Is Raghuram Rajan setting himself up to be Manmohan Singh in Rahul Gandhi-led UPA-3? The question might seem churlish, but it is a legitimate one since Rajan seems inclined towards politicising his stature as a noted economist and a former RBI governor. A former International Monetary Fund (IMF) chief economist who returned to academia after his three-year stint at India’s top central bank, Rajan knows that his words carry weight and may serve as political fodder in an election season in world’s largest democracy.
That is why his recent comments on India’s economic growth and ‘centralisation of power at PMO’ are interesting, since the statements are essentially political in nature. There is nothing wrong, of course, with expressing an opinion — political or apolitical — but Rajan could not have been oblivious of the fact that his words are likely to be interpreted in a certain way and set within the larger political narrative against the government. Sure enough, the Congress didn’t waste time.
Rajan had previously declared that he is disinterested in joining politics. Some parts of his address at the University of California in Berkley on Friday indicate a willingness, however, to keep the political pot boiling. Not the least because Rajan’s comments on India’s GDP growth and GST, in particular, are curious.
While delivering the second Bhattacharya Lectureship on the Future of India, Rajan acknowledged that India’s growth rate of seven percent is “very, very strong”, but termed it as the new “Hindu rate of growth” and said that it is not enough for "the kind of people coming into the labour market.”
It is worth remembering that India’s GDP grew at 8.2 percent in the first quarter of current fiscal — the fastest in eight quarters — boosted by manufacturing and construction sectors. Set against the fact that macroeconomic stability is under pressure due to a rise in global fuel prices, the growth rate does indicate that Indian economy is recovering from the transitory shock of reforms.
Few would disagree, however, that India needs more jobs and faster growth. Rajan’s point that we “cannot be satisfied at this level” is well taken. But it is little more than stating the obvious. The question of satisfaction doesn’t arise when millions need to be pulled out of poverty. However, the Narendra Modi government might be excused for feeling enthusiastic about India’s growth prospects. It points to the fact that structural reforms — for which the government has received wide praise — are beginning to bear fruit.
In August, IMF's Ranil Salgado was quoted as saying by DNA that “India’s economy is picking up and growth prospects look bright — partly thanks to the implementation of recent policies, such as the nationwide goods and services tax (GST). As one of the world’s fastest-growing economies — accounting for about 15 percent of global growth — India's economy has helped to lift millions out of poverty.”
In October, the IMF credited Modi for implementing structural reforms and projected India as the fastest-growing major economy for this year and next, according. Beyond 2019, the IMF saw India’s growth rate improving "owing to structural reforms and a still-favourable demographic dividend". The IMF added, “India’s medium-term growth prospects remain strong at 7.75 percent, benefiting from ongoing structural reforms.”
Set against this, Rajan’s comments sound pessimistic, verging almost on denial. He seems reluctant in giving credit where due. The term ‘Hindu rate of growth’ — harking back to the period when a shackled Indian economy grew at around 3.5 percent when the world was growing much faster — suggests a sense of stasis when reality speaks otherwise.
That said, it is heartening to note that Rajan has started believing in India’s GDP numbers. In 2015, as the governor of RBI, Rajan had openly voiced his scepticism on new series of numbers that was based on Gross Value Added (GVA) method and a new base year. At that time, Rajan had said that “most economies growing at 7-7.5 percent are just going gang busters and the issue there would be to restrain rather than accelerate growth” and talked of a “discrepancy” between India’s 7.5 percent growth (in quarter ending March 2015) and reality.
His other curious comment was on GST, which, he claimed, had “held back” India’s economy along with demonetisation. The former RBI governor said that for four years — 2012 to 2016 — India was growing at a faster pace before it was hit by “two major headwinds” in “demonetisation and the GST” that “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.”
The jury is still out on the impact of demonetisation and its benefits as a policy intervention but no serious economist disapproves of the idea of GST. Rajan had in January 2018 said that the “long-term benefits of GST would be tremendous.”
In another interview, talking to NDTV, the former RBI governor had said that “long term GST will have very positive effects and, I mean, there are people who say we should have prepared better, we should have delayed it. My sense is that many of the problems just come from doing it. So if we solve those problems and go forward, that would be very beneficial.”
Any major policy intervention is likely to have transitory impacts on the economy, more so if it involves a behavioral impact on consumers. It is interesting that from a nuanced view in January, Rajan seems to have shifted to a more absolutist position on GST — identifying it as a growth-retarding move. This is even more inexplicable when we consider that Rajan’s primary contention, that India was growing at a “faster pace before it was hit by two major headwinds in GST and demonetisation” is wrong.
As many have noted, India’s growth was certainly affected by the currency swap, but decline in growth was a trend from last quarter of 2015-16.
Moreover, as Sajjid Z Chinoy, Chief India Economist at JP Morgan Chase told at an event organised by The Indian Express in 2017: “Whenever you have large interventions in the economy, there is a tradeoff: there is always an immediate, short-term cost, and there are medium-term benefits… Firstly, we must appreciate that GDP growth was slowing well before demonetisation, so this notion that the entire slowdown is only because of demonetisation or GST is not borne out by the data.”
Instead of the measured view of an economist, Rajan’s statement seems loaded in favour of a political bias. This needs to be stressed because when Manmohan Singh or Raghuram Rajan hold forth on economy, their views as economists get credence in public opinion. The weightage of their views is incumbent on the neutrality of their opinion. If the first condition is unmet, then views need to be seen through the prism of politics.
Taken together, GST and demonetisation have resulted in greater formalisation and digitisation of the economy. There is considerably less cash in the system now. Critics, citing RBI data, have pointed out that since currency in circulation has reached record high, demonetisation has failed in its objective.
This argument overlooks the fact that currency levels, measured against a projection of 20-year average growth, are significantly lower than what would have been had note ban not been implemented. As Sanjeev Sanyal, principal economic adviser in the ministry of finance, has told ET Now: “The amount of cash that is out there right now is in our estimate something like 20 percent below where it would have otherwise been if this demonetisation had not been done. So in that sense, it has been a success.”
Two years after demonetization, currency in circulation remains Rs3.47 trillion below the long term trend (using the 20-year average growth rate). As shown in chart below, there is a clear break in the trend. #Demonetization pic.twitter.com/i1RZJxCO4a
— Sanjeev Sanyal (@sanjeevsanyal) November 8, 2018
The policy interventions have had a considerable impact on collection of direct and indirect taxes.
As finance minister Arun Jaitley has written in his blog, “Demonetisation and implementation of the GST curbed cash transactions in a big way. An increase in the digital transactions is visible. This formalisation of the economy has led to the tax payer base increase from 6.4 million in the pre-GST regime to 12 million tax payers in the post-GST regime. The actual consumption of goods and services being recorded as a part of the tax net has now increased. This has given a buoyancy to the indirect tax growth in the economy.”
As far as direct taxes are concerned, Jaitley points out that in 2017-18, the tax returns filed reached 6.86 crore, an increase of 25 percent over the previous year.” He is hopeful of doubling the assessee base by the time the government’s term is over.
GST and demonetisation have also impacted the way Indians carry out their transactions. Since this is a behavioral change, the impact is deeper. According to recent IT ministry data, “the number of digital payment transactions in India touched 244.81 crore in August 2018, more than three-fold rise from October 2016, underlining the massive adoption of digital payment modes over the last two years.” The number of digital payment transactions have recorded a 207 percent rise to 244.81 crore in August 2018 compared to 79.67 crore in October 2016.
BHIM UPI and RuPay cards have cornered 60 percent of digital transactions in India, prompting big daddies such as Mastercard to cry foul, according to The Hindu Business Line. RuPay transactions have increased from Rs 8 billion before Demonetisation to Rs. 57.3 billion in September, 2018 for PoS and from Rs. 3 billion to Rs. 27 billion in e-commerce, according to the finance minister.
In its World Economic Outlook report, the IMF acknowledged that “important reforms have been implemented in recent years, including the Goods and Services Tax, the inflation-targeting framework, the Insolvency and Bankruptcy Code, and steps to liberalise foreign investment and make it easier to do business.”
Therefore, when Rajan describes these policy steps as “headwinds” that “held back growth”, he seems to be speaking more as a political observer than an economist. We shall then be compelled to apply the usual disclaimers. The fact that this indeed might be the case becomes clearer when we consider Rajan’s subsequent statement during the address, that “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.”
One suspects Manmohan Singh might have a few words to say about that. Singh, the former RBI governor, was burdened with responsibility sans power in his 10-year stint as prime minister. If indeed Modi is concentrating power in his own hands (a debatable contention), we would at least know whom to blame when things go south. The larger question, though, is the motivation behind Rajan’s political surmises. Maybe it is time for him to jump into the fray?
Updated Date: Nov 12, 2018 22:45 PM