DeMo was dra­co­nian, but big puz­zle is im­pact on GDP was muted: Ex-CEA

The Times of India (Mumbai edition) - - TIMES NATION - Suro­jit Gupta & Sid­hartha

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

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