When there’s no trick left to defend a spectacularly failed experiment, blame Raghuram Rajan.
If India’s top policy think tankis to be believed, the reason economic growth faltered last year, reaching5.6percent in the Junequarter after 7.6percent nine months earlier, had nothing to do with the November 2016 ban on 86 percent of the country’s cash.
The decline had been in the making since early 2016 because, under Rajan’s governorship of the Reserve Bank of India, the central bank devised “mechanisms to identify stressed and non-performing assets, which is why the banks stopped giving credit to industries,” Rajiv Kumar, vice chairman of state-controlled NITI Aayog, said on Monday.
Kumar’s premise seems to be that had Rajan not forced banks to make a clean breast of their bad loans, they wouldn’t have faced a capital shortfall. What Kumar called the greatest deleveraging of commercial bank creditin India’s historycould thus have been avoided.
The political compulsionto defend demonetization isunderstandable. Recent central-bank data showed that 99.3 percent of the currency made worthless waseventually returned to banks. To the extent one of the stated goals of the exercise was to immobilize so-called black money–wealth that dare not join the formal banking system because it’s ill-gotten –the draconian experiment came a cropper.
The opposition Congress Party, meanwhile, had always claimed that the ill-conceived move, as well as causing immense direct hardship,alsocratered the economy. With general elections due next year, officials therefore have to help the government deal with the charge that it sacrificed twopercentage points of economic growth for …nothing.
Hence the impulse toshift the blame to Rajan.
Leave asidethe problematic idea implicit in Kumar’s argument that it’s somehow wrong for a banking regulator to make banks tell the truth.Focus instead on hisfactual claim about corporate deleveraging.
It happens that during thequarter that ended in September 2016, which is whenRajan abruptly left the RBI after oneterm, commercial creditby Indian banks expanded by10.8 percent, the fastest growth in more than two years. The next quarter, afterPrime Minister Narendra Modioutlawed most of India’s cash, credit growth slowedto 4 percent. After a dead-cat bounce itstayed depressed for most of last year.
Kumar could well have argued that India’s new GDP data aretoo unreliable to concludethat demonetization didcause a two-point slowdown. It would have been impossible to prove him wrong. But if deleveraging is his story, thenbanks’ pulling back thesupply of credit doesn’t wash. It’s more plausible that demand for credit slowed last year after the note ban –followed quickly bya botchedgoods and services tax – disrupted supply chains, hittingsmall businesses and exporters especially hard.
Asfor the charge that Rajanpushed India into an abyss of deleveraging, some state-run banks may have become zombies, but themarket hasn’t stood still.
Specialist lenders like AUSmall Finance Bank Ltd., which receivedlicenses under a category started by Rajan,are taking over retail credit. They’re packaging and selling loansto state-run lenders, which still have large branch networks anddeposits. Securitization markets wobbled last year aftermicro-finance loan portfolios were hit by demonetization. But with cash coming back into the economy, transactionsdoubled in the June quarter.
Even if the Modigovernment never admits that its war on cash was an all-round disaster, to use Rajan as a scapegoatis more than a little silly.