Why NITI Aayog’s Rajiv Kumar blaming Raghuram Rajan’s NPA clean-up for economic slowdown and defending note ban lacks logic

As they say, even if one beats up his mother, there will be two sides to argue, one even to find excuses for his actions. Likewise, even the best/worst economic policies will have both supporters and critics. That’s how human societies work at a psychological level. By this logic, there is nothing wrong with defending demonetisation. Eventhough it has failed to achieve most of its primary stated objectives, it is easy to find new objectives and justify the move. It is understandable when such defence tactics come from the government’s own policy think-tank NITI Aayog whose loyalty is first to the government. NITI Aayog is not an independent body to adopt a critical approach to government policies but is meant to justify its actions. That’s the reason why it will be difficult to recollect any instance when NITI Aayog criticised any government policy ever since it was born from the deathbed of erstwhile Planning Commission. [caption id=“attachment_4388827” align=“alignleft” width=“380”]  File photo of Raghuram Rajan. PTI copy[/caption] In fact, the think-tank has largely been a disappointment so far with no significant contributions in terms of ideas to the economic story, nor has it any major executive powers on fund allocation unlike the Planning Commission. Politically, it is imperative that the government defends each of its policies. And it is typical that the party in power uses think tank and economists on its payroll to build a convincing defence. But, in his bid to defend demonetisation when NITI Aayog’s Vice Chairman Rajiv Kumar blamed former RBI governor, Raghuram Rajan and Reserve Bank of India (RBI)’s non performing asset (NPA) clean-up process that was kicked off under him as a major reason for the economic slowdown, there is a serious issue here. For one, Kumar is shooting a self -goal by attacking the bad loan clean-up that was essentially backed by the Narendra Modi government itself, without which it would have been nearly impossible for the central bank to commence such a large scale of NPA operations.

In effect, Kumar is criticising his own bosses that wouldn’t have been his idea when he said this. The NPA clean-up was part of the government’s agenda to cleanse the banking system and in PM Modi’s words, the cleansing of UPA-era legacy issues.

Second, the NPA clean- up in such magnitude was sure to have its near-term impact on the economy but that was unavoidable. If the programme wasn’t initiated, the economy would have faced a full-blown banking sector crisis sooner or later due to the rot within. The system, mainly state-run banks, was neck-deep filled with evergreened loans, huge corporate bad loans technically masquerading as standard loans for several years and loose-lending practices that had become the signature of many state-run banks. All this eventually turned them into zombie banks. This is why the RBI under Rajan, with the backing of the central government, initiated an all-out attack on bank NPAs, asking banks to state the problem as it was and call a spade a spade. In the absence of such an exercise, the economy would have never reflected a true picture. Third, it is grossly wrong to exonerate demonetisation for causing economic slowdown. The move, regardless of its good intent, caused a major drag on the economy which has eaten at least one full percentage from the Gross Domestic Product (GDP) growth by destroying supply chains and dealing a blow to the informal sector. All cash-intensive segments felt the pain and coupled with the Goods and Services Tax (GST) rollout became a major reason for the slow economic growth. Kumar is right in saying the economy was already slowing, but that’s on account of multiple factors which includes the NPA clean-up and demonetisation ill-effects. Other factors include the global shocks and India’s own inability to re-engineer it’s growth dynamics attaining a larger share of manufacturing growth and resolving the agri-crisis. After his Rajan remarks made headlines, Kumar clarified in a tweet that he wasn’t attacking the person but policies.

My views on GDP’s decline being unrelated to solely demonetisation & having begun way before with stricter norms of NPA by RBI under Mr Rajan R fact-based & self-explanatory but some misleading headlines have coerced me to reiterate that the discussion is on policies not people.

— Rajiv Kumar (@RajivKumar1) September 3, 2018

But, even when he says this, singling out bank NPA clean-up and blindly defending demonetisation do not add up. At best, it sounds like a desperate statement by one of the Bharatiya Janata Party (BJP) spokespersons on TV channel debates and not like a statement from the head of a policy think-tank.