S Gurumurthy (Source: BloombergQuint)

New RBI Director S Gurumurthy’s Views On The Indian Economy And Banking

S Gurumurthy, a well-known chartered accountant and political economy commentator, has joined the central board of the Reserve Bank of India as a non-official part-time director.

As a part of the central board, Gurumurthy, who is also affiliated to the Rashtriya Swayamsevak Sangh and is a supporter of the ruling Bharatiya Janata Party, has the opportunity to add to the discussion agenda at the RBI. To be sure, in the capacity of a non-official part-time director, Gurumurthy has no administrative responsibilities or decision making powers at the RBI.

Over the years, Gurumurthy has been a prolific writer on matters related to the economy and banking. So what do his public writings tell us?

BloombergQuint has compiled some of his recent views based on his newspaper columns and comments on social media.

On Demonetisation

Gurumurthy was a vocal supporter of the government’s decision to withdraw nearly 87 percent of the country’s currency in November 2016. On the 9th of November, Gurumurthy wrote that demonetisation is a game-changer.

“The nation owes a standing ovation to the Prime Minister for taking this unprecedented and high-risk political decision which is a game-changing multi-dimensional effort to take on corruption, black money, protect national security and prevent capital flight out of the nation by hawala...” - New Indian Express (November 9, 2016)

A year later, when it looked like demonetisation had not succeeded in making a significant dent in the stock of black money as 99 percent of the scrapped currency had come back to the system, Gurumurthy continued to support the move.

He countered the narrative that the success of demonetisation should be measured by the percentage of money that was returned to the system.

“Its fundamental aims were many,” Gurumurthy wrote in the Hindu on November 9, 2017. “It terminated the asset price-led, spurious jobless growth and averted a crisis in the making.” - The Hindu (November 9, 2017)

He, however criticized the government for not timing the demonetisation exercise together with the Income Declaration Scheme of 2016. This, he wrote, could have helped the government collect an estimated Rs 2-3 lakh crore in tax payments upfront.

On The MUDRA Scheme

Gurumurthy has also been a supporter of the MUDRA Scheme - another pet project of the government. Under the scheme, refinancing facilities are provided for small-ticket loans, with the objective of aiding entreprenuership.

The original idea of the government was to create a specialised ‘MUDRA Bank’. This, however, was not approved by the Reserve Bank of India, then led by Raghuram Rajan.

On June 22, 2016, in an article titled ‘Rajan: The Exit That Was Inevitable’ Gurumurthy wrote about the MUDRA scheme.

“When the Modi government came it realised that it could not generate jobs unless it funded the 58 million unfunded unorganised businesses which needed a capital of Rs 12 lakh crore — of which just 4 per cent was provided by banks. The government decided on a new financial architecture, the MUDRA bank, on the lines of the National Housing Bank, to focus on them and fund them. But Rajan’s RBI stonewalled it, saying it would lead to regulatory arbitrage — meaning seeking to profit between two regimes — and systemic risk.” - New Indian Express (June 22, 2016)

In the same article, Gurumurthy said that “India does not need a celebrity governor. It needs an economist who knows the hinterland India, who can keep his head down and work.”

On The Bad Loan Clean-Up

In a series of tweets, Gurumurthy over the past few months has questioned the manner in which the bad loan problem was being resolved.

In a post on July 11, 2018, Gurumurthy said that India is a bank-driven economy and this fact had been ignored during the bad-loan clean-up. He also criticised the RBI for not using its reserves to help recapitalise banks.

“The NPA rules formulated by Rajan were intended to worsen the PSU banks to force their privatisation. That is why the RBI is refusing to part with its reserves for capitalising the banks. To force the govt to either fund which it can’t or else privatise.” @sgurumurthy (July 11, 2018)

In the same twitter thread, Gurumurthy compared India and Japan, saying that Japan realised the flaw in the bankruptcy code model. He added that restructuring of stressed loans should not be seen negatively.

“Japan followed NPA solutions like India does now through RBI & IBC in 1999-2000. In 2010 Japan realised IBC model was wrong. They should have allowed the bank to restructure....But Rajan made restructure a crime. India has been doing it for decades.” @sgurumurthy (July 11, 2018)

He went on to question whether stringent provisioning norms were required in India, where 70 percent of the banking system is owned by the sovereign.

The 3% Fiscal Deficit Target

In a March 2016 post on the website of the Vivekananda International Foundation, Gurumurthy questioned whether the attempt to bring down the fiscal deficit to 3 percent of GDP was logical.

He argued that the 3 percent target is an import from the Maastricht Treaty adopted by the European Union. That target may not hold or be desirable for India. In fact, it may hurt the economy.

Gurumurthy questioned why India’s Union Budgets were being driven by the need to meet that one 3 percent number.

“The idea of fiscal prudence is not new to India. Many may be surprised to know that, in India, revenue deficit occurred for the first time in 1979-80. The issue is not about whether deficit financing is good or bad, but how much of it is good and how much is not. Good economics is not about either this or that, but about how much of both. The need for and quantum of fiscal deficit are a country specific issue and even a context specific one. It needs no seer to say that the adoption of the EU number is not only not rational but harms India.” - Vivekananda International Foundation (March 2016)