File photo of Raghuram Rajan, former Reserve Bank of India governor. (Photographer: Dhiraj Singh/Bloomberg)

Raghuram Rajan Says India’s Growth Held Back Due To Demonetisation, GST

Demonetisation and the Goods and Services Tax are the two major headwinds that held back India’s economic growth last year, former RBI Governor Raghuram Rajan said, asserting that the current seven percent growth rate isn't enough to meet the country’s needs.

Addressing an audience at the University of California in Berkley on Friday, Rajan said for four years—2012 to 2016—India was growing at a faster pace before it was hit by two major headwinds. “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 up,” he said delivering the second Bhattacharya Lectureship on the Future of India.

A growth rate of seven percent per year for 25 years is “very very strong” growth, but in some sense this has become the new Hindu rate of growth, which earlier used to be three-and-a-half percent, Rajan said.

The reality is that seven (percent) 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.
Raghuram Rajan, Former RBI Governor.

Observing that India is sensitive to global growth, he said India has become a much more open economy, and if the world grows, it also grows more. “What happened in 2017 is that even as the world picked up, India went down,” he said. “That reflects the fact that these blows (demonetisation and GST) have really really been hard blows...Because of these headwinds we have been held back.”

While India's growth is picking up again, there's the issue of oil prices, the economist noted referring to its reliance on import of oil for energy needs. With oil prices rising, Rajan said things are going to be little tougher for the Indian economy, even though the country is recovering from the dual shocks.

(Photographer: Tomohiro Ohsumi/Bloomberg)
(Photographer: Tomohiro Ohsumi/Bloomberg)

On the issue of India’s bad loan pile-up, Rajan said that the best thing is to clean up.

It is essential to “deal up 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.”

The bankruptcy code, he asserted, can't be the only way to clean up the banks. It is the only one element of the larger cleanup plan, he said and called for a multi-pronged approach to address the challenge of non-performing assets in India.

India, he asserted, is capable of a strong growth. “If we go below seven per cent, then we must be doing something wrong,” he said adding that it is the base on which India has to grow at least for next 10-15 years.

Rajan noted three bottlenecks for the country: torn infrastructure, a stressed power sector, and bad loans. He added that these bottlenecks cannot be resolved as long as there is an excessive centralisation of power in the political decision making.

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 RBI Governor.

An example of this is the quantum of decisions that requires the ascent of the Prime Minister’s Office, he said, amid mounting tension between the Reserve Bank of India and the finance ministry.