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Rupee devaluation not the right tool to boost exports: Raghuram Rajan

Linking the slowdown of Indian exports of goods and services with the broader trend seen in the emerging markets, Rajan said that India is better off in export of services.

rupee devaluation, raghuram rajan, rbi raghuram rajan, rbi banking, india exports, india economy rajan, business news, india news RBI governor Raghuram Rajan. (Express Photo by Prashant Nadkar)

While India’s exports of goods and services have slowed significantly over the last couple of years in line with the emerging market trend following a slowdown in global demand, RBI governor Raghuram Rajan dismissed the idea that devaluation of the currency would be the right tool to push it. He instead advocated on the need to improve productivity to achieve the objective of remaining competitive in the market and push export growth.

Watch | RBI Governor Raghuram Rajan Delivers The First RNG Lecture

[youtube https://www.youtube.com/watch?v=dAB17KRXTVk%5D

Stating that productivity can be improved by building infrastructure, improving human capital, vocational and on-the-job training, simplifying business regulation and taxation and improvement in access to finance, Rajan said while delivering the first Ramnath Goenka Lecture: “Fortunately, all this is what the government is focused on.”

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He also called for simply creating a good business environment that can support entrepreneurial activity. “Let us enable business activity but not try and impose too much design on it,” he said.

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Linking the slowdown of Indian exports of goods and services with the broader trend seen in the emerging markets, Rajan said that India is better off in export of services. While exports of goods have been much worse than goods exports from emerging markets, he said that India is doing fairly better in the growth of Indian service exports as the countries, like United States, to which India exports its services, are recovering more strongly.

Though demands from industry bodies have been growing amidst slowing export growth and they are urging the authorities to take some steps, Rajan looked to calm nerves and said, “India is not alone in suffering a fall-off in trade.” He added that if all countries are experiencing slower trade, the remedies may be beyond the control of Indian authorities. “While we can examine possible dumping in certain industries, we have to be careful that any remedies that increase prices in the protected industry do not render other domestic industries uncompetitive.”

While one demand has been to have a weaker currency in a bid to make its exports competitive, Rajan pointed that the rupee weakened by about 6 per cent against the dollar since the beginning of 2015 and while that depreciation should have helped our exports, but the fact remains that even other currencies depreciated against the dollar. “While we have gained an advantage versus US producers, other foreign producers may have become even more competitive because their exchange rate has depreciated more,” said Rajan.

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He added that while the nominal effective exchange rate has remained relatively flat since early 2015, the real effective exchange rate (nominal effective exchange rate adjusted for inflation) has been impacted by because of high inflation and that makes us slightly uncompetitive. Though he argued that in order to remain competitive, the rupee has to depreciate by the inflation differential vis-a-vis a trading partner, he did not advocate charting out on the of low exchange rate and said. “A sizeable portion of the investment made in the country based on an artificially low exchange rate will turn out to be uncompetitive when the exchange rate normalises,” Rajan said.

Stating that RBI only intervenes to prevent overshooting and undue volatility of the currency, he further added, “The ideal exchange rate for us is neither strong nor weak, it is just right.”

Arguing for other means to remain competitive, Rajan called for improving productivity and said that India can do so simply by reducing existing bottlenecks or by adoption of best practices. He said that productivity in India can improve simply if a better road is built from a factory to the rail head, or if the firm manages its inventories better. He thus argued that if India improves its productivity differential by 2 per cent each year, much of the real appreciation (exchange rates) that economists complain about will get offset by productivity differentials.

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He, however, called for orderly movement of rupee and said that macroeconomic stability, stable capital flows (long term capital flows and FDI money) and foreign exchange reserve are three key ingredients for the same. While the government and RBI is pushing for stable capital flows for the long term, he said that the foreign direct investment is set to hit an all-time high this year While it stood at $41.7 billion in 2007-08 (the highest in a year), it had already touched $38.7 billion for the 10-month period between April 2015 and January 2016.

 

First published on: 14-03-2016 at 12:53:49 am
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