Here is a full transcript of Raghuram Rajan's interview with NDTV:
NDTV: Hello and welcome to this NDTV special. Ever since he left India to go back to academia Raghuram Rajan has maintained a dignified silence on, to put it mildly, his eventful stint as RBI Governor until now, when he is in India to promote his new book 'I Do What I Do' and he has been on the front page of every single newspaper since he started giving those interviews. He now joins us on NDTV. Thanks very much indeed for being with us at NDTV. You're not surprised at all for the fact that you are on the front page of every single newspaper, given the context in which you left and in the context you returned.
Raghuram Rajan: I want to look forward and not dwell on the past. No, but there was a lot of attention when I used to be in the job as Governor because people thought that I will drop hints on monitory policies, but it still continues so there's something else.
NDTV: Before I go to the future I want to go back a little bit to the past. I want to begin as in the end which was your parting of ways with the government and your decision to go back. Now you must have read a Karan Thapar piece where he wrote that unimpeachable sources have told me that Mr Rajan was offered a two-year stint, however, his problem was his inability to get a further leave of absence for two years from Chicago University without losing his valuable tenure. True or false?
Raghuram Rajan: False because Chicago never put any restriction on me. They were happy to continue to grant me leave to the extent that I needed it. So that was never a constraint. I could have more leaves.
NDTV: Okay. So Chicago was happy to extend your turn?
Raghuram Rajan: Yes. They just wanted to know in advance because they had to plan for the new year.
NDTV: So were you surprised at this?
Raghuram Rajan: Well Karan and I had an email exchange on it. I told him off the record, since I was in silent mode, what the facts were.
NDTV: Okay. So if it wasn't Chicago then what was it?
Raghuram Rajan: Look, The reality is I had a three-year term. The term came to an end. So if there had to be a new term or an extension there had to be an agreement with the government. There was no agreement with the government. They didn't offer me a new contract and that's where it ended.
NDTV: But had they offered you a contract you were happy to stay on?
Raghuram Rajan: We were discussing what it might look like, but since there was no sense of what it might look like, so yes, that's where it ended.
NDTV: Because I remember you wrote in your farewell letter to the RBI, you said that inflation was the target zone. You were setting out some of the steps you had initiated and where we stood on that. You said inflation was on the target zone but monitory policy committee that will set monitory policy is yet to be formed. Moreover, the bank clean up, having already brought more credibility to bank balance sheets, is ongoing and said while I was open to seeing this developments through, on due reflection and after consultation with the government I want to share with you that I want to return to academia.
Raghuram Rajan: Very convoluted way of saying we didn't reach an agreement.
NDTV: No but it does suggest that you wanted to get rid of some of this unfinished agenda. It wasn't as if you were in a hurry to go back.
Raghuram Rajan: I was open. More than inflation, of course the committee was important. It has been structured very well. It was more the clean-up which I thought was extremely important and the delay would cause problems for the Indian economy if we didn't get the clean-up done on time. It required constant adjustment because we need to see what was working. If it wasn't working, bring something new so that we can make this process come to an end. It can't be a long drawn-out process because the banks actually feel the pressure.
NDTV: Sure. But then it requires a sustained monitoring and observation which you were planning to do.
Raghuram Rajan: Absolutely. And given that I had been there structuring these new structures with my team I had a good sense of how to carry it through.
NDTV: That's fair enough. So if it wasn't that what was it then? I mean why do you think they weren't keen on you?
Raghuram Rajan: I am the wrong guy to ask.
NDTV: Were you ever given an indication of it though?
Raghuram Rajan: I can't go into the details of our discussion but there was no agreement at the end.
NDTV: I want to ask you, on hindsight given now that we publicly know your views on demonetisation, that you weren't wildly enthused by it, do you think that could have been a factor?
Raghuram Rajan: Look again it's incorrect, improper for me to speculate because I don't know what the specific issues were.
NDTV: Right. Okay, let's look at demonetisation then because you have finally set the record straight on that and you do that right at the interaction, because you know that people like me would ask you a question on that right of the pad and you said a couple of things. One of the things you said is that you had an oral conversation on demonetisation. I believe this was somewhere around February 2016 with the government where you said that there might be long-term benefits, but you felt that the likely short term economic costs would outweigh them. You made these known in no uncertain terms. Subsequently you said in a separate note which the RBI sent to the government where you sort of outlined the pros and cons but clearly pointed out that this would need preparations; this would need a certain amount of time. So let me begin by asking you, that as far as the short term economic costs that you felt would outweigh the gains, what was of concern to you?
Raghuram Rajan: You know again I don't want to go into the details.
NDTV: No broadly.
Raghuram Rajan: Let me step back and say what monitory economists would think about when something like this happened. On one hand if you are not prepared on day one with all the currencies that are being replaced with new currencies, currency is important for economic activities. You cannot substitute it with cheques or credit cards. So in areas where you use the currency, would have a chilling of economic activities. You would see a dramatic slow-down of economic activities. That's number 1.
NDTV: Which is what has happened.
Raghuram Rajan: We have seen some evidence of it in the GDP numbers. But it is hard to attribute it precisely to how much demonetisation and how much other stuff. That's a concern.
A second factor that you have to worry about is this, we're saying there's been a chilling of economic activities that feeds into investments and so on, but also can put some companies out of businesses that are operating on relatively thin margins, thin buffers. They see sales plummet, they can't seem to ride out the storms so to speak. They go out of business. Now new companies would come in but in the short run there's disruption which extends to the medium term because these guys haven't been replaced quickly. Third element is effects on sentiments and investments. There's a concern that this is a part of a long drawn campaign, doesn't finish on this stage. There'll be investigations. How much does it affect consumption and investment is a concern.
NDTV: You are saying that these are the source of concerns that a monitory economist would have were you to take a step like that without fully working through. But as far as conveying it to the government can I ask you who in the government did you convey it to?
Raghuram Rajan: I think that'll be going into more detail than it is fair.
Raghuram Rajan: I have said before that it was conveyed, when I say in no uncertain terms, it was conveyed to whosoever it matters.
NDTV: Whoever would be taking those decisions presumably?
Raghuram Rajan: Whoever would be involved in the decisions.
NDTV: There's something I wanted to check with you which seemed to me some contradiction and correct me if I am wrong. You seem to suggest that part of the problem with demonetisation or a step like demonetisation is in the implementation aspect of it, the planning aspect of it. But separately, in another one of your lectures, which you referred to it in the book, you seem to suggest that the idea itself may not be the best way to solve the black money problem. You say and I quote, ''unfortunately my sense is that clever will find ways around it".
Raghuram Rajan: I think whatever I was talking to you just now as monitory economist was the effects on the economy. There's also this question of you catch the guys that you want to catch and do they find ways around it. I think the worst possible combination of circumstances will be where you don't catch the guys, but you still have the effects on economy.
NDTV: So then in a sense, when you say to the question do you catch the guys, you seem to have suggested in that lecture that actually it doesn't really work, because people break up black money into smaller bits and then filter it into the system, which essentially is what has happened.
Raghuram Rajan: In India working people have coined the word jugaad. We're pretty good at jugaad. So if you know India well you should recognise that a lot of jugaad happened, people will find ways around it. It's economic arbitrage with a touch of illegality about it.
NDTV: Right, so you are basically paying a cost to try and convert your black into white or you're basically entering it into the banking system?
Raghuram Rajan: Remember that cost if not caught is offset by the interest you're earning. That stuff was sitting in your basement and eroding at the inflation rate. Now you put it to the banking system or into the formal financial system. This is actually an important point that sometimes gets missed. People say we've formalised savings. They were financing the system anyway but in an interest-free way. The people who had cash were essentially funding the RBI and through the RBI funding the government. Once they put the cash back into the system they started earning interest on it, which is why in a sense the RBI dividend has gone down so much.
NDTV: The reason why I am going with all these with you because there was this confusion on when exactly the planning of demonetisation started. The impression was created that it started well in advance, perhaps during your tenure. But as you made amply clear in the book that wasn't the case
Raghuram Rajan: No let me be very clear, that what we have said in the book that after we gave our note a committee was set up and started the process of discussion. In my view it never came back to us that here is a decision that you've to make or here's the timing we want to do this scheme.
NDTV: So it didn't come back to you as a decision. A committee had been set up but the actual decision wasn't during your tenure?
Raghuram Rajan: As far as I understand.
NDTV: You left in September 2016
Raghuram Rajan: But preparations can go on without a decision or a date. Let us be prepared just in case.
NDTV: No the reason why I am asking it again, you left in September 2016 and boom, within a month or two months you have demonetisation. It seems like an extremely tight window to turn something around, something as you yourself say requires a lot of planning.
Raghuram Rajan: Well let me again say that the process of new notes for example, we had started the process of redesigning all the notes and the 2,000, the 500, the new 1,000, all of them sense in that sense had been approved by the RBI Board in May during my time. Now that was an input in the preparation process, if you will, though it wasn't explicitly considered as an input, because you have to replace new notes with old notes. Design takes time. That was done. To say that none of that was done will be incorrect, but to say that a monitory economist would want you print 100 per cent of the stuff that was taken out. We clearly weren't there.
NDTV: Right. Do you feel now, and I'm sure that gives you joy, that if you look at the impact of what it did to the economy if you look into the manner in which it was implemented, greater attention was paid to the cautious approach you were advocating.
Raghuram Rajan: Look we still don't know the full impact of demonetisation, that many of the benefits that are sometimes cited may be longer term. I think the single most important benefit that is cited is tax compliance. We still don't know what the reality there is. In short term we haven't seen an enormous increase. We've seen some increase being pointed out in the economic survey. So to offset the cost which people expect to be 1-2 per cent of GDP, let us say about 1.5 per cent of GDP, about 2 lakh crores, there has to be substantial amount of benefits in the line and if you ask, given the information that has come in till now, and ignoring any possible benefit or cost down the line, both of which can be there I think the answer at this moment is pretty obvious.
NDTV: You rather sort of leave it unsaid but it is pretty clear. The reason why I ask you is on the show that I do, we have systematically gone and looked at the claims that were made in favour of demonetisation. Goalposts kept moving. It started with black money, corruption and fake currency and then it moved to digitisation, the widening of the tax base, the formalisation of economy and none of the claims add up. Whatever has been the incremental gains, suggested or claimed, are no different from the trajectory in which all these parameters were growing in the past, like you mentioned the tax base for example, 25 per cent figure that was quoted, if you look at previous years, averaging roughly about that. In fact I think in the financial year prior to that it was 27 per cent. So it was a couple of percentage points higher. So you end up with the sense that what it was all about, perhaps somewhere down the line there was some mysterious undiscovered gain. But every single claim tested on the basis of facts which you value more than anyone else.
Raghuram Rajan: Here's what I would say is very important. Intent of the government to reduce the amount of black money, I won't say black money because that's really about stock, but to reduce the non-compliance is important. Finance Minister after Finance Minister has said that too few people pay taxes. We need to think what kind of measures we need to implement to bring up tax compliance. At the same time we also have to make sure that whatever we do we don't knock the economy for a six in doing that. So there's to be a process of thinking about various measures. One process which I like is, that is being implemented, is getting everybody to sign onto their account number so that numbers that can be duplicated, like the PAN numbers can't be left out. Now if everybody puts in their Aadhaar number you've a sense of what their holdings are. Yes there'll be children, grandchildren who also have holdings but at some theoretical level you can bring it all together, it becomes harder to hide stuff.
NDTV: Though there might be anti-Aadhaar advocates who would jump onto this but, anyways still less of a shock to the system than note ban
Raghuram Rajan: There's a privacy issue with Aadhaar which the Supreme Court has flagged and we've to be careful and do what is necessary. But for an economy which has been trying to recover, we've to worry subjecting it to many shocks. I am looking forward rather than looking backwards. Going forward we've to recognise that any fight against corruption has to take place in a context where we also want economic growth. We have to ensure that this is done in a reasonable way.
NDTV: I also want to ask you, quite apart from what demonetisation meant for the economy, many saw it as damaging, also hurting the institutional autonomy of the RBI. Is there a concern you share as well?
Raghuram Rajan: One of the things that is important is to understand what is an area which is entirely under RBI's domain and what is the area that the legislatures, the framers of the Constitution thought that the government could actually do itself.
NDTV: So demonetisation was almost under RBI's domain?
Raghuram Rajan: The previous demonetisation that was done in 1978 was done through an Ordinance, which the government found within its purview to do. It's possible for the government to do something to bring in an ordinance or a piece of legislation which demonetises notes. It is not something that the RBI can say we have the last word on this.
NDTV: Surely it wasn't only about that. It was about everything that followed, for example, the almost farcical level when it was impossible to get from RBI the sense of how many notes were counted. I mean the RBI was giving us regular updates till the middle of December and then it freezes. It comes in its annual report, which is also delayed. This has never happened.
Raghuram Rajan: It's hard for me to comment on all these reports.
NDTV: I've got a quote from your own book by the way. When you talk about RBI autonomy you say, and I'm quoting from your book, "If the government takes the mistaken view that the RBI Governor is just another bureaucrat it will be displeased if it sees the Governor deviating from the usual differential behaviour of the bureaucrat." and you also say as a counter that, "if the Governor has the same view, he ends up being subservient to Central and state governments and is not able to prevent economic distress."
Raghuram Rajan: Going back to the role of RBI Governor, you're tested many times. It's important to indicate where you will accommodate and where you will draw the line and once you draw a fairly clear line you're typically tested much less.
NDTV: You're again being politically very correct. You are speaking in generality but surely to some extent, you'd have felt a degree of concern of what's has happened to the RBI during this period?
Raghuram Rajan: It's difficult early on in any RBI Governor's tenure because it all come together. This demonetisation exercise is a bigger sort of challenge, coming into somebody's tenure so early is very difficult.
NDTV: He actually said that, "I will go on leave, if it is imposed on him".
Raghuram Rajan: I am just saying, to have such a huge event hit you so early on the tenure, it is difficult.
NDTV: Let's talk about the economy now, and where it stands partly because of this and partly because of other factors, like the growth is slowest in 13 quarters what is surprising to many; that macro-economic indicators seem alright for the government. You had low oil prices, inflation was relatively under control, fiscal deficit was under control, yet for whatever reason the economy seems to be slipping down. What do you think is going wrong?
Raghuram Rajan: One obvious effect that does not require much thinking is that tail wind that we got from lower commodity prices went tail wind. Every time the commodity prices went down it implied lower GDP growth, because we import the oil without us doing anything, every time that happened, you saw growth. The higher growth we have seen during that period was because of that.
NDTV: That was one fact.
Raghuram Rajan: Yes. That was one fact. The oomph that it gave was about 1.5 to 2 per cent of the GDP disappeared. The second is the overhang of the bank balance. Right from 2014 we have de-acceleration of the public sector bank credit as against the private sector bank credit which is zooming, that suggests clean-up was very important.
NDTV: It's not resolved yet. It's ongoing.
Raghuram Rajan: That's what I am saying, we should be focused on this as a pre-eminence task for us if we are get economy back on track, clean up, set the projects back on track to the extent possible, recapitalize the banks, these are some of the steps.
NDTV: Let me ask you, since the time you left and now did you see any improvement?
Raghuram Rajan: I think there is a very big structural change that is the Bankruptcy Code
Raghuram Rajan: A lot of re-negotiation that we we're trying to enhance was weakened by the fact that there was no Bankruptcy Code. Point of renegotiation of bankruptcies was, if you don't co-operate, I am going to take you to bankruptcy, that's when we will take everything. So now that we have a Bankruptcy Code, we need to operate it efficiently, this is big challenge.
NDTV: It's not that we did not have debt recovery tribunals. It's only that we did not have will, the rate of recovery was a fraction of the debt, about 10 per cent.
Raghuram Rajan: It's what I talk about in the book.
Raghuram Rajan: Absolutely, I think it is important that it is not weakened by all the tricks that entrepreneurs have, larger ones are finding the legal ways of emasculating the recovery process. We should resist that. Supreme Court is resisting the appeals. I think there are some good signs. It needs to be done regularly, if we show enough success here. It will have two effects, those entities cases will be resolved and those entities that have been holding out thinking they can avoid the process will start coming to the table for talking. I think this will accelerate.
NDTV: Numbers don't reflect it. Immediately after demonetisation no one actually thought banks will be flush with cash. We shall see a jump in lending. Credit continues to fall. In January it was the lowest since 1998.
Raghuram Rajan: Banks have been distracted by one distraction after another from focusing on clean up to focusing on credit. If you are spending time taking on notes and top management is worried about the process, that it can't be carried out properly and cleanly, the structures you need to do splits the focus. It's important that they be allowed to spend the time thinking how to straighten their banks.
NDTV: You mentioned the way the entrepreneurs have found the way of gaming the system; it is also about the culture, you spoken about it extensively in your lectures. IRMA was the benchmark kind of comment on that. You talked about the class of super promoters who want to take all the advantage of the upside, but don't want to take the hit when the ship is going down.
Raghuram Rajan: They have their own ships.
NDTV: Their own yacht. Do you see any of them? Do you see any sign of that changing? We in media don't.
Raghuram Rajan: The attempt to change the system as you said, we don't want. Many promoters have grown up in a system that is, we want to change the system where new flows are clean, if you push on that, you disrupt the old, you don't want to absolve, but you don't want put the system on hold. It's balance. So, focus on the cleaning up the new flows. Second possibility is pick up couple of egregious cases, the biggest cases, and make an example of these and then you send the message very strongly that it is inappropriate activity and we are going to turn you in.
NDTV: There is a perception in public that Mallya...
Raghuram Rajan: Key question is you cannot focus on one individual. One of the tricks was to over-invoice their assets; one can follow the money trail. It was buying stuff in your company and bringing it back in. Buying up everything from everyone else and pushes it back to the parent company at twice the price. If he over-paid the parent company by 52 per cent we identify that, how difficult is that? Clearly can we increase the pace. Part of the problem in India is Justice delayed, it becomes so much delayed that it is justice denied. Trail has gone cold. One of things we focused on during my tenure was to move quickly on the fraud cases, the problem in moving quickly is to point fingers at every around the loan rather than focus on criminals.
NDTV: Rather than carry the can for it. I want to ask, you talked about the hard drivers of economic growth, we tend to ignore the soft ones, free speech, right to dissent, tolerance, that you yourself have argued are important ingredients for growth, to make that point emphatically
Raghuram Rajan: Manufacturing led growth is becoming harder because the industrialised countries are insourcing the manufacturing more than they used to. It is not impossible but difficult. The way for us will be service led growth, maybe innovation led growth, it may be new universities, new think tanks. Such establishments all those require people who are intelligent, people who are able to think out of the box, which typically means they are going to speak up and speak out of turn as a society that encourages that and which we historically have. Sanjiv Sanyal in the Finance Ministry has written a book on that time, when we had best performance was when we were most open.
Raghuram Rajan: Given that, I would say we will be shooting ourselves in the foot in a sense, if we go back on that on that history of tolerance.
NDTV: We are going back brazenly. A journalist was shot and killed in Bengaluru and this is to many of us, not just in media, a reflection of the fact that narrowing of the space for tolerance.
Raghuram Rajan: First it is very unfortunate that the journalist has been killed, if it is in carrying out of their duties and at the time it is early before we know who did this and why jump to conclusions of who and why. I would say let investigations be over.
NDTV: I agree with you, there is a context. Dr Sen who has coined the term 'argumentative Indian' has expressed his own anxiety that there is narrowing of that tolerance.
Raghuram Rajan: Let me put it this way, we have to be vigilant, that we don't narrow the space for discussion. Let us not be overly worried that we are going only in one direction. Supreme Court's judgement on right to privacy was splendid in opening up to some extent the arguments that Indians have. In US for example one of the things that have been comforting is that institutions have sat up and taken up....
NDTV: I can't agree more on this. But the Supreme Court verdict was bit of an isolated one; was a huge relief for most of us about the way things were. I am not taking away from you your nuanced approach, you speak up on tolerance; you speak about intolerance and 10 people jump up saying it critical about the country. This is not appreciating the freedom that India gives you and that explains the case.
Raghuram Rajan: I think we should not let our dialogue be governed by the idiosyncrasies; we should be prepared that anybody can shoot out a tweet or a response on the internet; I have had whole lot of people saying things.
NDTV: This was not just people on the Twitter, people like government ministers had taken to Twitter on some of the things you have said, for example your famous, "In the kingdom of blind a one eyed man is the king" comment.
Raghuram Rajan: When that comment was made it was taken out of context and fed to people, had immediate reactions to it taken of context. It had to be read in full that said "I don't want to downplay the concerns you raised as it has been said many times, eternal vigilance is the price of the liberty, we have to be vigilant that our fundamental ability to speak is not ground out by the voices that are more narrow minded"
NDTV: Some of the analysis of what's happening in India links it to the US, who in a sense left in the Obama-era and returned in the Trump era. The advent of strongman politics of populist nationalism, you also mentioned this in lecture, have economic implications you interestingly argued that populist nationalism feeds crony capitalism, it is counter to the rhetoric of the demagogue who says I am coming in, am draining the swamp, cleaning up the old establishment cronyism. You argue that it makes thing worse.
Raghuram Rajan: What I worry about is if you say America for Americans, than you defining them as a sub-set of people who consider themselves as Americans, then start taking policies that benefit that sub-set, for example the protectionism. Once you go for protectionism, who do you protect? Then your friends and relatives become more attractive to protect than the strangers you don't know much about.
Raghuram Rajan: Then you see beginning of some kind of cronyism. The whole license-permit Raj we had here or the substitution Raj problem, with that was who got the protection? It was the guy who was well connected and that's when the efficiency of the economic system breaks down as tradeoff for the rhetoric.
NDTV: It doesn't necessarily mean so called strongman kind of politics plays on the idea of identity politics or populist nationalism necessarily makes things better.
Raghuram Rajan: Everyone wants to look like you, every strong man economy wants to be like you, but you could be like Mobuto Siseko, which was also a strong man economy. The reality is transparency, openness, working on ensuring that everybody is capable of working in an economy these all leads to stronger and equitable growth.
NDTV: Rather try to set up barriers and walls.
Raghuram Rajan: These benefit specific elements. One of the reasons for the rise of populist nationalist is the victimisation of the majority community. In every country you see it is oh these guys are pampered and we are victimised, you see this in the US in a very big way. We need to worry about it as it does create, in the longer run, bad economics.
NDTV: We just had the example of nativism in the economic domain with the newly appointed NITI Aayog chief talking about Anglo-American policy makers, naming you and Dr Panagariya. This is a new India; rich people have been shown the door?
Raghuram Rajan: I don't want to talk about specific personalities. With Rajiv, we have had some very good conversations in the past, what has changed him dramatically? I would like to go back to Deng Zhaou Peng, who said it does not matter whether the cat is black or white so long as it catches mice.
Raghuram Rajan: If we have to grow as a country, we are not overflowing with talent, we have undoubtedly very strong people in India, but we need people we can get. We had two economists, they had ten.
NDTV: I find that weird as he himself is an Oxford train economist. How many years abroad, how many stamps on the passport?
Raghuram Rajan: We are in the La la land when you talk like that. Everyone who says you have not lived in a village for 20 years, how can you be any better than anybody who is from San Francisco? I think we get into the realm of silliness when we discuss these things. There are some areas where you need to know the Indian system very well. Clearly there are some areas, where you are not captured by the system, makes you better. You can merge both, there are things you can learn and there are things you can teach.
NDTV: Another great admirer of yours, Dr Subramanian Swamy, who raised doubts you are mentally Indian.
Raghuram Rajan: I think we should go to a more useful subject.
NDTV: In conclusion, do you have any regrets? You were setting off on a journey to try and fix the system that you would know more than I would, that are, could not be completed?
Raghuram Rajan: I think 90 per cent of what we had set out for,100 per cent of what we laid as a programme; much of what we thought we could do we did, including after my letter that I was moving on, we did. Inflation was below 5 per cent in the months before I left. New banks have come up, Reserves have got added; young people have been enthused. I have no regrets.