Niti Aayog Vice-Chairman Rajiv Kumar has delivered an almost unprecedented defence of demonetisation and has put forth an alternate line of argument about India's growth story under the Modi government, rubbishing the notion that the note-ban caused a slowdown and instead ascribing it to the manner in which NPAs have 'grown' in the last few years.

Answering questions concerning the two big reveals regarding India's economy from the last week -- that 99.3% of the total value of invalidated Rs 500 and Rs 1000 notes at the time of demonetisation (November 8, 2016) have made their way back to the RBI, and that India's GDP is estimated to have grown at 8.2% in Q1 2018-19 -- Rajiv Kumar challenged the views of a number of opposition parties, particularly those of the Congress party which has called Demonetisation a failure, and via former Finance Minister P Chidambaram, delivered a lower projection for GDP growth in coming quarters crediting the recent high number to a low-base effect.

ON DEMONETISATION BEING A 'FAILURE' BECAUSE OF 99.3% FIGURE

In response to the 99.3% demonetised cash making its way back to the Central Bank, Kumar said that "RBI's report doesn't say demonetisation didn't have an effect on the black economy and cash transactions. It only says that Rs 13,000 crore didn't come back." 

In consonance with what Finance Minister Arun Jaitley had said earlier about cash deposited in banks leading to the anonymity of the depositor disappearing, Kumar went on to make a strong statement regarding demonetisation's efficacy in terms of a black money crackdown:

"Another important statistic is that till now, Rs. 23,942 crore have been seized by tax authorities. Adding the two, it's nearly Rs. 40,000 crore. Apart from these, over 18 lakh accounts have been made suspicious accounts and Rs 3.5-4 lakh accounts are being probed using data analytics. As per this, Rs. 9.4 lakh crores are such that if probe is held, more money will come. At least there are Rs 1.5 lakh crores that will return because of Demonetisation."

The chief of the body that succeeded India's Planning Commission also elaborated on the other benefits of demonetisation:

"Because of Demonetisation, culture of cheating and being flagrant has come to and end. Probity, integrity and honesty have been given a fillip and that's why the common public has supported -- that those who earn money legitimately will be able to breathe easy and those who don't will face difficulty."

He remarked on the increase in tax compliance that demonetisation had effected, something that Jaitley had called the larger goal of the move, while writing about it in his blog post:

"This (demonetisation's effect) is why our Income Tax returns have increased so much from 3.5 crore to almost 7 crore. People attributing growth to Pay Commission are wrong. Tax returns hadn't grown with the Sixth Pay Commission. Demonetisation has caused a positive effect and in our economy, a morality has returned, and also, those who don't abide by this won't be able to rest easy as they'd always be scared that their money would be caught."

'THOSE WHO TALK AGAINST DEMONETISATION HAVE BEEN DIRECTLY HIT'

Rajiv Kumar also took on the specific claim made by P Chidambaram that cash in the economy had actually increased by 1.4%, and went on to make a charge against demonetisation's critics:

"As about cash, I heard that Chidambaram said cash in the economy has increased by 1.4%. This was obviously going to happen. But what he didn't say is that our economy, in those two years, has grown by more 14-15% in nominal terms. So when the economy grows, cash will grow. What must be seen is Cash-GDP ratio, which has decreased by 1.5%. It's now around 10.8%, and it'll continue to decrease because of digital transactions. This is demonetisation's effect. I believe those who talk against demonetisation are those who have been directly hit because of it and who don't want that honesty comes to our economic systems."

'SLOWDOWN BECAUSE OF NPA-RELATED TREND, NOT DEMONETISATION'

Coming to the charge that demonetisation caused a slowdown in India's GDP growth, something that hadn't been challenged up till this time -- merely called 'transient' -- Rajiv Kumar said that the growth was slowing down anyway, because of the NPAs increasing and resulting crackdown:

"If you look at the six quarters before demonetisation, growth was slowing. It was a trend. This trend happened because at that time, the NPAs increased from Rs 4.5 lakh crore to Rs 10 lakh crore -- these were brought before us -- and a crackdown was initiated, and the banks' ability to give credit came down. Credit being given to Large and Medium industries came down fast. Hence, growth came down not because of demonetisation, but because of the bad situation of banks. To say that it was because of demonetisation is completely wrong."

CHALLENGING CHIDAMBARAM'S 'LOW BASE' EXPLANATION

While he would speak about this in greater detail later, naming former RBI Governor Raghuram Rajan, Kumar first returned to Chidambaram's 'low base' explanation:

"I disagree with Chidambaram's base effect. Chidambaram knows that 5.7% isn't a low base. When one talks about low base, one normally says negative growth or a very low base. 5.7% was the culmination of a downward trend. To say that it's a low base is being illogical. Within 8.2% GDP growth, agriculture has grown by 5.3% on a base of 3.2% which is a very high base because average long-term growth of agriculture is around 2.5%."

He turned the tables on the senior Congress leader, stating that Chidambaram should instead have noticed that this latest GDP figure came against the backdrop of a decline in the growth rate of public expenditure:

"What Chidambaram should have noticed is that this growth has been despite the decline in growth rate of public expenditure. If you look at public infrastructure, that growth rate has declined."

FORECASTING EVEN HIGHER GROWTH BECAUSE OF PUBLIC EXPENDITURE

Proceeding from there, Rajiv Kumar stated that subsequent quarters could have an even higher growth rate because public expenditure will rise:

"Hence, I feel assured that this growth rate will be even better in coming quarters rather than lower. And also, from April-June 2017, every quarter's growth rate has been higher than the previous quarter. There's a momentum now in the growth rate and this will continue because I'm sure that govt will ensure that public expenditure continues to be on a rising trajectory because our fiscal position is very sound."

Coming back to NPAs and MSMEs defaulting, he explained what the scenario was like, but gave a very positive roadmap:

"There had been a 20% growth in their NPAs in 2017-18. But we know this... if all commercial banks start pulling back their credit and they fall short on their working capital, then their growth will slow. But now, MSME's are picking up and the statistics about these are yet to come. Hence, in coming quarters, certain smaller cities and towns will show a quickening in growth and capacity will also increase."

8.3-8.4% Q2 GDP GROWTH FORECAST

Upon being asked about a snap poll of top CEOs and leaders affiliated to the CII (Confederation of Indian Industry) in which the Modi government had been given a major endorsement, and the participants had given positive hiring outlooks, Rajiv Kumar spoke about the 13.5% growth rate recorded by the manufacturing sector:

"Our second engine, which was stopped for two years, has been ignited. So those who say 8.2% will slow in coming quarters, they're wrong. The confidence and forecast of CEOs that hiring and employment will rise is a big deal and critics should keep this in mind."

To this he added a stunning GDP growth rate prediction for the coming quarter:

"I don't think any weakness will come in our economic growth and I feel in the coming quarter our growth rate will be between 8.3-8.4%."

QUESTIONING RAGHURAM RAJAN'S NPA POLICY

Finally, he was asked once again about the recent narrative on India's economy, i.e. that demonetisation had led to a slowdown, and he elaborated on the role of the NPA detection mechanism that had been instituted by the central bank under former Governor Rajan:

"This is a false narrative and leading economists like Chidambaram and our former PM (Manmohan Singh) added to this, because if you look at growth rate statistics you'll find that in the post-demonetisation period, growth rate came down not because of demonetisation but because there was a declining trend for the last six quarters. It was simply the continuation of a trend and not because of a shock given to it by demonetisation as has been claimed."

"Nobody's brought evidence to show there's been a direct link between demonetisation and slow growth rate. And that slowdown was because of the rising NPAs in the banking sector. When this government came, that figure was about Rs 4 lakh crore. It rose to Rs 10.5 lakh crore by mid-2017, because under the previous governor, Mr Raghuram Rajan, they had instituted new mechanisms to identify stressed and non-performing assets and these continued to grow, and because of this the banking sector stopped giving credit to the industry."

"In fact, in MSMEs their credit actually shrank, it was a negative growth in some years, and even in large industries, it came down to a measly 1% and 2.5% and sometimes even negative. This has been the instance of historically the highest deleveraging of commercial credit to the industry in India's economic history. Never have we seen such a continuous and persistent year-after-year deleveraging of credit. That's the cause for the slowdown of growth. And this is what's been compensated for by ramping up of public expenditure."

ON HIGH FUEL PRICES

Finally, he also integrated an aspect regarding the criticism the government has come under over all-time-high prevailing fuel prices, while delivering a positive outlook for India's economy:

"People ask how government used its oil revenue bonanza. It used it precisely in ramping up the capital expenditure and yet at the same time maintaining fiscal prudence. So it has been because of the government that you've now seen a rise in quarterly growth rate quarter-after-quarter since Q2 2017-18 and now you've come to 8.2 and since it's a momentum that's carrying, I think it'll carry forward and we'll achieve higher growth rates as we go ahead."

Here are Niti Aayog Vice Chairman Rajiv Kumar's full remarks: