No space for another export-led China: Raghuram Rajan

Sounding a note of caution against Prime Minister Narendra Modi’s ‘Make in India’ campaign, RBI Governor Raghuram Rajan.

By: ENS Economic Bureau | New Delhi | Updated: December 13, 2014 3:22 am

TERMING the global economic outlook as “mediocre”, Reserve Bank of India Governor Raghuram Rajan said on Friday that it would be better for India to focus on its domestic market than emulate the export-led growth path adopted by China and other Asian countries in the past.

In the backdrop of the government’s concerted push for the Make in India programme, he added the ‘Make For India’ sub-text, suggesting production for the Indian market.

Addressing a seminar organised by industry chamber Ficci weeks ahead of the government’s first full Budget, Rajan also called for an increase in household savings rate and even advocated for tax benefits for individuals to save more.

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

On the government’s Make in India programme, he said there was a danger in assuming that this means a focus on manufacturing and an attempt to follow the export-led growth path that China followed. “The world as a whole is unlikely to be able to accommodate another export-led China,” said Rajan, adding that India should not have export-focussed manufacturing.

“India is different, and developing at a different time, and we should be agnostic about what will work,” said Rajan. His advice comes at a time when the government has pitched hard for reviving manufacturing by improving India’s ranking in the World Bank’s Ease of Doing Business index. He, however, lauded the government’s intent to bring the cost of doing business down, adding that infrastructure must improve.

Under pressure from the government to cut policy rates to ring in a low interest rate regime, Rajan said it was not the regulator’s job to boost the Sensex but to ensure that underlying fundamentals of the economy and the financial system are sound.

The RBI Governor also said India should not be railroaded into compromising its interest to attract FDI. Citing an example, he said, “The requirements to patent a medicine in India are perfectly reasonable, no matter what the international drug companies say — we should ensure policies are transparent and redress quick.” Rajan said if it is made easier for young Indian companies to do business, it will also make it easier for foreign companies to invest, for, after all both are outsiders to the system. “This means a transparent and quick legal process to deal with contractual disputes, and a proper system of bankruptcy to deal with distress,” he said.

Calling India an emerging economy that “weathered the initial squalls of the ‘taper tantrums’ of the summer of 2013”, Rajan said that it should focus on four aspects — Make in India, Make for India, ensure transparency and stability of the economy and work towards a more open and fair global system.

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