Exchange Rate Adjustments Are Unavoidable, Says Chidambaram

Current A/c gap must be moderated n Growth rate to be accelerated to 8%

Finance minister P Chidambaram yesterday said that adverse exchange rate adjustments were an unavoidable price that developing countries had to pay in a period of adjustment.

This was particularly true in a scenario of volatile capital flows and cross-currency variations, said the minister while addressing a seminar on Emerging Asia organised by the Asian Development Bank (ADB) in the Capital.

Chidambaram said that Asian nations, including India, must aim to ensure safe limits for their current account deficits. The current account deficit, just as overall fiscal deficit, should be modest and moderated, he said in his keynote address.

The finance minister also said the country was committed to sustain an annual economic growth rate of seven per cent and accelerating it to eight per cent of GDP by the turn of the century.

In the short run, exchange rate adjustment is an unavoidable price that developing countries have to pay. I say price, because such adjustment can lead to an over-shooting of the exchange rate out of line with economic fundamentals, and also result in several rounds of domestic price and wage adjustments, he said.

In the same context, Chidambaram also pointed out that in the light of the recent experiences in South-East Asia, the commitment to a fixed exchange rate can test the toughest central bankers. Sudden reversal of capital flows can create severe balance of payments problems, he added.

The minister, however, dismissed recent media and claims by commentators that the prospect of the Asian growth miracle had diminished considerably after the recent currency turbulence in the region.

One might be tempted to conclude that the outlook is very gloomy. I have serious reservations about such a hasty conclusion, said Chidambaram, adding: Just as the Asian miracle was hyped, I believe the current currency crisis has been exaggerated.

According to him, one of the main challenges that the region faced was with regards to the acceleration in financial sector reform. A fine balance needs to be struck between liberalisation on the one hand and regulation on the other, he said.

The minister said another challenge was to tackle the asset-price bubble, which manifests itself in meteoric asset prices and had been fuelled by easy credit. He also stressed the need to re-examine the issue of the optimum level of current account deficit on the balance of payments.

The existing view, he said, held that a high current account deficit can be sustained as long as the fiscal deficit was under control. But the recent experiences, especially of Thailand, had established that this was no longer true and adequate attention had to be focused on the external sector too to avoid high current account deficits, he said.

Later in his address, ADB chief economist V V Desai said that the currency crisis notwithstanding, the policy experiences of East and South-East Asia are likely to prove salutary.

Whatever mistakes have been made in the management of East and South-East Asian banking and financial systems, they do not detract from the contribution that good policies have made to their rapid growth, Desai said.