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10 Nov 2018

India's economic growth held back due to demonetization, GST: Rajan

Rajan blames demonetization, GST for poor economic growth

Goods and Services Tax (GST) and demonetization are the two major headwinds that held back India's economic growth last year, the 23rd and former Reserve Bank of India Governor, Raghuram Rajan, said yesterday.

He asserted that the current 7% growth rate is not enough to meet the country's needs.

Rajan was addressing an audience at the University of California in Berkley.

Here's more.

In context

Rajan blames demonetization, GST for poor economic growth
India's growth degraded when global economy is peaking up: Rajan

Comments

India's growth degraded when global economy is peaking up: Rajan

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 demonetization 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.

Observation

We need jobs for people coming into labor market: Rajan

A growth rate of 7% per year for 25 years is "very very strong" growth, but in some sense, this has become the new Hindu growth rate, which earlier used to be 3.5%, Rajan said.

"This 7% isn't enough for the kind of people coming into the labor market and we need jobs for them. We cannot be satisfied at this level," he said.

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'India has become a much more open economy'

Details

'India has become a much more open economy'

Observing that India is sensitive to global growth, Rajan said India has become a much more open economy, and if the world grows, it also grows more.

While India's growth is picking up again, there is the issue of oil prices, the MIT graduate noted, referring to the huge reliance of India on the import of oil for its energy needs.

Highlights

Best thing is to clean up: Rajan on NPAs

With the oil prices going up, Rajan said things are going to be little tougher for the Indian economy, even though the country is recovering from the headwinds of demonetization and initial hurdles in the implementation of the GST.

Commenting on the rising Non-Performing Assets (NPA), he said the best thing to do in such a situation is to "clean up".

Bankruptcy code not only way to clean up banks: Rajan

Handling NPAs

Bankruptcy code not only way to clean up banks: Rajan

"It has taken India far long to clean up the banks, partly because the system didn't have instruments to deal with bad debts," Rajan said.

The bankruptcy code, he asserted, cannot be the only way to clean up the banks. It's the only one element of the plan, he said and called for a multi-prong approach to address the challenge of NPAs in India.

Target

Need to maintain 7% growth rate for 10-15 years: Rajan

India, Rajan asserted, is capable of a strong growth. As such the 7% growth is now being taken granted.

"If we go below 7%, we must be doing something wrong," he said, adding that's the base on which India has to grow at least for next 10-15 years.

India, he reiterated, needs to create 1mn jobs a month for people joining the labor force.

The economist talks about three major bottlenecks India is facing

Pointing out

The economist talks about three major bottlenecks India is facing

The country today is facing three major bottlenecks. First is torn infrastructure, Rajan said, observing that construction is the one industry that drives the economy in early stages.

Second, the short-term target should be to clean up the power sector and to make sure that electricity goes to those who want the power, he said.

The third is cleaning up the banks, he added.

Power centralization

'India works when you've many people taking up the burden'

Another problem in India is that there is an excessive centralization of power in the political decision making, Rajan said.

"India works when you have many people taking up the burden," he added.

An example of this is the quantum of decisions that require the assent of the Prime Minister's Office, he said, amidst mounting tension between the RBI and the Finance Ministry.

RBI, government feuding for some months now

Current scenario

RBI, government feuding for some months now

The RBI led by Governor Urjit Patel and the government has not been on the same page on different issues for some months now.

The disagreements came out in open when the Deputy Governor of the Central Bank and economist Dr. Viral Acharya, in a hard-hitting speech, said that failure to defend RBI's independence would "incur the wrath of the financial markets".

To handle situation, government invokes never-before-used provision of law

This time, the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth and issues which the Central Bank thinks cannot be relented.

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