Ill-conceived demonetisation, poorly executed GST major causes for slump in Indian economy: Raghuram Rajan

Former Reserve Bank of India governor Raghuram Rajan has said that India's fiscal deficit 'conceals' a lot and is probably pushing the country to the brink of a 'worrisome' situation.

While delivering OP Jindal lecture at Brown University, the former RBI governor said the uncertainty about the overall economic vision at the top rungs is causing deep distress in the Indian economy. "India has slowed considerably from the go-go years before the financial crisis, but even from the 9% growth in the first quarter of 2016."

According to a report in The Print, Rajan said, “India is losing its economic way, in part because it is centralising power without a persuasive economic vision. We risk wasting the demographic dividend,” he said.

India’s growth dipped to a six-year low of 5% in the April-June quarter and is likely to be at 5.3% in the July-September quarter.

The Index of Industrial Production numbers that came out on Friday saw August clocking the lowest figures in seven years, a negative growth of 1.1%.

Moody’s recently cut India’s GDP forecast for 2019-20 to 5.8% from the earlier estimate of 6.2%, attributing it to the deceleration of an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation.

RBI had last week cut the country’s growth forecast for FY20 to 6.1% from 6.8% estimated earlier.

The former central bank governor said the slide can be traced back to "legacy problems that haven't been solved." Even with the country's failing financial sector and a power sector that still needs immediate aid, Rajan said the real problem is that India hasn't been able to figure out "new sources of growth."

"India's financial stress should be seen as a symptom, rather than a sole cause," he said.

Raghuram Rajan attributed this slump to fall in investment, consumption, exports and the NBFC crisis, but said there were two major tipping points, an "ill-conceived demonetisation and the poorly executed GST roll-out."

Citing the example of demonetisation, the former governor blamed the centralised way the government made decisions, saying, "bold ideas by the top come out of the blue, and are not tested broadly, which can be seriously problematic."

“The sequence of demonetisation and GST was essentially the straw that seems to have broken the Indian economy’s back because it came at a point when the Indian economy was already relatively weak,” he said.

Rajan said the Modi government was more focussed on public welfare and distribution, instead of growth. However, he pointed out the difficulties in spending for such schemes during a time when revenue was clearly taking a big hit. "Something's got to give," he said.

"India has become too big an economy to run from the top, and recent experience has shown that it simply doesn't work," Rajan said.