Demonetisation, GST held back economic growth, says Rajan
Calls for a multi-pronged approach to address NPA challenge
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.