In a strong disapproval of sector-specific sops, Reserve Bank Governor Raghuram Rajan has said “encouraging” any industry may be the surest way of killing it and policymakers should refrain from dictating the course of a business.
He also disagreed with the frequent demand made by industry bodies to the authorities to “do something”, such as lowering the value of rupee to boost merchandise exports and said the currency valuation might not be necessarily slowing down India’s trade volumes.
Rajan, known for being vocal on various macroeconomic issues, further said in a Project Syndicate article that advanced economies have been imposing risks on emerging market countries like India by pursuing aggressive monetary policies to stimulate demand.
“Indeed, one day we face surging capital inflows, as investors go into ‘risk-on’ mode, and outflows the next as they switch risk off,” he wrote.
“I am often asked — Which industries should we encourage? I would say that ‘encouraging’ any industry may be the surest way of killing it. Our job as policymakers is to enable business activity, not to dictate its course,” he said.
Rajan, the former Chief Economist at IMF, said India is trying to create a domestic platform of macroeconomic stability on which to build growth, so as to safeguard its markets from the external volatility.
He argued that India has managed a growth rate of over 7 per cent despite “inhospitable global growth conditions” and and two successive droughts, any of which would have thrown the economy into a tailspin in the past.
“The task is to build on this base… And, as advanced economies become more competitive, and as China moves up the value chain, more inputs are being sourced within countries. For all these reasons, the heady days of double-digit growth in Indian trade in goods and services will not return soon.
“Many emerging markets have been hit by lower prices for their commodity exports, but India’s exports of goods seem to be doing worse recently than those of other emerging markets.
“At the same time, India’s exports of services are doing somewhat better, perhaps because of demand from the US,” he said.
Rajan, who is currently in UK for a series of lectures including at the Cambridge University, said India is not alone in suffering a fall-off in trade, but “that does not stop industry bodies from demanding that the authorities ‘do something’ – especially by lowering the value of the rupee”.
Fall of nearly 6 per cent in rupee value against dollar since beginning of 2015 has not helped India’s merchandise exports much, as other currencies have also depreciated.
Besides, inflation in India remains higher than in most other countries, Rajan said, while adding that exchange rates are only one measure of competitiveness.
“Productivity also matters. In a rich country, firms typically can improve productivity only through innovation. In India, productivity can be improved simply by building a better road from a factory to the railhead,” Rajan said.
He further wrote the ideal exchange rate for India is neither strong nor weak, but it is the ‘Goldilocks rate’ produced by market forces.
Stating that RBI was focusing on attracting long-term capital inflows and intervening only to maintain orderly movement of the rupee versus other currencies, Rajan said, “To ensure such an orderly market, in good times we must resist the temptation to open up too much to short-term foreign-currency debt.
“Our rules now encourage investors in infrastructure and other projects with limited foreign earnings to issue Masala bonds (whereby Indian companies can borrow abroad in rupees), or to borrow long term, thereby limiting their risk when the exchange rate moves against them.