP has probably suffered some because of that and the informal economy has also suffered which we would not count in GDP.



Now in terms of benefits, some of the hope was it would be easy to identify black money hoards. That has not turned to be the case because this money has all come back. Now you can still ask questions of people who have put the money back, how much of this can you account for. Of course my guess is that that will require a lot of effort from the investigative agencies after which there could be potentially court cases and appeals and so on.



It is not clear how much you will essentially unearth at the end. You have also a sent a fairly strong message about black money, does this increase compliance, well we did not see much enhancement in compliance on the schemes that were offered but we have seen some possibly blip up in the taxes that have been paid.



But again, at this point it seems relatively small, Rs 10,000 crore as the economic survey points out. We have to see how it looks going forward. I think the effects on electronic transactions has been-- some of it has been short lived and has come back to the trend line. UPI has been I think quite significant. The question is UPI was in its early stages, maybe this has accelerated UPI that is a good thing but could it have been done in different ways that is really the question. Broadly speaking, we have to find benefits worth about Rs 2 lakh crore, the 1% to 2% - I am taking the lower end of the range in terms of costs -- to justify this whole exercise.



The fact is the government in a sworn affidavit did tell the Supreme Court that it expects about Rs 2.5-3 lakh crore back in the system. The goal posts kept shifting. I am glad you are talking about digitisation but that was never the intended move, the intended move was to crack down on black money, counterfeit and terror funding. But because goalposts kept shifting and you have said that the long-term gains must justify the short- term pain, what could be the long-term gains of this entire exercise?



I think you should see the range of things that are being done as a broader sort of movement against black money. Improving the taxpaying habit of our economy is very important. I would like to see some action against the big sources of black money, including defaults on big loans but also the over invoicing on big transactions. I would think that if you want to send a strong message acting on some of these big areas to me would be a very important task.



It is easier to send a message there and there are more gains to actually sending that message. Accelerate the process of inquiry into bank frauds. We have seen reports every so often coming about large players over invoicing their goods. What has happened to those inquiries, why are they not translating into court cases and jail time? I would prefer more emphasis on that. And of course, at some point we really have to ask where we want to focus our attention.



Are these the alternates that you were talking about in your book?



No, I think amongst the alternates that the government is implementing right now, is to narrow the space for black money, that addresses the most important issue of flow. GST is a very big advance there and it is very helpful. Trying to ensure that all your accounts in the system have Aadhaar tagged on to it so that you cannot multiply the various accounts that you have. Yes, you will still find various relatives to have accounts but it will be easier to see the sum total of what you and your relatives have if you can track that. Those are the ways you narrow the space for people to hide their black money. I think we need to do more of that. Tracking gold sales and so on are part of this overall exercise but the flow, it seems to me, is really quite important.



Did the disruption play out as it was expected or was it worse than you would want?



Look, I do not think we have got a good sense of the effects so far. Some of the effects on small medium enterprises will come from later revisions of GDP and we have to see what those are. I do think that some of the early studies I have seen of this process do suggest there has been some disruption to the informal sector but let us see what the overall effect is.



Do you fear that the taxman may actually go after the most honest depositor who had cash lying around to meet targets to unearth black money? That is one of the concerns.



Every time you use the government apparatus, you have to recognise that the government apparatus itself is not flawless and that in some ways pushing too hard on a system which is not completely transparent itself can create opportunities for extortion, for harassment.



And we have seen plenty of that happening.



It is something and especially when you say there are lakhs of accounts which need to be investigated, does the system have the ability to do this in a reasonable way without imposing excessive burdens and without in a sense not actually extracting the benefits for the country but extracting the benefits for the system itself.



Has the credibility of the RBI, the whole autonomy, the independence of the RBI taken a hit due to demonetisation?



That is a difficult question to answer because again this is something I will go back to Dr Reddy when he talked about loan waivers that he said he was against and rightly so. But ultimately when the government decides something, there is a section in the RBI Act which allows the government to give a directive to the RBI thou shall do this.



Even without going there, remember how the previous demonetisation was done. It was done through an ordinance. There are ways that legally the government can bypass the RBI. This seems to be an area where the framers of our constitution have decided that they do not want the RBI to be the stumbling block or even if they did not think about it, since then parliament has not acted to close off this particular area.



In that sense this is not an area which our legislators have thought it appropriate to say this is only within the purview of the RBI. Given that, as I said before, if you disagree with the decision you do not go be part of it but you do not sabotage it. If you are asked to make the decision and it is in your purview you have the ability to say no.



Is it a tough task saying no as the RBI governor?



Well you try and say no whenever you have to explain it in careful detail why you are saying no. And it is not easy. You know that saying no sometimes may be a career ending decision.



Has it been?



I do not know but let me say that whenever I had to say no, I said no and there were some things that you really had to say no.



I am going to take a question on dividends because there seems to be this very uninformed speculation about it. The dividend that came in from the RBI this year was obviously a lot less than the previous year and also lesser than what the government had budgeted for. Now there is this speculation will more money flow in? Would you want to end that debate once and for all?



Will more money flow in?



Will there be a special dividend that will come in again from the RBI?



Well there is no provision for a special dividend. The RBI generally pays out what comes in, except it keeps a certain amount aside for reserves that the board thinks appropriate. Now one of the things people do not understand and which is why there is a lot of loose talk about this demonetisation is that they say the money that was sitting idle has come into the system, that is a good thing. And what these people do not understand is that money was already in the system, it was financing the government.



On the RBI balance sheet, currency is a liability as if we have got an interest free loan from anybody holding currency and you invest it in interest bearing assets. The difference is what you pay to the government as dividend. When the currency held by the public falls because they have deposited it into the banking system, you have fewer interest free loans because whatever you have now you are paying interest on, your liability goes and your income is lower.



As a result, the RBI dividend falls because the surplus the RBI is making is lower. So there is no provision, this surplus fall is precisely because of what is touted as one of the benefits of demonetisation. The money that came into the system, was already financing the government. Now it has become a liability of the banks and the people who had that money are earning interest. In that sense, it has to be accepted as a cost of demonetisation which you pointed out earlier and therefore the dividend is lower.



A quick last question. The Finance Minister in response to your interview to the Times of India said that people in high offices are sworn to secrecy. Have you not kept your end of the bargain?



I kept whatever I had to keep. I have not mentioned any internal discussions except the answer to a question from parliament which I was supposed to have, according to statements that were made.



You were party to the discussions.



I was party and I wanted to make it absolutely clear what impact we had advised the government on and I feel that when my views are distorted and especially when it is a question not by the press but by parliament, it is important that parliament understands exactly what happened.



What was your first reaction when you heard that India had demonetised 86% of its currency, you have to be honest with me?



I was not expecting it to be done then. I knew that it was probably in the works but I was not expecting it to happen then.



So let us talk about the macroeconomic picture. We have grown at 5.7% in the first quarter of this financial year, down from 6.1% the previous financial year. Of course, depending on which side of the treasury bench you sit on, people say it is because of demonetisation and I would say it is because of GST. Where does the truth lie?



We do not know. There are three factors, not just two. That is the twin balance sheet problem that Arvind has pointed out and we will be focussed on trying to clean up. The corporates with high leverage not investing and the banks not lending. That combination has been a big factor in the slowdown.



The effects of demonetisation which we cannot truly tell apart from that first factor now of course anticipation of GST which has also slowed down the economy. Put these three together I think they must explains some big fraction of the slowdown because we are slowing down even while the rest of the world is growing faster.



Do you expect things to improve in the second quarter? People like Rajiv Kumar at Niti Aayog have said we will grow at 7 to 7.5%?



I would hope they would improve but with growth forecast, you have to be somewhat careful about making specific because it is not clear we have never experienced thesecombination of circumstances so it is not clear that we have precedent to go on.



Will you answer an honest question have we brought India’s growth trajectory down from 8—9% then 7-8% and now 6-7%?



Well I would really hope that given our level of per capita income. this does not become our potential growth.



But you fear it will.



No, I do not. I do think there have been a bunch of circumstances. We have to work very hard clean up our balance sheets that is something like many other things should have been done yesterday rather than still being in the process.



We have to work hard on fixing the power sector. When we have the potential to produce so much power, we still have power blackouts in certain parts of the country. We do not have 24x7 power throughout the country and I think fixing the problem of discoms, accelerating the real sort of reforms that UDAY wanted as opposed to the financial reforms is very important. Finally, on the educational sector, we need to improve the quality of the education kids are receiving on a war footing.



One of your lasting legacies and your book also extensively talks about is inflation targeting and moving to CPI instead of WPI. There has been of course a battle of words between the RBI and finance ministry with Arvind Subramanian essentially saying that the forecast errors are large and systematically one sided in overstating inflation and they have said that there has been an error in reading the forecast, in getting the number right, do you feel so?



There will always be errors right and they could be in either direction. I remember when we started out on this process, nobody thought we had a chance of reaching anywhere near the inflation targets or the glide path we had set. Everybody said you are bound to fail, why are you setting such hard glide paths. Now the accusation is that we have done better and therefore there is a problem.



Now ultimately you have to let-- you have appointed the experts on the Monetary Policy Committee and you have to let them do their jobs. We can always guess what the right measures should be and sort of hindsight can be 2020 but unless you think these people are deliberately biased and there is no reason to believe that the people you appointed are deliberately biased, remember the government appoints the governor, the deputy governor as well as the three members of the MPC. Why would they want to sabotage-- you have to explain what that rationale is.



You do not believe that the RBI has been behind the curve in cutting rates and has it reduced...



I will not comment on current monetary policy. I think it is not appropriate for me to do that. What I will say is just about the process, the whole process of the Monetary Policy Committee is to appoint experts that you think are unbiased and I think the government has done a good job in doing that now let them do their job.



As a macroeconomist -- between growth and inflation -- what concerns you more about India today?



Today I would say that the big worry is that growth has fallen considerably and we need to ensure that we accelerate the pace of reforms so that growth picks up as well as conveying to the business community there are no surprises that are waiting, they should feel confident in investing. But that said, I mean it would be nice if we could feel entirely confident about inflation also going forward and clearly what it seems currently is certainly from analysts’ projections that it is reasonable but there are underlying concerns.



So one of your everlasting legacies will have to be the war that you waged against inflation but obviously did not take it to its logical end. How will you assess the current process of resolving NPAs and are you disappointed with the pace or are you at least glad that there is some kind of a legislative ring fencing that has now happened?



No, no, I think this has been an extraordinarily important move of putting in the Bankruptcy Code and of operationalising the NCLT, I think the actions by the Supreme Court in limiting the extent of appeals and so on has been quite important. And if we can make this a time-bound programme, it will be exactly what the system needs, given that there are a bunch of out of court resolution processes that we have put in place, the SDR, the joint forums and so on, JLFs.



I think putting all those together with this threat of Bankruptcy Code should speed up the resolution process. What is still missing is confidence amongst the bankers that if they make the appropriate decisions that they will be not questioned and I think the government is working on something there and hopefully that will give the bankers more confidence but if you have that piece in place I think we should see an improvement in the pace of resolution.