Raghuram Rajan bats for Atal Bihari Vajpayee model of governance

Rajan said bank mergers are a step in the right direction but did not come at a right time

Former Reserve Bank of India (RBI) governor Raghuram Rajan has partly blamed a lack of “persuasive” vision and too much centralisation of power under the current government for the economic mess that the country is in today.

Delivering the O P Jindal lecture at Watson Institute, Brown University, Rajan also said the system does not accept people from the outside, but sectors like banking need outside expertise.

Rajan pointed out that the recent cut in corporation tax rates has been beneficial but the uncertainty in terms of changes in the tax regime becomes a dampener for firms. “We have a habit of going back and forth. The level of FDI (foreign direct investment) hasn’t changed much despite reforms,” he said.

On the RBI cutting the repo rate for the fifth consecutive time, he said the cuts won’t be passed on to customers as the banking system itself is stressed.

Rajan said bank mergers are a step in the right direction but did not come at a right time. “Bank mergers are coming at a time when the banks are dealing with high levels of NPAs (non-performing assets) and at a time the economy is slowing… Banks are going to be engulfed in managing the mergers over the next few years instead of focusing on making better loans,” he added.

Attacking the model of the Prime Minister’s Office (PMO) under the incumbent Narendra Modi and his predecessor Manmohan Singh, the former RBI governor advocated a middle ground, seen during the Atal Bihari Vajpayee tenure.

“What Modi has done is centralisation of power in the PMO whereas in contrast we had a system in UPA 1 and 2 where it was complete decentralisation of power. To me neither is good.

“What we perhaps need is a middle path, something of Vajpayee model of governance where ministries were free to take their decisions, but PMO wasn’t weak. Today what we have is a PMO which directly deals with bureaucrats bypassing the ministers while bureaucrats themselves are scared of taking big decisions due to this parallel anti-corruption campaign,” he said.

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

India’s economic growth slowed to a six-year low of 5 per cent in the quarter ended June 2019. “Growth has slowed considerably. The fiscal deficit is large, leaving little room to do much about growth,” said Rajan.

He said investment banks’ projections indicate there isn’t “going to be a rebound in the very short run”.

Rajan said the actual fiscal deficit may be much higher than the combined fiscal deficit of states and the Centre at 7 per cent.

“Revenue projections are very optimistic by most counts. What is less noted and something that the auditor general flagged is that a lot of borrowing is going on through off-balance sheet borrowings,” he said.

He said borrowings of the Food Corporation of India should be thought of as a part of the fiscal deficit and that the actual combined fiscal deficit has been pegged at 9-10 per cent by global investment firms.

The fiscal deficit is also under pressure because of a rise in contingent liabilities, he said.

Rising NPAs means banks will need more capitalisation. In addition, healthcare schemes like the Ayushman Bharat will require greater allocations in the Budget.