De­mon­eti­sa­tion, GST held back eco­nomic growth, says Ra­jan

Calls for a multi-pronged ap­proach to ad­dress NPA chal­lenge

Business Standard - - FRONT PAGE -

De­mon­eti­sa­tion and the goods and ser­vices tax (GST) are the two ma­jor head­winds that held back In­dia’s eco­nomic growth last year, for­mer RBI Gov­er­nor Raghu­ram Ra­jan has said, as­sert­ing that the cur­rent 7 per cent growth rate is not enough to meet the coun­try's needs.

Ad­dress­ing an au­di­ence at the Univer­sity of Cal­i­for­nia in Berkley on Fri­day, Ra­jan said that for four years — 2012 to 2016 — In­dia grew at a faster pace. “The two suc­ces­sive shocks of de­mon­eti­sa­tion and the GST had a se­ri­ous im­pact on growth in In­dia. Growth has fallen off in­ter­est­ingly at a time when growth in the global econ­omy has been peak­ing,” he said, de­liv­er­ing the sec­ond Bhat­tacharya Lec­ture­ship on the Fu­ture of In­dia.

On the sec­ond an­niver­sary of de­mon­eti­sa­tion on November 8, Fi­nance Min­is­ter Arun Jait­ley staunchly de­fended the move, say­ing “prophets of doom” had been proven wrong as hard data of two years showed an in­crease in the tax base, greater

for­mal­i­sa­tion of the econ­omy, and In­dia re­tain­ing the fastest grow­ing econ­omy tag for a fifth year in a row.

Ra­jan said a growth rate of 7 per cent per year for 25 years was “very very strong” growth, but in some sense this had be­come the new Hindu rate of growth, which ear­lier

used to be 3.5 per cent.

“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,” he said.

ON GROWTH RATE

“SEVEN (PER CENT) IS NOT ENOUGH FOR THE KIND OF PEO­PLE COM­ING INTO THE LABOUR MAR­KET AND WE NEED JOBS FOR THEM”

ON CEN­TRAL­I­SA­TION OF POWER

“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”

RAGHU­RAM RA­JAN, FOR­MER GOV­ER­NOR, RBI

Ob­serv­ing that In­dia was sen­si­tive to global growth, he said In­dia had be­come a much more open econ­omy, and if the world grew, it grew more.

“What hap­pened in 2017 is that even as the world picked up, In­dia went down. That re­flects the fact that th­ese (de­mon­eti­sa­tion and GST) have re­ally been hard blows...Be­cause of th­ese head­winds we have been held back,” he said.

With the oil prices go­ing up, Ra­jan said things were go­ing to be 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 the ris­ing non­per­form­ing as­sets (NPA), he said the best thing to do in such a sit­u­a­tion was to "clean up".

It is es­sen­tial to "deal with the bad stuff", so that with clean bal­ance sheets, banks can be put back on the track. "It has taken In­dia far long to clean up the banks, partly be­cause the sys­tem did not have in­stru­ments to deal with bad debts," Ra­jan said.

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

In­dia, he as­serted, was ca­pa­ble of strong growth. As such the 7 per cent growth was now be­ing taken for granted, he added. "If we go be­low 7 per cent, then we must be do­ing some­thing wrong," he said, adding that is the base on which In­dia has to grow at least for next 10-15 years.

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

The coun­try to­day is fac­ing three ma­jor bot­tle­necks. One is torn in­fra­struc­ture, he said, ob­serv­ing that con­struc­tion is one in­dus­try that drives the econ­omy in early stages. “In­fra­struc­ture cre­ates growth,” he said. Sec­ond, short-term tar­get should be to clean up the power sec­tor and to make sure that the elec­tric­ity pro­duced ac­tu­ally goes to the peo­ple who want the power, he said. Clean­ing up the banks is the third ma­jor bot­tle­neck in In­dia's growth, he added.

Part of the prob­lem in In­dia is that there is an excessive cen­tral­i­sa­tion of power in the po­lit­i­cal de­ci­sion mak­ing, he 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 is the quan­tum of de­ci­sions that re­quires the assent of the Prime Min­is­ter's Of­fice, Ra­jan said. He high­lighted the re­cent un­veil­ing of the 'Statue of Unity' of Sar­dar Val­lab­hb­hai Pa­tel as an ex­am­ple of a mas­sive project that re­quired the ap­proval of the PMO.

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