Raghuram Rajan addresses Demonetisation and GST together for the first time, remarks on India's desired rate of economic growth

Demonetisation and Goods and Services Tax (GST) were the two major headwinds that held back India’s economic growth last year, former RBI governor Raghuram Rajan said, asserting that the current 7% growth rate was not enough to meet the country’s needs.

Addressing an audience at the University of California in Berkley on Friday, Rajan said for four years — 2012 to 2016 — India was growing at a faster pace before it was hit by two major headwinds. “The two successive shocks of demonetisation and GST had a serious impact on growth in India. Growth fell off interestingly at a time when growth in the global economy was peaking up,” he said while delivering the second Bhattacharya Lectureship on the Future of India.

“The reality is that seven is not enough for the kind of people coming into the labour market and we need jobs for them, So, we need more and cannot be satisfied at this level,”

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Observing that India was sensitive to global growth, he said India was a much more open economy. “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 been hard blows...Because of these headwinds, we have been held back.”

While India’s growth was picking up again, the oil price issue remained, the economist noted, referring to India’s huge reliance on the import of oil for its energy needs. With oil prices going up, Rajan said things were going to be a little tougher for the Indian economy, even though the country was recovering from the headwinds of demonetisation and initial hurdles in the implementation of the GST.

Commenting on rising non-performing assets (NPA), he said the best thing to do in such a situation was 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 took India far longer to clean up banks, partly because the system did not have instruments to deal with bad debts,” Rajan said.

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The bankruptcy code, he asserted, was not the only way to clean up banks. It was the only one element of the larger clean-up plan, he said and called for a multi-prong approach to address the challenge of NPAs in India.

India, he asserted, was capable of a strong growth. As such the 7% growth was now being taken granted. “If we go below 7%, then we must be doing something wrong.”

India needed to create one million jobs a month for the people joining the labour force.

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The country was facing three major bottlenecks, Rajan said. Firstly, torn infrastructure, since construction was the one industry that drove the economy in early stages. “Infrastructure creates growth,” he said. Secondly, the short-term target should be to clean up the power sector and make sure that the electricity produced actually went to the people who actually wanted the power. Cleaning up banks was the third major bottleneck in India’s growth, he added.

Part of the problem in India was that there was an excessive centralisation of power in the political decision making, Rajan said. “India can’t work from the Centre. India works when you have many people taking up the burden. And today the central government is excessively centralised,” Rajan said. An example of this was the quantum of decisions that required ascent of the Prime Minister’s Office, he said, amid mounting tension between the Reserve Bank of India and the finance ministry.

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The RBI, led by governor Urjit Patel, and the government, had not been on the same page on different issues for some months now. The disagreements came out in open when RBI deputy governor Viral Acharya in a hard-hitting speech said failure to defend the central bank’s independence would “incur the wrath of the financial markets”.