India to run current account deficit for foreseeable future: Rajan

RBI's focus on keeping inflation low and stable, says Raghuram Rajan

An article by Reserve Bank of India Governor Raghuram Rajan, released on Monday, says that he sees India running a current account deficit in the foreseeable future, needing net foreign financing. Rajan's forecast comes a day before the central bank's bi-monthly monetary policy review, due on Tuesday.

“The most stable form of financing, foreign direct investment (FDI), has the additional benefit of bringing in new technologies and methods. But India should not be railroaded into compromising its interests to attract FDI,” Rajan said in an essay titled “Maintaining Growth in India” on the Project Syndicate website.

Elaborating on the FDI theme, Rajan said: “India’s requirements for patenting a medicine are perfectly reasonable, regardless of what the international drug companies say. But India must ensure that its policies are transparent, and that contractual disputes, especially over taxation, are quickly resolved. Efforts to ensure this have already begun.”

On the monetary side, RBI should “focus on keeping inflation low and stable, ensuring optimal conditions for growth.” According to him, to combat inflation, RBI must recognise that “emerging markets are not as resilient as industrial economies. They are more fragile, and their households’ economic buffers and safety nets are thinner. Disinflation, when necessary, cannot be as steep.”

Rajan said fiscal prudence was essential in managing the government’s finances. “Whether India needs more institutions to control deficits and monitor the quality of its budgets is a question worthy of discussion. A number of countries have independent organs that pronounce on budgets. These bodies are especially important in providing budgetary estimates, particularly for un-funded long-term liabilities. As the experience of developed countries has shown, long-term fiscal commitments, such as universal pensions and health care, can be easy to make, but difficult to fulfil,” he added.

He also dwelled on the theme of financial stability. “The RBI will also have to pay attention to financial stability. This is normally a secondary objective, but it may become central if the economy enters a low-inflation credit and asset-price boom. It will be important to remember that the central bank’s role is not to boost stock prices, but to ensure that the economy’s underlying fundamentals and its financial system enable sustainable growth,” he said.

India does not export vital natural resources and is dependent on substantial commodity imports, so it needs an open, competitive, vibrant system of international trade and finance.

“India’s energy security, for example, depends not on owning oil assets in remote fragile countries, but on ensuring that the global oil market works well and is not disrupted. Strong, independent, multilateral institutions that can play the role of impartial arbiter in facilitating international economic transactions are in India’s interest,” Rajan asserted.