Former RBI Governor Raghuram Rajan's policies led to the slowing down of the economy, Niti Aayog vice-chairman Rajiv Kumar said on Monday. He said the slowdown in the immediate aftermath of the demonetisation was caused by the RBI policies that had led to a drying up of loans for the industries, not because of the actual ban on Rs 500 and Rs 1000 notes.
"The slowing of growth rate in the post-demonetisation period was not due to the decision to ban notes, but because there was a declining trend in the economy. Starting from last quarter of 2015-16, the growth rate had come down for six successive quarters, he said in an interview with ANI news agency.
Kumar said Rajan's policies on stressed assets resulted in a steep rise in non-performing assets in the banking sector. Economic growth declined in tandem with the rising NPAs in the banking sector, he explained. "When this government came into office that figure was 4 lakh crore, it rose to 10.5 lakh crore by the middle of 2017 because under the previous RBI governor, Mr. Rajan, they had identified mechanisms to identify stressed and non-performing assets which is why the banks stopped giving credit to industries," he added.
An RBI report said last week that more than 99 percent of the Rs 500 and Rs 1000 notes that were withdrawn in November 2016 had returned. Critics of the note ban had used the data to argue that demonetisation was a failure and it had resulted in the slowing down of the economy.
The Niti Ayog chief brushes aside this line of argument, saying the dismal growth in credit was the real reason behind the falling economic growth. He pointed out that credit growth had fallen to 1-2 percent, with some quarters reflecting even negative growth.
This led to a drastic shrinking of credit for the small scale sector. Even for the large industries, growth shrank to 1.5 percent to 2 percent, he pointed out. "This has been the highest deleveraging of India's commercial sector in the country's economic history. Never had we seen such a continuous year after year of deleveraging of credit. This has been the primary reason for falling growth. The current government ramped up the public capital expenditure for the very raseon," Kumar said.
Rajan, who is widely acclaimed for having predicted the great global economic meltdown of the last decade, was a staunch critic of demonetisation. He has also said that he had cautioned the Narendra Modi government against implementing the note ban. "Demonetisation I think was not a well-planned, well thought-out useful exercise. And I told the government that when the idea was first mooted," Rajan told ET earlier this year.
