SUNDAY TIMES OF INDIA, AHMEDABAD
SEPTEMBER 3, 2017
I left because there was no offer
on the table from the govt
What strikes you most about Raghuram Rajan is not his academic brilliance,
open mindedness or honesty of thought, but how he blends all of these with
simplicity of expression and disarming humility. Currently Distinguished Service
Professor of Finance at University of Chicago Booth School of Business, Rajan is
an alumnus of IIT-D, IIM-A and MIT. Before he became the 23rd governor of the
Reserve Bank of India (2013-16), he was chief economist with the International
Monetary Fund and chief economic adviser with the Government of India.
In his forthcoming book I Do What I Do: On Reforms, Rhetoric and Resolve,
Rajan reflects on his RBI stint exactly one year after the self-imposed period of
silence. In an exclusive interview with TOIs Sidhartha and Surojit Gupta, Rajan
discusses key ideas in his book, what he thinks of demonetisation and why he is
optimistic about the Indian economy. Excerpts:
I
n the book youve clarified
your stand on demonetisation
which you conveyed to the gov-
ernment orally. Your stand
was that the economic costs
would outweigh the benefits.
Now that this weeks RBI report has
revealed that 99% of banned notes
are back in the system, what is your
reaction?
In order to become a more developed
country, India has to get people who owe
taxes to actually pay them, and this rang-
es from income tax to various kinds of
indirect taxes. Certainly, the govern-
ments move to try and reduce the amount
of black money in the economy through
various measures is an important one.
But as for demonetisation itself, there are
really two or three questions. One, of
course, is that we have seen the costs of
demonetisation upfront, and they are
substantial. Let us not mince words about
it GDP has suffered. The estimates I
have seen range from 1 to 2 percentage
points, and thats a lot of money over
Rs 2 lakh crore and maybe approaching
Rs 2.5 lakh crore. Then there are the
other costs the hassle cost of people
standing in line, the printing cost that the
RBI says is close to Rs 8,000 crore, the cost
to the banks of withdrawing the money,
and the time spent by their clerks, by
their managers and by their senior offic-
ers doing all this, and the interest being
paid on all those deposits, which earlier
were effectively an interest-free loan to
the RBI.
I think the people who mooted this
must have thought that some of it would
be compensated if money didnt come
back into the system. The fact that 99%
has been deposited certainly does sug-
gest that aim has not been met. However,
the government can investigate the de-
posits, and some of it may turn out to be
black money but it does imply that a
greater effort is required and could also
mean and this is something a number
of commentators have pointed out
more harassment for the general public
that has honestly deposited money that
was lying for one reason or the other in
various accounts. So that benefit if it
comes let us see at what cost it comes.
The other potential benefit was that
electronic transactions would go up. And
if you look at electronic transactions,
you see that there was a blip-up when
demonetisation happened but it has
come back to broadly the trend growth
line. One area where there has been sub-
stantial take off is transactions done on
the Unified Payment Interface, and thats
a positive for the economy. The question
is, would it have happened anyway be-
cause UPI was at an early stage when
demonetisation happened, which just
pushed the process forward? And that
leaves the last aspect, has this been an
important signal about the need for tax
compliance? And there the jury is out.
There is some data to show greater tax
ON WHETHER FOREIGNERS
ARE FAIR-WEATHER FRIENDS
I think national
sentiment in people
living outside is as much
as in those living in India.
I didnt leave when my
leave expired; I left when
the government and I
could not agree on terms
for me to stay on
TOI EXCLUSIVE
inflows (I think the Economic Survey
says its about Rs 10,000 crore) but how
much is because of demonetisation and
how much because of natural growth is
unclear at this point.
So, I think all said and done, it would
be fair to say the intent was good. But
certainly at this point, one still cannot
in any way say it has been an economic
success. But again, as I said, only time
will tell.
Do you think demonetisation hit ru-
ral areas the hardest since it was
done in a hurry?
Like any monetary economist, I
would say that if you are taking 87% of
the currency out of circulation, there
will be a tremendous impact on the ar-
eas that use cash. It is probably fair to
say that demonetisation has had the larg-
est impact on the people who transact
informally, of which many might be very
poor. And again we see some sort of an-
ecdotal evidence of this but we have to
wait for a better measurement. Unfortu-
nately, given the way we measure GDP,
these are people who are probably not
going to be counted that much. The GDP
measurement will overlook the stress on
these people, and we will only indirectly
ON DEMONETISATION
The estimates (of
GDP loss) I have seen
range from 1% to 2%,
which is lots of money
over Rs 2 lakh crore
I left the RBI in September
2016 and as I have
said in the book, at no
point during my term
was the RBI asked to
make a decision on
demonetisation
see this, for example, through the kind
of stresses that micro-finance institu-
tions are experiencing because they deal
with many of these people.
As the economy gets remonetised,
hopefully some of them will bounce back
but there are also people with very thin
buffers. Some informal firms may have
closed down because of the kind of stress
they experienced and we will have to, over
time, see how we can measure and get a
full understanding of the impact of
demonetisation.
I think the view of any monetary
economist would be that you first print
the money and then do the demonetisa-
tion, and I dont know what the rationale
for doing it when it was done is. I am not
party to that decision.
Did you have any inkling that it was
coming?
I was party to the conversation, as I
have already said, on the costs and ben-
efits of the case but not on the date. Sep-
arately, we were moving to a new set of
notes, not related to the demonetisation
exercise necessarily, but as part of a move
to a set of newly designed notes. Of
course, the accelerated printing of the
2,000-rupee notes did make us better pre-
pared for an eventual demonetisation
without a specific date having been fixed.
Does that mean even the RBI was not
fully kept in the picture as to when
demonetisation may happen?
I left the RBI in September 2016, and
as I have said in the book, at no point
during my term was the RBI asked to
make a decision on demonetisation.
You served under two governments,
the NDA and UPA, and have written
in your book about the good under-
standing you had with the political
leadership. Did you find one govern-
ment more decisive than the other?
I cant comment on specific relations
with governments that would be inap-
propriate and a betrayal of trust. I met
frequently with finance ministers and
regularly with the prime ministers of
both governments. I had cordial rela-
tions with both governments.
Youve talked about the fine line the
RBI governor has to tread and in fact
described your role as that of a nation-
al risk manager. What are the pulls and
SUNDAY SPECIAL
pressures from the government?
The duty of the central bank and
other regulatory bodies is to work to-
gether under the overall direction of the
elected representatives of the people.
You cannot go off in a separate direction.
There are some areas where you have a
duty to warn, to persuade, to sometimes
say no, and that is something I have
talked about in the book. As Dr Y V
Reddy talked about in his book, you may
be against a certain move and you think
it is improper but ultimately after mak-
ing your arguments, it is the government
which has to decide. You cannot be a fifth
column inside government, undermin-
ing the legitimate right of the govern-
ment to decide.
Is there a more effective way for the
government to dig out black money
without hobbling the system?
One has to start by saying that any
method will have a certain amount of
uncertainty associated with it. There is
no perfect method. However, I think one
option which the government is cur-
rently trying to implement is to reduce
the room for black money by making it
harder and harder for people to invest
that black money. One way to do that is
the broader use of Aadhaar in any finan-
cial investments because it gives the
authorities a sense of what your entire
wealth holdings might be. This is some-
thing that we dont get today because you
have bank accounts that may not be
linked to the same PAN number. So by
moving to an Aadhaar-based system, you
can get far better compliance on the
flows. Of course what is already hidden
stock whether it is gold or currency is
harder to identify through this but at
least you stop the flows or make the flows
harder which, in the long run, is what
you need to do to tackle the black money
problem.
To what do you attribute this consist-
ent demand for lower rate of inter-
est, now even from the current chief
economic adviser?
This tension exists in every country
which is why you dont ask the finance
ministry to set interest rates; you dele-
gate it to a central bank. The whole idea
of an inflation committee is really to
give it a structure by saying, Dear gov-
ernment please tell us what you want in
terms of inflation and even go ahead and
appoint three experts who you think are
sensible and take appropriate decisions.
And let them join with RBI people and
let the collective determine what the
interest rate should be.
Youve included a speech in which
you talk about the number of bad
loans made in 2007-08. Do you think
it was lazy banking that led to de-
faulters such as Vijay Mallya?
As I mentioned in the book, it was a
period of irrational exuberance in India.
A lot of projects had succeeded and this
made bankers willing to take on new pro-
jects with higher leverage and less pro-
moter equity. There was also poor assess-
ment of projects and, undoubtedly, some
corruption. Now, the regulator is not a
commercial banker and can potentially
raise concerns about whether appropri-
ate assessments have been done, but the
regulator really comes into the act when
the losses start showing. One of the is-
sues I pointed out in one of my speeches
was that credit growth by public sector
banks had been slowing down since 2014,
way before the strong balance sheet clean-
up was initiated, and this because banks
were seeing the problem on their balance
sheets. To some extent, it was necessary
to force the clean-up and the recapitalisa-
tion so that they could move forward. And
clean-up does not mean liquidate the as-
set but put it back on track with the right
capital structure.
Now, I do think that there has been a
lot of hesitancy in various quarters,
among bankers and, to some extent, in
the authorities to speed up the pace of
clean-up for fear that some of the people
who perpetrated the mischief will go
scot-free. We should separate the two is-
sues. From a national perspective put-
ting assets back on track and letting
them be revived is extremely important.
That creates jobs, it creates growth.
Separately, we have to beef up the qual-
ity of investigation so that people who
made away with money that didnt be-
long to them are caught quickly and
brought to justice. Those are two sepa-
rate issues. Just because there is some
fear that the promoter has misappropri-
ated money doesnt mean that his fac-
tory or his power plant should have a
stigma. Take the power plant away, do
what is necessary to put it back on track,
bring in new management if necessary
and deal with his shenanigans separate-
ly through the investigative authorities.
Try and ensure that anytime the bankers
make a concession in order to bring a
plant back to life they dont face the
threat of an investigation.
Every finance minister says India
should have large global banks. What
is your view on bank consolidation?
There are several issues here. One is
the quality of management in public sec-
tor banks needs to be raised. There are
some very good public sector bankers
but there are some not so good ones, and
it is not necessarily at the top that the
problem lies. New capabilities are also
needed in the middle management. The
argument for mergers may be that good
banks can uplift less good banks. I feel
mergers are always better done at a time
when the banks are relatively clean and
the management can spend time on the
merger process, which is never easy, es-
pecially if banks have strong cultures.
So, to bring together a bank, for example,
which has largely been in north India,
with one from the east will bring togeth-
er cultures that will take some time to
adjust to each other. What is important
is to ensure that you dont double the
problem by bringing the wrong banks
together. The second concern expressed
at various gyan sangams is whether the
banks are in fact all following the same
strategy. And, unfortunately, so long as
strategy is determined in North Block,
it will always be the same. So one of the
moves that this government has taken,
which has to be taken to its logical con-
clusion, is to appoint boards that are
more independent, which are more ca-
pable and cut the strings between the
boards and the government. The joint
secretary in the ministry of finance
should not be able to summon a board
member or a CEO.
After the departure of NITI Aayog
vice chairman Arvind Panagariya,
there is talk that people who come
from abroad arent as dedicated to
serving India as homegrown folks
and that the government should be
careful about appointing such people
in important posts. Your views?
There are people who think, some-
times fairly, that those who come from
abroad jump to positions that they them-
selves would like. They question their
capabilities and say, Oh they dont know
India, and therefore will make wrong
decisions. I think that there are circum-
ON BANKING REFORMS
One of the moves that this government has
taken, which has to be taken to its logical
conclusion, is to appoint boards which are more
independent. The joint secretary in the ministry
of finance should not be able to summon a board
member or the CEO of a bank
13
ON ECONOMY
I think the government
has done some very
important things such as the
Goods & Services Tax. But the
immediate concern is that
private investment hasnt
picked up and, as a result, jobs
havent been created to the
extent that we need
The problem in India is not that
we dont know what to do. It
is that we should have done it
yesterday or last week
ON RBIGOVT RELATIONS
You may be against
a certain move but
ultimately after making your
arguments, it is the government
that has to decide. You cannot
be a fifth column, undermining
the legitimate right of the
government to decide
stances where an intimate knowledge of I say this because there was a column
India is necessary in order to make the in a newspaper a few weeks ago which
right decisions, and there are certain seemed to suggest that I went back even
circumstances in which you can make though the government asked me to stay
the right decisions only because you are because the University of Chicago was
not trapped in a mindset that resists not willing to extend my leave. I think
change. I think anybody who is sensible the appropriate answer to that is we
and who comes from abroad will take the never reached a point where the govern-
wealth of experience that exists in their ment made me an offer to stay on.
The story behind Rajans most embarrassingly
famous newspaper headline
T he title of the book I Do What I do reflects the serendipitous nature of public
lifeAs one press conference was ending, I was asked whether I was dovish
like Yellen or hawkish like Volcker. I understood what the reporter was asking, but
I wanted to push back on the attempts to pigeonhole me into existing stereotypes.
Somewhat jokingly, I started in a James Bond-ish vein, My name is Raghuram Ra-
jan To my horror, mid-sentence I realised I did not know how to end in a way that
did not reveal more on monetary policy than I intended. So with TV cameras trained
on me, I ended lamely and I do what I do. For some reason, the sentence became
the financial press headline the next day, with the details of our monetary policy
relegated to the inside columns. The commentary on social media even reached my
usually supportive daughter, who emphasized her negative reaction to my unwitting
sentence with repeated thumbs-down emojis! FROM THE BOOK
colleagues, their subordinates, their su-
periors and make decisions based on that.
Did the government offer you a
shorter term?
As I said in the book, I never actually There was no offer on the table. Thats
decided things on my own. I used to ask fair to say.
my colleagues to contribute and invari-
ably the decisions that came from discus-
sions at senior management meetings
How do you see Indias economic
performance?
were better than what I individually I am very hopeful. I think the govern-
might have taken or hopefully what they ment has done some very important
might have taken without my inputs. I things such as the goods and services tax
think we should take the best capabili- reforms because politically a difficult
ties there are and make use of them. task has been done. This is one situation
Obviously we come in because it is where the dividends will pay off in the
fulfilling to do something for the country. longer run even though there might be
I think national sentiment in people liv- short-term disruptions. It will also help
ing outside is as much as in those living in curbing tax evasion in addition to
in India. Many of us want to give back uniting the country as a single market
which is why we are willing to leave our and reducing transactions. This is a ma-
cushy positions in academia or elsewhere jor reform.
and make the adjustment which is not The immediate concern is that pri-
easy and take the criticism that always vate investment hasnt picked up and,
emanates in these situations while trying as a result, jobs havent been created to
to do the best job we can. Let me also add the extent that we need. In an emerging
that sometimes there is a notion that we market the biggest source of jobs is con-
are fair-weather friends, who come when struction. I think it is fair to say we need
times are good and leave as soon as our to do more here. We need to ensure that
leave expires. I didnt leave when my leave some of these reforms that have taken
expired; there was absolutely no issue place the real estate Act, GST, and so
about extending my leave, if necessary. I on are also met with moves to enhance
left when the government and I could not investment so that the country can
agree on terms for me to stay on. In that make use of what the Economic Survey
sense, the notion that we come to India calls a sweet spot. There is a very good
for our sabbaticals is just not an appropri- external environment and it is some-
ate criticism. thing that we should take advantage of
now. Unfortunately, with private invest-
ment not picking up, so far we havent.
I would say three big places we need to
work hard on are cleaning up the banks
and putting those projects that are lan-
guishing back on track to the extent
possible, and then recapitalising the
banks to ensure that they have the
money to lend when growth picks up.
Second, in the power sector, we have to
be fairly careful that going forward we
dont have more distress. The reforms
required by UDAY have to be acceler-
ated, and discom losses have to be
brought down faster.
The third element that is extremely
important is agriculture. We need to in-
crease productivity in agriculture and
also reduce the gap between what the
farmer gets and what is paid by retail
buyers. This means improving the qual-
ity of markets giving farmers access to
productivity tools and insurance. All
these we have been working on for some
time but I always said the problem in
India is not that we dont know what to
do. It is that we should have done it yes-
terday or last week.
Will you be interested in coming to
Parliament like your friend Jayant
Sinha?
Actually, I am very focused on writing
and research right now. And I dont be-
lieve I have any sort of political aptitude.
I am happy where I am.