There are truths and half-truths. What Niti Aayog vice-chairman Rajiv Kumar said about former RBI governor Raghuram Rajan being responsible for the economy’s slowdown, not demonetisation, was a half-truth. Due to the banks’ burgeoning non-performing assets which they tended to hide or under-declare, Mr Rajan insisted on an asset quality review in October 2015 that saw a jump in NPAs from Rs 3.4 lakh crores to Rs 10.2 lakh crores in the quarter ending March 2018. He also insisted on higher provisioning for bad loans. Mr Rajan’s reasoning was that once the banks were strong, they could start lending again. The immediate result of this Operation Clean-Up was that lending slowed as banks became risk-averse. Medium, small and micro enterprises bore the brunt. They depend on banks for loans as borrowing from other financial agencies is very expensive. Easy money was also no longer available to industry on a phone call. To that extent, Mr Kumar is right in laying the reason for the slowdown at Mr Rajan’s doorstep. But Mr Rajan’s objective was to put banks on a stable footing, and this must be recognised.
Interestingly, Prime Minister Narendra Modi and Mr Rajan are on the same page on the quality of governance in banks. Mr Modi in fact vindicated Mr Rajan’s efforts to clean up banks when he talks of the “phone banking” syndrome of “dynasts”. Such “phone banking”, Mr Modi said, led to the loss of crores of rupees for the country. It was a loot of the country’s resources by a few, he said. Mr Kumar would do well to take note, and put Mr Rajan’s role in the right perspective. Alternatively, as the PM is ex-officio Niti Aayog chairman, the PMO should take note of the vice-chairman’s statement and do the needful.
Where Mr Kumar is right is that the slowdown happened after the clean-up measures, but he should also recognise that demonetisation accelerated the slowdown, shaving a little over one per cent GDP. Historically, the slowdown started towards the end of Dr Manmohan Singh’s UPA-2 government, when “policy paralysis” set in. Decision-making was slow or non-existent and projects languished due to this. There was high inflation and low investments coupled with external factors like uncertainty over the quantitative easing or rollback of the stimulus by the US Federal Reserve that created global financial upheavals.
The Narendra Modi government tackled this but even as the economy was beginning to look up, demonetisation was followed by the hurried introduction of a flawed GST. The economy is now getting over the devastating overhang of these two weapons of mass destruction.