Raghuram Rajan says 80:20 scheme was launched to create jobs, combat gold crunch

Breaking his silence over the PNB fraud, former RBI governor Raghuram Rajan on Tuesday said that "before we assign blame, we have to know what really happened". "We need to look into how the PNB scam occurred and how the lapses happened," the former governor said in an interview to CNBC TV. Rajan's name was dragged after the BJP launched a scathing attack at former finance minister P Chidambaram for clearing a gold scheme days before the new government was to take charge at the Centre.

Last month, Union Law Minister Ravi Shankar Prasad in a press conference accused Chidambaram of favouring seven private companies, including Fire Star Diamond of Nirav Modi and Gitanjali Gems of Mehul Choksi, under the 80:20 gold scheme.

In an interview published in Moneycontrol, Rajan explained the reasons behind the liberalisation of gold import in 2013. Rajan said: "On the 80:20 gold scheme, remember the circumstances in which it was brought about. We had a foreign exchange crisis in 2013 and there was a great sense that the current account deficit was getting out of control, a big part of the current account deficit was big purchases of gold as real interest rates were strongly negative. So, when the public was moving into gold in a big way the government thought that perhaps one stop gap arrangement - a temporary arrangement would be to reduce the imports of gold."

Rajan added the scheme - as per which out of every 100 grams import of gold one had to re-export 20 grams - had a major effect in quelling the imports of gold.

The RBI in a circular issued on May 21 allowed the Premier Trading Houses and Star Trading Houses to import gold under the 20:80 scheme. Earlier, these private entities were permitted to import gold exclusively for the purpose of exports only.

When asked about the rationale behind the government's decision to allow new players, Rajan said: "I don't know what the rationale was. The Department of Trade in Commerce Ministry has a criterion to issue star trading houses premium trading houses licences. The whole objective was to bring down the premium that had built up due to constraints in the supply."

Firestar Diamond of Nirav Modi and Gitanjali Gems of Mehul Choksi are at the centre of over Rs 12,000 crore banking fraud.