DeMo was draconian, but big puzzle is impact on GDP was muted: Ex-CEA
Your description of demonetisation calling it massive, draconian has stoked a controversy. Why did you choose these words?
How do you describe 86% reduction in cash? Draconian is a connotation of being severe and it was meant to be bold and severe. If you take away 86% (cash) nobody would you call it mild, or soft? The important point there, which all of you seemed to have missed, is what I was saying was that there is a big puzzle here. I am implying almost opposite of what people are saying. The puzzle is that the action, severe, extreme, draconian, whatever you want to call it (was taken) but impact on GDP was muted. What is your personal view of demonetisation? I want to ask more important questions about demonetisation as economic policy and politics of taking action. What should we learn from demonetisation? To me it is part of a worldwide phenomenon. Why do people apparently vote against their safe interest? In the US, why do white male voters vote for Trump and the Republicans? This was a kind of extreme case of that because if you believed, as all of us do, a lot of hardship was imposed on the informal sector. If that was the case why was it almost rewarded by the same people (in the UP elections)? To me it says if the costs are broad based, it’s easier to take that action than if the costs are imposed on a few. So, it is more difficult to take on narrow vested interests, rich farmers, unions but it seems like it is easier to impose hardship on a lot of people and we need to get into the heart of that. So, that was the political puzzle, the economic puzzle is it that we don’t understand how cash works. Is it that we are completely mismeasuring GDP? Is it that actually the Indian economy is very resilient that in ways we don’t know? That’s why I think these are the questions that we will have to understand.
The question that everybody has been asking since demonetisation. Did the government consult you?
I say in the book this is not a kiss and tell memoir. I say in the book that all that is for gossip columnists, Twitter trolls and TV anchors with multi-screen TV pundits, who say no more than two people at the same time! As an economist would you recommend demonetisation to another country similar to India?
It’s all context specific. It’s something that countries have to decide for themselves.
How do you view this ongoing fight between the government and RBI?
By definition, the objectives are different. So, there has to be disagreement and creative tension. But all that has to be against a deeper background of trust, communication and independence. I used to speak out against Raghu (Rajan). I had to speak up in order to move the debate. I was very happy that I did that but I could do it because the basic understanding was there. You can disagree with people whom you respect. They (RBI) have broadly done a very good job but in the last seven-eight years, the financial system oversight has been a major concern. Then, there has been the IL&FS issue. Suddenly, out of the blue, a Rs 90,000 crore blow hits you and nobody knows. We just need to get back to the drawing board and say, look, all of us have been complicit in various aspects of this and how we can move forward. We need to think seriously about reform, which is privatisation (of banks). On the Prompt Correction Action framework (for weak banks) I am very much of the view that it is a very sound way to find a solution – it’s like a Y V Reddy kind of solution. The new thing that I am calling now is the asset quality review of the NBFCs. While I have criticised the RBI for oversight, the asset quality review did play a very useful role. Ever since 2012-13 we have all known the NPA problem is much bigger than people were claiming it to be. My beef with RBI is why didn’t it start earlier? The government has to allow the PCA framework to continue, we need to think more seriously about public asset construction agency (PARA), the Bank Nationalisation Act and what we do with the power (sector).
What are your views on the transfer of excess RBI reserves to the government?
RBI should put the money only for recapitalisation of public sector banks, conditional on all the reforms being undertaken, otherwise it is money down the black hole. I started the excess reserves view a few years. I am confident that it is Rs 4-Rs 4.5 lakh crore. It’s a reasonably big number. It should not be used for general financing of the deficit because that would be raiding the RBI and it should be done cooperatively. The government has to be careful. Politicising the board, anything that chips away at that fundamental autonomy, independence that should be maintained but equally I think that on the part of RBI, independence does not mean no consultation, no cooperation, no communication.
Do you think the government did the right thing by threatening the RBI of invoking Section 7?
This is kind of, at least at a perception level, you are getting into territory where people think some basic arrangements are being tampered with and institutions are being encroached upon. It’s not in anyone’s interest to go down that road and the government has drawn back.
What would be your advice to your successor, Krishnamurthy Subramanian?
First, best wishes. It’s the best job I have ever done or will ever do. Build teams, forge relationships with everyone in government. Be absolutely independent-minded in thinking, certainly the finance minister wants to hear independent views. We must not compromise on the quality of analysis. Having a good relationship with the finance minister--- having his trust and confidence and ear. In terms of issues, the financial system is his play, agriculture is going to be a real challenge and keeping a very high quality of macroeconomic analysis is very important, the current account, oil, keep track of all this.
Subramanian believes RBI should put the money only for recapitalisation of public sector banks, conditional on all the reforms being undertaken