Raghuram Rajan on bank privatisation and India's dream of a $5-trillion economy

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Former RBI Governor Raghuram Rajan cautioned that "drastic changes" in India's monetary policy framework can upset the bond market. The noted economist also opined on the government's $5-trillion economy dream and how it was "more aspirational, rather than a carefully computed one even before the pandemic". Here are some of the hard- hitting quotes from Rajan's interview.

"Drastic changes" in India's monetary policy framework

"I believe the (monetary policy) framework has helped bring inflation down, while giving the RBI some flexibility to support the economy. It is hard to think of what would have happened if we had to run such large fiscal deficits without such a framework in place."

Risk of upsetting the bond market

"We risk upsetting bond markets if we make drastic changes in the framework". "I think the framework has been beneficial in bringing down inflation, I don't think it has been costly in slowing growth, and this is probably the wrong time to make drastic changes."

On privatisation of two banks

"I think it would be a colossal mistake to sell the banks to industrial houses. It will also be politically infeasible to sell any decent-sized bank to foreign banks."

India's current macroeconomic situation

"When the economy shrinks 8 per cent, as it did in fiscal 2021, any rebound because of the end of lockdown coupled with ordinary growth and some pent-up demand can make the subsequent growth numbers look extraordinary. However, the true test of our resilience is not 2021-22 but 2022-23, when the numbers will be more reflective of our actual situation."

PM's dream of making India a $5 trillion economy

"The Prime Minister can use it to motivate people but policy makers need to base plans on a more realistic sense of where we are. I presume they are doing so."

Asset reconstruction Company and asset management company

"If its management has proper incentives, independence and adequate capital, it can improve the restructuring of bad assets significantly. "Poorly designed, the bad bank will just shift bad loans from one pocket of the government to another."

On banks' gross non-performing assets (GNPAs)

"Whether it needs another asset quality review (AQR) to do this, I don't know, but I certainly think the government should prioritise this issue. The low amounts set aside to capitalise PSU banks in the budget, despite the alarming rise in NPAs predicted by the RBI, indicates it needs to give this issue more weight."