Raghuram Rajan’s book out today: Sneak peek on what he writes about demonetisation, social media and more
A year after demitting office, RBI governor Raghuram Rajan has disclosed he did not favour the government’s move of scrapping high-value banknotes, saying that the short term economic costs would outweigh any longer term benefits from the move.
Rajan reveals this in his latest book – I do what I do – which will be launched in Chennai on Tuesday. The compilation of speeches he delivered on a wide range of issues as the RBI governor will be released in Delhi on September 7 and Mumbai on September 8.
Here’s what Rajan writes about demonetisation in the new book:
There is one issue, however, on which I have been asked many questions, which I have resolutely refused to answer until my period of silence is over, and that is the demonetisation that was announced in India in November 2016. The questions, which have reportedly also been asked by parliamentary committees, include when I knew about the possibility of demonetisation and what my view on it was. The press, quoting government sources, have variously reported that I was against it (in the early days of the demonetisation process) and that I was ‘on board’ (in the most recent reports).
My only public commentary on the issue of demonetisation was in response to a question in August 2014 at the Lalit Doshi Memorial Lecture. At that time, the matter had not been broached by the government. As the HT reported, “... Rajan said, ‘I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past, demonetisation has been thought of as a way of getting black money out of circulation. Because people then have to come and say ‘how do I have this 10 crores in cash sitting in my safe and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is, the clever find ways around it.’...”
Given that various stances have been attributed to me, including in Parliament, let me clarify. I was asked by the government in February 2016 for my views on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals. I made these views known in no uncertain terms. I was then asked to prepare a note, which the RBI put together and handed to the government. It outlined the potential costs and benefits of demonetisation, as well as alternatives that could achieve similar aims. If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed, and the time that preparation would take. The RBI flagged what would happen if preparation was inadequate.
The government then set up a committee to consider the issues. The deputy governor in charge of currency attended these meetings. At no point during my term was the RBI asked to make a decision on demonetisation.
Rajan enjoyed a mass appeal not normally associated with a central banker, a media darling as much for his intellectual calibre as for his handsome looks. Yet, he was wary of social media, often the preferred platform for motivated search for controversy. One of Rajan’s oft-misquoted lines, ‘in the land of the blind, the one-eyed man is king’, triggered a row, as social media plucked those words out of context. In the book, Rajan talks about social media and why the ‘one-eyed king’ controversy underlined the flippancy of the medium. Here are the excerpts:
Social media does take a life of its own. In its world of alternative truths, the reality can get grossly distorted. Occasionally, in a game resembling Chinese Whispers, each commentator opined on what they thought I had said, based on a previous commentator’s garbled version, without many bothering to find out what I actually said.
Speaking of being misunderstood, perhaps the greatest flak I got was for some comments I made at the end of a tiring day at the IMF meetings. I was being interviewed for MarketWatch by Greg Robb, whom I knew well. In the middle of a long interview, the question I was posed was:
MarketWatch: The Indian economy is the bright spot in the global economy. When other central bankers and finance ministers ask you for your secret sauce, what do you tell them?
My natural caution as a central banker as well as my concern that our recovery was work in progress suggested I should not boast. So here is what I said.
Rajan: Well, I think we’ve still to get to a place where we feel satisfied. We have this saying, ‘in the land of the blind, the one-eyed man is king.’ We’re a little bit that way. We feel things are turning to the point where we could achieve what we believe is our medium-run growth potential. Because things are falling into place. Investment is starting to pick up strongly. We have a fair degree of macro-stability. Of course, not immune to every shock, but immune to a fair number of shocks. The current account deficit is around 1 per cent. The fiscal deficit has come down and continues to come down and the government is firm on a consolidation path. Inflation has come down from 11 per cent to less than 5 per cent now. And interest rates therefore can also come down. We have an inflation targeting framework in place. So a bunch of good things have happened. There are still some things to do. Of course, structural reforms are ongoing. The government is engaged in bringing out a new bankruptcy code. There is goods and services tax on the anvil. But there is a lot of exciting stuff which is already happening. For example, just last week, I was fortunate to inaugurate a platform which allows mobile-to-mobile transfers from any bank account to any other bank account in the country. It is a public platform, so anybody can participate. It is not owned by any one company, unlike Apple Pay or Android Pay or whatever. I think it is the first of its kind. So technological developments are happening and making for a more, hopefully, reasonable life for a lot of people. Let’s see how it goes.
On any fair read of my entire answer, one would conclude that I was optimistic about India, not downplaying what was going on, even while recognizing we had work to do. But social media went to town after plucking just the following words out of the answer: ‘We have this saying, “in the land of the blind, the one-eyed man is king.” We’re a little bit that way.’ A couple of ministers, fed this quote, commented adversely on what I said. I was finally fed up of the perhaps motivated search for controversy. So I picked the National Institute of Bank Management Convocation on 20 April 2016 to say the following, cautioning on euphoria and ending by emphasizing once again the need for mutual respect and tolerance.
Rajan also forged a reputation of being an outspoken technocrat who articulated his views as effectively in private as he did in his public speeches. Did that make him an unconstrained critic of the government or its cheerleader? How did the media view him? Why did he feel a special responsibility towards the country’s youth? The risk manager par excellence opens up on what drove him in the new book. Here are the excerpts:
The Governor of the Reserve Bank is much more than just a regulator or a central banker. Since the RBI is both the lender of last resort, as well as the custodian of the country’s foreign exchange reserves, the Governor is the primary manager of macroeconomic risk in the country. If the Governor takes this role seriously, he (or she) has to warn when he fears the economy is in danger of going down the wrong path. As an apolitical technocrat, he can neither be a cheerleader for the government, nor can he be an unconstrained critic. This is a fine line to tread, and the Governor has to pick both the issues he speaks on, as well as the tone of his commentary, very carefully.
The mistake on all sides is to treat the RBI Governor as just another bureaucrat. If the Governor takes this mistaken view, he ends up being subservient to the central and state governments, and not offering an independent technocratic perspective that could keep the nation from straying into economic distress. The RBI Governor has to understand his role, and know it occasionally entails warning of macroeconomic risks from government actions or saying ‘No!’ firmly.
Every government tests what the RBI Governor will acquiesce to, and ideally, it will not push beyond a point, knowing that the RBI’s cautions are worth heeding. If the government takes the mistaken view that the RBI Governor is just another bureaucrat, it will be displeased when it sees the Governor deviating from the usually deferential behaviour of bureaucrats, and it will strive to cut him down to size. This does not serve the country either.
I was determined not to neglect my responsibilities as national risk manager, even while trying to explain to the government of the day why this was a necessary role. Where I had direct responsibility, this meant saying no in private occasionally, even while offering safer alternatives for what the government intended. Where I had indirect responsibility, this meant advising or counselling in private, and occasionally, when the issue merited a national debate, speaking in public. Of course, my past experience as Chief Economist of the International Monetary Fund, where my job was to identify macroeconomic risks across a variety of countries, gave me a unique cross-country perspective, and heightened my sense of responsibility.
I also felt this responsibility from a different source. Because of the relentless press attention, I realized that many young people who were looking for a role model now saw the Governor of the Reserve Bank as one they wanted to learn from and imitate. I felt I had to display the highest professional integrity, over and above the obviously necessary personal integrity, if I were to discharge my responsibility to these youth.
While the Governor has to warn about risks where necessary, he is not an agent for the opposition. He continues to be an essential part of the country’s administration, and his objectives have to be the broader government objectives of sustainable growth and development. The danger in a country that is unused to legitimate words of caution, and a press that is accustomed to deference from bureaucrats, is that it may misinterpret this role. A new narrative may form around the Governor. He can come to be seen by the press and social media as a critic, and every speech or comment of his is then scrutinized for evidence that supports the narrative. Should the Governor disappear from public view and not speak for fear of misinterpretation, or should he take the risk in order to discharge his responsibilities? I chose the latter, in part because I thought it was extremely important that our country should steer a stable path when surrounded by so much global risk, and in part because I thought young people (including my own younger staff at the RBI) should realize that it is important to speak up when one’s responsibilities demand it. I did, however, meet regularly with the government to share my views and listen to its point of view, and always left feeling that there was mutual understanding.
Given my risk manager’s perspective, and given that we were recovering from the currency turmoil, in my first speech on the economy I tried to talk up what was going on in India. However, I also had to respect the dharma of the central banker, and not indulge in excessive hype. Indeed, this swing from excessive euphoria to excessive pessimism and back was the subject of my speech at Harvard Business School in October 2013.
Rajan was in the middle of a clean-up of massive bad loans at state-run banks when he demitted office in September, 2016. Through his tenure, Rajan warned against recklessly exuberant lending, and finally launched the Asset Quality Review to force banks to square their books. Critics blamed the move for a slowing of credit from public sector banks. In his new book, Rajan reveals the key people behind the first major exercise to clean up bank balance sheets and the challenges he faced. Here are the excerpts:
In the absence of a functioning bankruptcy code, the RBI put together a number of schemes to facilitate bank resolution of distress. We repeatedly re-examined the schemes to see how they could be tweaked to facilitate resolution. Unfortunately, with the exception of a few hard-charging and conscientious bankers, the general mood among the bankers was to continue to extend and pretend. They feared they would be held accountable for any concession they made, and constantly (and perhaps understandably) avoided taking decisions. In this environment, the idea of a bad bank, funded by the government, that would take the loans off their books, kept cropping up. I just saw this as shifting loans from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters. Indeed, if the bad bank were in the public sector, the reluctance to act would merely be shifted to the bad bank. Why not instead infuse the capital that would be given to the bad bank directly into the public sector banks? Alternatively, if the bad bank were to be in the private sector, the reluctance of public sector banks to sell loans to the bad bank at a significant haircut would still prevail. Once again, it would solve nothing.
As we found banks reluctant to recognize problems, we decided not just to end forbearance but also to force them to clean up their balance sheets. The Asset Quality Review, initiated in 2015, was the first major exercise of this nature in India, ably led by Deputy Governor Mundra. I would especially highlight the role of two extremely polite and self-effacing but tough-as-nails ladies, Chief General Manager Parvathy Sundar and Executive Director Meena Hemchandra, who really energized their staff and assured them of their support at every turn. The young team they put together was tireless, and made me aware once again of what we are capable of if we put our minds to it.
Every situation of banking sector stress I have ever studied was fixed only by recognizing the problem, resolving the bad loans, and recapitalizing the banks. India was no exception, but once again there were a bunch of critics who claimed that cleaning up the bad loan problem was what led to the slowing of credit by the public sector banks. In a speech in June 2016 in Bengaluru, I made the case for the clean-up once again by asking these critics to actually look at data, which showed the slowdown started before the clean-up, probably as banks became aware of the magnitude of the problem.