From Make in India to instilling growth in the economy, Reserve Bank of India (RBI) governor Raghuram Rajan on Friday gave a piece of his mind, which is unlikely to go down well with the Central government.
Raising concerns over the export-oriented growth strategy envisaged by the PM's pet project – Make in India, Rajan clarified that growth cannot be met just by undertaking monetary measures, and rather stressed the government needs to deliver on infrastructure front while hinting at a moderate growth strategy to keep inflation under control.
Wary over the world economy's appetite for yet another export-oriented economy, in the context of China already having a strong presence, Rajan said, "Export led growth strategy will not pay for India as it did for the Asian economies including China due to the tepid global economic recovery, especially in the industrial countries. A regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-oriented China." He was addressing Bharat Ram Memorial Lecture at Ficci.
Rajan, however, clarified that the he was not against exports. In what could be seen as the first critique of PM Modi's Make in India slogan, Rajan said, "I am counseling against an export-led strategy that involves subsidising exporters with cheap inputs as well as an undervalued exchange rates simply because it is unlikely to be as effective at this time. I am also cautioning against picking a particular sector such as manufacturing for encouragement simply because it has worked well for China," he said.
On maintaining a balancing act between inflation and growth, Rajan hinted that the RBI will follow a very cautious approach, and reminded the government that mere dependence on monetary policy will not work. "Monetary stimulus will not do. The government needs to work on infrastructure," Rajan added.
Despite North Block trying its best to push for a rate cut to instil growth, RBI has so far practiced restraint and made it clear it will not tinker with rates until inflation level comes down to 4%. "A 'Volker'-like disinflation was never on the cards in India, but an Urjit Patel glide path fits us very well, ensuring moderate growth even while we disinflate. Going forward, we will discuss with the government in an appropriate timeline within which theeconomy should move to the centre of the medium-term inflation band of 2-6%," said Rajan. The RBI governor will meet the finance ministry in the next two to three weeks time to discuss this.
RBI Deputy Governor Urjit Patel led committee had earlier recommended a 'glide path' to disinflation. By March 2015, the RBI plans to bring down inflation to 8%. The panels' recommendation is to bring down retail inflation to 4%. "In reacting to developments, however, the central bank has to recognise that emerging markets are not as resilient as industrial economies. So, the path of disinflation cannot be as steep as in an industrial economy, because an emerging market is more fragile, and people's buffers and safety nets are thinner," added Rajan.
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