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Barkha Dutt
Barkha Dutt


Chest thumping will come back to haunt us

38-Raghuram-Rajan Informed choice: Former RBI governor Raghuram Rajan says a better option to curb black money would be to link all bank accounts with Aadhaar | PTI

Raghuram Rajan in conversation with Barkha Dutt

  • The government never made me an offer to stay on.

  • We have such a long way to go to even match the next BRICS country. We have to be much less boastful and much more focused on the work that needs to be done.

  • The position of the Reserve Bank governor hasn’t been clearly established within the system.

I last met Raghuram Rajan in the summer of 2016 in what would turn out to be his penultimate interview before his exit as the governor of the Reserve Bank of India. In sharp contrast to this week’s meeting on a balmy September afternoon in Chennai, I could sense how tightly wound up with tension Rajan was. “Oh no,” he had said then, as he took his chair to be miked up. “When I saw it’s your interview, I knew it wasn’t going to be a dull monetary policy conversation.” But despite the attempt at levity and humour, he weighed every word with caution—the interview was taking place amid fierce rumours that his term would not be extended and as attacks were being hurled at him for not being Indian enough. (Rajan is an American green card holder, but an Indian citizen.)

What was clear to me in that meeting was that Rajan had been open to a second term. As it turned out, he would end up being only the second Central bank governor since 1991 to not get the customary five years, in extension. After he left, Rajan imposed a one-year embargo on telling his own story, letting the theories around the why and what of his exit swirl around him with Zen-like silence. This year the quiet has been broken by a chart-busting book of essays, I Do What I Do, a compilation of all the public speeches he made in India, including the ones that landed him squarely in the middle of repeated controversies. Except that this time, he has a prologue and an epilogue to almost each one of them, looking back and ahead at what he said and what he meant.

Over a one-hour expansive conversation in one of his two hometowns—he considers Delhi, where he studied at the IIT to be the other—Rajan spoke to me of why he left, why he chose to go beyond economics to speak of tolerance and why he believes that his comment on the Indian economy being like a ‘one-eyed king in the land of the blind’ has been vindicated. And this time, he seemed much freer, more candid and much more himself.

Excerpts from the conversation:

Professor Rajan, why the one-year, self-imposed silence?

I thought it was appropriate for my successor to establish himself and to be able to communicate. It was inappropriate for me to hold on to the reins of the RBI. I still get complaints from a lot of people when the RBI doesn’t do something, asking me to fix it; it clearly takes some time for people to recognise that you have left office. So I thought the best way to do that was to stay out of the limelight and just go silent.

Why the book now, if you were steering clear of public attention?

I think I gave a year merely to create that gap. Now I am no longer the RBI governor. I am a professor and I think it’s important for two reasons to talk about what we did and what happened. I feel there are lots of young people, who are energised, who want to do something and I want to tell them that there are places in India where you can do something. I had a wonderful time at the Reserve Bank because I had a lot of freedom and I thought we accomplished a lot. I want to tell the story to energise people to engage in public service. We also did a lot of reforms that I would like to see continue.

Your speeches are in the public domain. What everyone will pick up this book for is how you explain the context of each one of them. Now, the introduction of the book, in which you talk about demonetisation, is making headlines. You say you need to clear the air on whether you were on board or not. You were clearly not on board. In fact, the phrase you use is that you expressed your reservations and warnings about the pitfalls in “no uncertain terms”. You then talk of how the RBI prepared a note and in that note you offered not just alternatives to demonetisation, but also the time period needed to implement demonetisation if the government went ahead. How did the government respond to your reservations?

The reason I talk about this—this is the only part of my relationship with the government that I am explicit about—is because I understand that Parliament has asked questions about it and my response has been recorded and it was important that I state for public record what the actual situation was, so that there is no ambiguity about what the RBI told the government. Having the truth out there in some sense is important. In response to a variety of sources from which the government got information, it set up a group in the finance ministry to which we sent a participant (a deputy governor) which then took forward the discussion on demonetisation after we sent this note. My hope was that if the government ever decided to go ahead, it would do what was necessary as we said.

And it did not….

It happened after I left office. But clearly, any monetary economist would say don’t do it until you have all the money printed.


(In the book you write)… the RBI note outlined the preparation that would be needed and the time it would take. The RBI flagged what would happen if the preparation was inadequate. May I ask you to elaborate a little bit on how much time you think would have been ideal—though you didn’t think demonetisation itself was ideal—if the government went ahead with it?

If you take a poll of monetary economists, they would tell you that on the day you actually do it, you should be prepared to replace as much currency as needed for transactions. So it’s not the entire currency you are withdrawing because some of that, you presume, is not held for transaction purposes. Not everyone can switch to electronic payments overnight. Because otherwise, it will cause a reduction in economic activity. Monetary economists say, be ready to replace on day one everything that was used for transactions.

But this is 86 per cent of the cash flow that we are talking about.

You would replace a significant fraction of that; not all 86 per cent, but enough so that anybody who wanted money would be able to take it out from ATMs.

A theme that comes up more than once in your book is the independence of the RBI. I think the phrase you use is, “We are not a fifth column in the government,” but you are very clear that the RBI governor must not be treated as “just another bureaucrat or a regulator”. I want to link this to the demonetisation debate. What a lot of people are now asking is: if Raghuram Rajan and the RBI were not in favour of demonetisation, who was and on whose advice did the government actually proceed with the decision? And given that it clearly bypassed the RBI, does that not undermine the independence of the RBI as an institution?

The real question is, can the government demonetise without the RBI and I think if you look at the 1978 experience, it actually brought in an ordinance without the Reserve Bank. So, ultimately, there are channels through which the government can bypass the RBI legally. There are some other issues on which it cannot, but on this one, it can. The RBI act also allows the government to give a directive to the RBI—this has never been exercised…. So, in that sense, I think your independence comes from the fact that these kinds of instruments are typically not used by the government and ultimately if the governor disagrees, I think [former governor] Dr Y.V. Reddy had a very interesting response to what he would have done! He said he would have gone into the hospital and then resigned…. Now some people can’t go to the hospital because they look the picture of health.

Would you have either checked into a hospital or resigned?

I think that’s a hypothetical question. I don’t want to answer that because if you are not faced with that situation, I think it’s easy to say that you would have done x or y.

The note did recommend alternatives. Since then you have spoken about how they could have been more effective measures to tackle black money, especially since most of it resides in real estate and gold and not even in cash at home. What were some of those alternatives?

I think the [cash] flow issue is something that is quite important and the government is taking some measures along those directions. For example, all bank accounts could be linked to Aadhaar, keeping in mind the privacy issues.

I was just going to ask you that. I don’t know if you have been following the raging privacy debate?

Absolutely. There are privacy issues but there are also issues of tax collection. So, so long as you make sure that every revenue officer cannot start fishing in that database and a lot of it is automated and you can only go into it when those suspicious transactions are flagged and ordinary citizen’s privacy is protected..., that is the way to reduce the flow.

But isn’t that the danger of what might happen now? And I say danger because, I remember being a kid in the 80s and 90s when the taxman was really powerful, you had a kind of the cusp of liberalisation reality where the taxman could come and raid you and ask questions and the whole neighbourhood would come out when the taxman visited. Now when the government says that not all the money that has returned to the banks is clean and many of these deposits are dodgy, is there a danger that we are returning to a kind of intrusive tax regime that militates against a promise of minimum government?

I do worry that when we undertake actions on behalf of the government we have to recognise that we are dealing with government employees as they are, not how we wish they would be. And we have to recognise the reality that there is some corruption in the government also. To give licence to some areas of government without checks and balances could, in fact, enhance corruption.

How would you assess today—knowing what you do and knowing that as RBI governor you did issue this health warning—the success or failure of demonetisation?

I think the positive impact on taxes we have to wait and see. I think the Economic Survey talked about new taxpayers; it talked about Rs 10,000 crore more. If it’s a first down payment, Rs 10,000 crore is fine. If it represents the sum of what we can expect to see, given the potential cost, that seems relatively small. I think if you look at digitisation, we saw a blip up and then it looked down after the stress period was over. We have to see what the long-term effects are. I feel UPI (unified payment interface) has benefited substantially, but UPI was in its very early days when demonetisation was done, so you would expect fairly strong growth, but I think there has been some contribution there. Now you have to weigh all this against the cost. India was growing at about 7.5 to 8 per cent at the point of demonetisation. We have come down substantially and some of this has been because of demonetisation. Remember the world economy is going stronger than it was at this [time] last year and in that sense we should be going up with the tide and should have moved up with the growth. In fact, it has moved down. So is this only because of demonetisation? Probably not.

What do you think?

I think there are three factors at this point: one is the stress in the banking system and the bad loan situation, the second is the demonetisation jhatka [shock] and the third is the anticipation of the goods and services tax (GST). At this point, our growth is not anything to write home about. Hopefully, these are temporary factors, but certainly we have to make sure that our business people feel more confident that there are no more surprises.

You had people like Dr Manmohan Singh and some other economists forecasting shaving off the growth figures by 1 or 2 per cent. We are down to a 5.7 per cent growth rate in the first quarter. Would you identify demonetisation as the biggest blow to the GDP in the last year?

I think it has been a fairly important setback in terms of short-term growth. I would argue that we haven’t measured some of the effects because it is in the informal economy which we don’t measure well. Reliable analysts who are independent tell me it’s between 1 and 2 per cent of the GDP.

You underline the fact that your disagreement and your warnings on demonetisation were expressed verbally and then followed up by a note that the RBI prepared. Do you believe that the government was receptive? Were there some people in agreement with you and some people who were not?

The government is a big place, but this was an exercise which, because of its very nature, was kept very small. So I think when I say the government, I communicated to anybody who was necessary to this exercise.

But has the RBI been undermined?

I don’t think the RBI has been undermined, because ultimately this decision belongs to the government. Now whether the actual process was followed and whether the RBI had a say at that point or not, that is beyond my regime.

You also talk about a bureaucracy that wants to whittle down the authority of the RBI governor and how the role needs a clearer definition. Your book mentions this more than once.

I think everybody wants to expand turf and if you want to do that, it comes at the expense of somebody else’s turf. This is not just my experience; it is the experience of previous RBI governors. There has always been a tension between the finance ministry and the RBI. The finance ministry likes to believe that the RBI is one of its organs, and the RBI correctly believes that it is a Central bank and not just another regulator who is at the beck and call of the ministry’s bureaucrats. There is always a constant tension about this partly because the position of the RBI governor hasn’t been clearly established within the system. On the one hand, you have chief ministers saying ‘sir’ to you, and on the other, you have secretaries claiming that they have authority over you.

43-BRICS Raghuram Rajan in conversation with Barkha Dutt| Vibi Job

How did you deal with it?

Where it was necessary, I asserted my authority. When it was something substantial, I drew the red lines. But the constant bickering is not particularly good. It takes away from the time you have to devote to more important things.

I just want to read out the operative bit from you book on this. “The RBI risks becoming dangerously weakened as successive governments and finance ministers misunderstand its role. The RBI governor is the technocrat with responsibility for the nation’s economic risk management and not simply another bureaucrat or regulator.” Can you share a specific example where you had to push back against bureaucratic interference?

Look, one example is of the FSLRC (Financial Sector Legislative Reforms Commission), which is the committee set up by the finance ministry which gave a set of recommendations, essentially creating an agenda for financial sector reform. There are some good things in that report, but there are also some things which have never been debated: take power from the Central bank, give it to someone else and create a mega regulator. I gave a speech on that saying, “If it ain’t broke, don’t fix it.” I think that’s an example of a report being used to change the reality on the ground; not because there is a genuine problem, but because you are essentially dealing with empire building.

Talking about speeches, you say some of your speeches were distorted by media and social media. But there is one particular speech where you referenced ‘Hitler’ while making a larger point and you say it was misconstrued to mean the Modi government. You write that if you knew that’s how it would have been viewed, you would not have used the same word. But, you do not express the same reservation about the ‘andho mein kaana raja (one-eyed king in the land of the blind)’ phrase, right? These phrases were used to say Raghuram Rajan is talking beyond monetary policy. He is exceeding his brief. How do you look back at these two phrases that returned to haunt you in some ways?

Let me take the ‘andho mein kaana raja’ comment. I said that sometime in April, 2016. Trace the progress of the Indian economy ever since I said that. Every quarter we have done worse.

Are you saying you were accurate?

I was trying to say, ‘Let’s not be complacent’. We have problems; our real problems start when we thump ourselves on the chest and say how well we are doing and then don’t pay attention to the fact that there is so much more to be done. I was in Beijing just before I came here. They have started asking, ‘Which is the fastest growing economy in the world now?’ These things, like the thumping of the chest, will come back to haunt you. Let others praise you, let others give you kudos. But don’t keep boasting, because the media will take it up for a little while, but investors remember. My point was—here’s some good stuff but we have to be careful that we are not complacent. And it was taken here as me being derisive; that was clearly not the intent.

But if you look back, that was the truth. We were being complacent then and we have not done so well since. And we have to reflect again what is that we are not doing to get our growth back to where it should belong, in the 9-10 per cent range rather than the 5-6 per cent range. We have such a long way to go to even match the next BRICS country. We have to be much less boastful and much more focused on the work that needs to be done.

On the other issue [reference to Hitler] I didn’t realise it. I had my speeches read by my PR team as well as my assistant and I didn’t realise that the word would get associated with the government. If you read the speech, it is about how India doesn’t have government capacity and we need to strengthen that. Instead, it got focused on authoritarian governments and that was not my intent.

But there is another speech you referenced, at IIT where you spoke about the larger theme of tolerance and you say in the book that you were actually underlining the great assimilative culture of India. But again it was seen to be a judgment on intolerance. But you had one fan in your son, who texted you to say you did well. Did that kind of endorsement make up for some of the political push back you faced? You said after some speeches there were a couple of ministers who were a bit angry.

You know, after that speech, a minister told me this is exactly what I have been saying. But, it is interesting that the IIT speech was seen as anti-government, when the government was not mentioned at all. It was really about emphasising India’s tradition for tolerance as important for its growth. I ultimately wanted to link it back to our economic prowess. We are in a situation where we have some advantages which some of our BRICS compatriots don’t have, which is free speech, democracy and a sense of vibrancy. These are going to be important for our growth.

Having a middle class which is innovative also means that they actually want to live there and that they feel unconstrained. It is important that we keep that environment. Otherwise, we are going to damage one of our greatest strengths. So, part of that speech was saying—let’s be careful about clamping down on all this. Sanjeev Sanyal, who is at the ministry of finance, wrote a book on this, how at times when India was open, it did its best. It was in a sense picking up on that theme. Of course, it is the kind of thing you want to tell children, that’s the message you want them to take away.

As a public servant, given that I had a platform, given that I was going back to my alma mater, what better message to convey to the youth of India, our future, that this is the India you want to build, not an intolerant India.

45-Rajan Fond farewell: Rajan with his wife, Radhika, leaving after addressing the students of St Stephens College, Delhi. It was his last public speech as RBI governor | PTI

I have seen some early critiques of your book, where some people have argued that this was not your role. That your role was to restrict yourself to monetary policy and not to talk about the history of tolerance and so on. How do you respond to the charge that you went beyond what you were put there for?

Well, I could have kept quiet and sat in a corner. I think as a public servant, you also have a public responsibility. That responsibility means that you typically don’t criticise the government. You can’t stay in the job if you have serious differences with the government. But it also means that when there is an environment in the public that has not been created by the government—but it emerges—then you have a duty to say that this is not the way we should go as a country. I felt that in none of my speeches was I criticising the government. If I did feel so strongly, I would’ve resigned. But, it was about the kind of environment and in my discussions with the powers, I always felt that they would suggest this was what they wanted.

They never asked you to tone it down or keep quiet?

No, they never told me to keep quiet or tone it down. This is what they thought they were saying as well.

Now, there is one thing that we have not resolved in this country, which is the issue of banks and bad loans. I remember when I met you before you left, the RBI and you spoke very strongly about how you needed to go public with your list of wilful defaulters. How do you see this Vijay Mallya phenomenon? I want to link this to a recent speech you made where you spoke of how when people see this crony capitalism and the fat cats that are able to get away, it hurts liberals everywhere and creates phenomena like the rise of Trump. We have fat cats here, who are partying it up while their ex-employees don’t get salaries. Do you feel regretful that you were not able to address that issue head on?

See, the RBI does not have an investigative arm. My focus was to speed up catching the genuine criminals in the system. And so, we made lists of the big frauds. We made a list and gave it to the PMO and said, ‘We have spent 4-5 years investigating some of these guys, where is the outcome of this kind of investigation?’ But I think for the system it would be great if we could catch one or two of these big frauds.... There was a discussion of the Enforcement Directorate looking at over-invoicing, which was rampant. Why didn’t we go after that? That was very easy to catch.

So why didn’t this happen? What was the push back you faced when you were there?

It is not the RBI governor’s job to do, but it is important to ask the question what happened to all those inquiries? Why hasn’t anybody been brought to book for allegations of over-invoicing? We had, a few years ago, discussions about CBI tapping into phone calls between bank managers and a certain company about money changing hands. What happened to that investigation? How come they all die in the process and nothing actually comes out in public?

So what would be your prescription on wilful defaulters?

We should restrict their access to credit from the system. There are people who borrow again and again. We have a tendency to look at individual loans and see if they went bad. I would rather focus on the loans given under a person’s tenure as chairman or on the loans a particular loan officer has signed off on.... If so many of them have gone bad, and there are a couple of banks which are in trouble because of the tenure of just one CEO, I would go after those guys and ask were they so totally incompetent or is there evidence? I would actually investigate them much more closely.

When you look back, what was the toughest time in your tenure?

I think the beginning was difficult, because when I was coming in from the finance ministry, we had tried a lot of things to stabilise the currency and nothing seemed to be working. I remember in the first few months I used to look at the value of the rupee every 10 seconds, on the flashing CNBC ticker. I used to look at it every time just to make sure it was not falling off.

Let’s talk about the elephant in the room. Nobody quite knows why you left. You have subsequently said there was no offer on the table and there was no agreement on terms between you and the government. There was a column by Karan Thapar suggesting that everyone had got it wrong; that you weren’t being punished; but the RBI was cutting into your time at the University of Chicago. Can you clear the air?

Look, I was at the end of a three-year term.

Since the 90s, most had served for five years.

It has been typical for things to be extended. But there was no obligation on the government’s part to extend my tenure, and similarly, there was no obligation on my part to stay on. I had expressed in my letter to my staff the desire to stay on to at least see what was in the works were completed. And, you know the government never made an offer to stay on. So that was where it ended. The University of Chicago was not the constraint.

Do you believe now that maybe the reason that the offer did not come was your opposition to, say, demonetisation, or the speeches you made?

It would be speculation for me answer; I have no idea.

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