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Raghuram Rajan on demonetisation: We may never know real cost and benefits

At his book launch, emphasises need to clean up balance sheets of 'unhealthy' banks before merger

T E Narasimhan & PTI  |  Chennai 

Raghuram Rajan
Former RBI Governor Raghuram G Rajan releases his book 'I do What I do' at an event in Chennai (Photo: PTI)

Former Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday said that it was better to merge banks when they were healthy, and more time should be devoted to cleaning up their balance sheets.

“There is a little bit of a catch-22 situation — if you don’t have the capacity and management capability, it is better not to pursue a merger before bringing them,” said Rajan. Speaking at the launch of his book I Do What I Do in Chennai, Rajan, currently professor of finance at the University of Chicago, said, “You have to be careful, because take time and consume a lot of effort, especially if we are merging very different entities, from different areas and with different cultures.”Breaking his silence after completing the unwritten one-year moratorium for not commenting on India-specific issues, Rajan said he wanted to give young people an idea of “what we do at the RBI, and why we do it”.    

Rajan said that he had worked under two governments and there was absolutely no interference. “I had very cordial relations with both the governments, kept them informed and essentially had government support all along the way,” he added.

He said he mentioned demonetisation in the introduction of his book as there had been questions asked by the parliamentary standing committee and the responses that came out from the leaks were not in accordance with his recollection of what had exactly happened. “So I want to set the record straight just because the Parliament has the right to know what in fact the response of the on this was,” Rajan said.  Replying to a question on demonetisation, Rajan said, “The jury in terms of the data is still out”.

“We still have to wait for the full evolution of the data to understand what exactly the cost and benefits have been. It may be that we never know because we do not measure some of the areas where demonetisation had an impact because those were part of the informal economy,” said Rajan. He, however, said the cost of demonetisation has been quite substantial. “What (the impact) is because of demonetisation, what is because of banking sector stress, what is because of anticipation of the goods and services tax... All three are happening at the same time. So I don’t think you can pinpoint and say exactly this much, but analysts have made an estimate — 1 per cent and 2 per cent of gross domestic product (GDP) in terms of the growth cost,” said the former governor.


Rajan also said it was always better to underpromise and over-achieve than to face awkward questions when it comes to growth comparisons with China. Rajan, the only central bank governor in two decades who did not get a second term, also seemed to defend his controversial remark of India being a ‘one-eyed king in the land of the blind’, saying GDP expansion slipped in every quarter since that remark in April of last year. 

“This notion that, we at every corner, we have to say we are the best and there is nobody else like us. Well, that is not true, first. There is lot of potential in India, we are capable of doing significantly more over the years to come,” he said.  “Let us be confident, we can do it. Let us do it. But let us boast only after we have achieved it. Let us not be overly complacent before that,” he added. Rajan said he faced awkward questions in Beijing recently on India lagging behind China in terms of GDP growth rate for the second quarter in a row. India’s GDP growth slowed to 5.7 per cent in April-June quarter, down from 6.1 per cent in the preceding three-month period. China clocked 6.5 per cent growth rate in both the quarters.

For the central bank, stabilising the value of the rupee and holding it is what is important. Rajan said the Committee report gave the a pathway to do that. “We moved to CPI (Consumer Price Index) focus rather than WPI (Wholesale Price Index) focus. CPI is what ordinary people see,” Rajan said. 

Rajan gave a memento of the rupee symbol with a slogan below that read “Hamari Zimmedari” (our responsibility) when he handed over charge as the governor to underscore the RBI’s role in currency management.

The six-member Monetary Policy Committee (MPC), which decides on interest rate, was established after Rajan left office. “I was always for creating an MPC. A committee would bring many minds together and result in better decisions than an individual making those decisions,” he said. A committee would also provide continuity, and even if one person left, it wouldn’t create uncertainty. “It was important to create an institutional structure, which would be resistant to pressure - that was my intent there,” he said.

First Published: Wed, September 06 2017. 09:12 IST
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