While stating that the Reserve Bank had communicated to the government that the short-term costs of demonetisation would outweigh the long-term benefits, former RBI Governor Raghuram Rajan on Thursday said that going ahead, the focus should be on stuck infrastructure projects, power sector and exports to stimulate economic growth.
Rajan also said that one should not be pessimistic that good times are over but there is need to worry, especially if the rate of job creation doesn’t match the rate of new entrants in labour force.
“One shouldn’t be so pessimistic. I think they can come back but we should be worried. One of the things that has been touted in the last few years has been population dividend, all these young people coming into labour force. If they don’t get jobs and they get frustrated, that creates a very unhealthy climate and can impede growth,” he said.
Speaking at the launch of his book: I do What I do, Rajan said that infrastructure is the lever that the government can push harder. “People tell me, for example, land acquisition is once again becoming an impediment, can we solve that? Can we get the priorities together using new found political capital and say let’s do this. How do we do this in a way that it reduced the impediments to progress?” he said.
Listing the second “extremely important” area as power, Rajan questioned that in a country, which is supposed to have surplus power generation capacity, why is it that there are still large areas which don’t have 24×7 power. “Power producers are in great difficulty because they can’t sell their power and the problem is we still have the problem of the distribution of firms sitting in the middle, which still are unhealthy and are making large losses … UDAY has gone some way in financial engineering, let it also go further in terms of reducing the line losses as well as the tariffs,” he said.
He said that India’s exports should ideally pick when exports are growing in rest of Asia. “Earlier we used to say that the rest of the world is growing slowly, but rest of Asia is seeing its exports grow. So what is happening to our exports. How much is it because our small and medium industries in exports being in difficulty because of the series of hits that they have taken … why is it that we are not pushing exports stronger than we have to. After all, that was what Make in India was about. Why are we not doing more than that?” Rajan said. He added that the argument that Make in India would lead to export-led growth hasn’t worked as “export-led growth has been thus far, measured by exports, a failure”.
Rajan said that the single strongest indicator that we are back on track will be private investment. “Let the industrialists talk about how happy they are about the world and where we are etc, but check what they do with their money. If they are putting in their investment on the ground, then we will be confident that things are back on track,” he said.
He said that there are benefits of demonetisation in terms of more potential taxes, but also costs in terms of more possible harassment. “The money has come back as deposits, that doesn’t necessarily mean that’s the end of story. You can still investigate where the money came from but that we don’t know how much will come from that investigation process. And how onerous it would be for the innocent who brought their money back into the system,” he said.
He also pointed out that the lower dividend by the RBI to the government is a fallout of the interest being paid on the deposits, which were lying as interest-free cash before demonetisation. “Money sitting in basements has come back into banks and you are paying interest on it. That’s a cost to the RBI because it was being funded by cash on which it doesn’t pay interest and now effectively you have to pay interest on that. Around Rs 3-4 lakh crore, which was sitting outside, multiplied by 6-6.5 per cent interest is Rs 20,000-22,000 crore, which is the outflow,” he said.
He said this would have an effect on the Budget in the coming years as well. “They now have deposits in the banks, they have moved to mutual funds, it’s become financialised and now you are paying interest to them. So the public was generously financing the government interest free, no longer doing that.
Now you have to find essentially the money to pay them that interest which is why it is a hit to Budget not only this year, but also going forward,” he said.
Source: indianexpress.com