Right as he was being appointed the new Vice Chairman of the NITI Aayog in 2017, economist Rajiv Kumar made his opinion of some others in his field quite clear. Lamenting the “Anglo-American” influence on Indian policy making, Kumar cited his predecessor at the government think tank, Arvind Panagariya, and former Reserve Bank of India Governor Raghuram Rajan as examples of non-residents who do not understand subcontinental ground realities and are not committed enough to India.
On Monday, he gave an example of what that “commitment” to this country and this government looks like: blaming Rajan’s Non-Performing Assets policy for the slowdown in India’s growth over the last few years, instead of Prime Minister Narendra Modi’s failed demonetisation effort.
“The declining trend for the last six quarters starting 2015-’16, when the growth rate was as high as 9.2%, was not a result of demonetisation,” Kumar said. “The growth was declining because of the rising NPAs in the banking sector. When this [Narendra Modi] government came to office, that figure was about Rs 4 lakh crore. It rose to Rs 10.5 lakh crore by the middle of 2017, because under the previous RBI governor Mr Rajan, they had instituted a new mechanism to identify stressed NPAs.”
It was this rise in NPAs that led to a decline in credit growth and eventually hampered the Gross Domestic Product growth as well, Kumar said. “This was just simply in continuation of a trend and not because of the shock of demonetisation as has been claimed. I think there is no evidence to prove that there was a direct link between demonetisation and slowdown in the growth rate,” he said. Kumar accused former finance minister P Chidambaram and former prime minister Manmohan Singh of spreading the “false narrative” that demonetisation was responsible for the decline in growth.
This opinion, which flies in the face of just about every economist’s belief that the twin shocks of demonetisation and the introduction of the Goods and Services Tax were responsible for the massive drop in India’s growth over the last few years, was not received well.
Note ban and GDP
There is some crucial context to this. First, the link between demonetisation and GDP decline has been acknowledged by no less than the former Chief Economic Advisor Arvind Subramanian in the Finance Ministry’s Economic Survey in 2017. Economists have disagreed over the extent of the impact of the note ban, which involved withdrawing 86% of currency in circulation and replacing them with new notes in a process that was badly managed and caused tremendous economic distress.
Some economists, usually supportive of the government if not the move itself, have argued that the effects were transitory and had exited the system by the time the currency had fully been replaced in the market. Others claim that the full impact of demonetisation, particularly on the unorganised sector continues to this day, but is hard to pinpoint because of limitations in how the state measures these things. A World Bank policy research working paper that used an unusual methodology to overcome these difficulties concluded that demonetisation led to a drop of up to 7.3 percentage points of GDP during the third quarter of 2016-’17 in districts dominated by informal activities.
Moreover, most economists believe Rajan’s effort to have banks openly acknowledge their stressed assets was necessary for India to begin handling what is called the “twin balance-sheet problem”. As Arvind Subramanian has pointed out, the first step to resolving the massive challenges that NPAs pose is to recognise them, which is exactly what Rajan’s Asset Quality Review effort did.
Indeed, Kumar himself called the Asset Quality Review a part of the ‘Clean Banking’ effort, that would help put Indian banks back on a path of honest, responsible, responsive banking. Later in the day, the NITI Aayog VC tried to clarify his remarks, saying his comments were “fact based” and on “policies not people.”
But regardless of what Kumar’s remarks mean, particularly for his reputation among economists at home and abroad, the more interesting matter might be the question of demonetisation’s political appeal. Where it was first lauded as a huge effort against corruption, and cited as one of the reasons behind the Bharatiya Janata Party’s massive win in Uttar Pradesh elections in 2017, the government has largely gone silent about it.
Modi did not mention demonetisation in the last Independence Day speech and Finance Minister Arun Jaitley’s responses to proof that the policy failed has been simply to insist that it achieved aims, albeit different ones than were laid out by Modi when he announced it. Kumar’s comments, and his pushback against the “false narrative” of Chidambaram and Manmohan Singh, suggest the impression of demonetisation having failed has spread and the best the government can attempt now is damage control. Or, as Kumar seems to have attempted here, blaming the problems on something else entirely.
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