Rajan sings a different tune, pitches for 'Make for India'

Calls for Budget sops to boost savings, says 'glide path' for inflation suits India well

As the Narendra Modi government goes on an overdrive in its  ‘Make  in India’ campaign, there is a word of advice from  Reserve Bank  of India (RBI) Governor Raghuram Rajan.

Amid the slowing of the world economy, Rajan on Friday cautioned the government against too much focus on merchandise export-led growth through this campaign and advised to supplement it with ‘Make for India’.

However, since domestic demand tends to get overstimulated, the government will have to frame suitable fiscal policies and RBI itself will have to ensure inflation remains  low, Rajan said in his Bharat Ram Memorial Lecture here.

He  said the path  of  disinflation may not be as  steep in India as in industrialised nations and disclosed that  RBI  will  talk to the government on the timeline beyond 2016 to keep inflation at four per cent, plus-minus two per cent.  

To finance domestic demand responsibly, he advised that it be financed primarily through internal  sources and suggested some more budgetary benefits  for savings in this regard.

The finance ministry has already started preparing for the Budget for 2016-17.

“The world is unlikely to be able to accommodate another export-led China,” Rajan said in his address, organised by industry body Ficci, in New Delhi on Friday.

Clarifying he was not suggesting pessimism for exports, he said, “I am counselling against an export-led strategy that involves subsidising exporters with cheap inputs, as well as an undervalued exchange rate, simply because it is unlikely to be very effective at this juncture.”

Rajan, formerl chief economic advisor in the finance ministry, said India would have to compete with China, which still has some surplus agricultural labour to draw on, when it decided to push manufacturing exports. “Export-led growth will not be as easy as it was for the Asian economies that took that path before us.”

Besides, industrial countries had themselves been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity was being “re-shored”, he said. “Any emerging market wanting to export manufacturing goods will have to contend with this new phenomenon.”

If external demand growth is likely to be muted, India has to produce for the internal market. “This means we have to work on creating the strongest sustainable unified market we can which requires a reduction in transaction costs of buying and selling across the country,” the governor said.

Improvements in the physical transportation network would help but so would fewer, but more efficient and competitive intermediaries in the supply chain from the producer to consumer, he said.

At a time when the Centre is struggling to evolve a consensus with states on the issue of a national goods & services tax (GST), Rajan said: “A well designed GST Bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.”

He also said the government would have to frame suitable fiscal policies and RBI itself would have to ensure inflation remained low, since domestic demand tends to get overstimulated.

He further pointed out that the path of disinflation might not be as steep in India as in developed nations and the glide path as advocated by the Urjit Patel committee suited the country.

He said RBI would consult the government on the timeline beyond 2016 to keep inflation at 4% (plus or minus 2%), and suggested domestic demand had to be financed responsibly, as far as possible through domestic savings.

“Our banking system is undergoing some stress. Our banks have to learn from past mistakes in project evaluation and structuring, as they finance the immense needs of the economy,” he advised. They (banks) would also have to improve their efficiency as they compete with new players like the recently licensed universal banks, as well as the soon-to-be licensed payment and small finance banks.

“At the same time, we should not make their task harder by creating impediments in the process of turning around, or recovering, stressed assets. RBI, the government, as well as courts have considerable work to do here,” Rajan said, pitching for financial inclusion and some Budget sops to boost savings.

“The income tax benefits for an individual to save were largely fixed in nominal terms until the recent Budget; this means the real value of the benefits has eroded. Some budgetary incentives for household savings could help ensure the country’s investment is largely financed from domestic savings,” he said.

Rajan said it was worth debating whether India needed more institutions to ensure deficits stayed within control and the quality of Budgets remained high.

“A number of countries have independent Budget offices and committees that opine on Budgets. These offices are especially important in scoring budgetary estimates, including unfunded long-term liabilities that industrial countries have shown are so easy to contract in times of growth, and hard to actually deliver.”

In addition to inflation, he said, a central bank had to pay attention to financial stability. This was a secondary objective but might become central if the economy entered a low-inflation credit and asset-price boom. “Financial stability sometimes means regulators, including the central bank, have to go against popular sentiment.”

The role of regulators was not to boost the Sensex but to ensure the underlying fundamentals of the economy and its financial system were sound enough for sustainable growth, he said. “Any positive consequences to the Sensex are welcome but are only a collateral benefit, not the objective.”

While emphasising on policies to attract foreign direct investment to fund the country’s current account deficit, Rajan said policies should not compromise India’s interests.

In this regard, Rajan said, the requirements to patent a medicine in India were perfectly reasonable, no matter what  international drug companies said. He also said policies should not focus only on FDI but promote young entrepreneurs, arguing “if we make it easier for young Indian companies to do business, we will also make it easier for foreign companies to invest, for both are outsiders to the system”.

This meant a transparent and quick legal process to deal with contractual disputes, and a proper system of bankruptcy to deal with distress — both issues the government had taken on, he said.

Noting that India did not belong to any power bloc, Rajan advised it, besides other emerging countries, to not only ensure quota reforms in the International Monetary Fund and the World Bank but inject new agenda, new ideas and new thinking into the global arena. “No longer will it suffice for India to simply object to industrial countries’ proposals; it will have to put some of its own on the table.”