Need to aspire for position where strong currency doesn’t derail export prowess: CEA Nageswaran

You have said India needs to do more to attract foreign capital because of how global dynamics have changed. What can the government do specifically to stage a turnaround? Or do we have to wait for things to settle down?

It cannot be either or, it’s a bit of both. We need to keep doing what we have to do and for global matters we have to wait because they’re not in our control anyway. But we should do what we need to do, and that is about providing tax simplicity, predictability, continuity, and stability, etc., in many areas which investors have been talking about where we may be an outlier compared to others. Even if we are not outliers, as long as we can continue to demonstrate predictability, continuity, and stability — I think they are desirable in and of themselves because the outcomes will depend on many other factors.

Yes, global factors have played a role because incrementally our gross FDI numbers have been increasing; it’s the net numbers which are influenced partly by profit taking — because Indian equity markets have been very strong — and partly because Indian businesses have been forced to consider investing overseas given restrictions in terms of access to those markets. These are all geopolitical developments and to the extent that they persist, they will have an impact no matter what we do. That is not to say that we shouldn’t be doing them and waiting for these things to change because ultimately when things change, if we have tackled these domestic factors, then the positive impact would be even bigger.

The tendency of the rupee has been to depreciate by 3-3.5% every year or so. Do you see a future where the rupee can strengthen in the long run? What would it take for such a future and would it be desirable?

Whether it’s desirable or not depends on the state of the economy and the preparedness we have in terms of being competitive. Switzerland, Germany, and Japan have had strong currencies and yet continue to be export powerhouses. It shows that they have made products that were in demand and which were also price inelastic, which is what the exchange rate is about.

Currency stability and strength are desirable and we should be looking to achieve them because they’re also in some sense synonymous with strong and stable economies in general. If you are a currency that is known for constant depreciation, that conveys a certain sense of vulnerability. And that is true. If you look at countries that have achieved such strong and stable currencies, they have established manufacturing competitiveness — especially in niche and high-tech areas — have recorded a consistent external surplus, and strong currencies occur as a result of it. And those strong currencies did not necessarily derail their export prowess. That is the kind of state we need to be aspiring for. Of course, cyclically, these currencies also have depreciated and strengthened, but they are not synonymous with depreciation. That’s exactly the state we need to get to.

What would you say to global investors who have been exiting Indian markets despite the recent upgrades from ratings agencies and government bonds being added to global indices? Is there more than just returns that they should pursue?

Obviously, it’s not my business to tell them what they should be pursuing. All we can talk about is our economy’s strengths, the issues we are working on, the reforms we have done, and the fiscal prudence and consolidation we have been able to achieve – which is what resulted in three credit rating upgrades last year.

Ultimately, it’s up to them to consider that along with any other parameter they may have. So, our job is to put out in front of them what we are doing, what we have accomplished, and what we plan to do. But the final decision is based on whatever input and investment framework they have.

Talk about fiscal discipline at the state level has become louder and louder. Do states also need an explicit debt reduction target, like the Centre?

That’s a good question and I don’t want to give a flippant answer because these are important questions. We need to reflect on them and decide what is the right metric for states and what will work. We need to do some scenario analysis (to see) which one plays out better than the other, etc, and come to a considered decision. In any case, in a few days, we will also see the 16th Finance Commission’s report being tabled. So, I think it’s not necessary at this stage to speculate before hearing what the Finance Commission has to say. After that, too, we need to do some more empirical work and scenario planning before we respond as to which is the right fiscal parameter to target.

The Economic Survey has usually been about new ideas and suggestions. Last year, deregulation was a key theme and you also made a call for companies to pass on more of their profits to workers for sustained demand growth. This time, the Survey seems to be more about taking stock of global developments and how they are impacting India. Would you agree?

I am very surprised. I am very surprised for you to say that. In the agriculture chapter, we speak about the importance of crop diversification, fertiliser subsidies, and improving soil nutrition. In the climate chapter, we speak about the adaptation focus more than the emission focus. And then we talk about the importance of state capacity. We raised the issue of fiscal transfers by states, looked at how manufacturing and competitiveness are the ones that will result in currency stability and strength. And we have done empirical work to show that. So, I am surprised you say this time the focus is only on the geopolitical global situation.

You said FY27 is a year of adjustment. A big adjustment will be the revisions in the GDP, CPI, and IIP data. The flexible inflation targeting framework is also under review. What happens if the revised statistics present a different picture of the economy?

We need to wait and see how these numbers stack up and what kind of growth outcomes become possible and what is the level of GDP that the revisions give us, etc. It would be somewhat premature and mostly speculative to talk about this at this stage.

Our macro national income data have been doing a good job of taking into account both the formal and the informal sectors at the annual frequency level; it’s only at the quarterly frequency that informal sector data are slow to come by. So, I am not entirely sure that big adjustments may happen or not; I would rather think about it once the Budget and the new CPI and GDP numbers are out of the way by February 27. By then, we should be able to think about whether they entail any change in our approach to growth, monetary policy, fiscal policy, etc., or not.

Some of the structural changes that we have been doing will need to continue to be done; even if the growth numbers are higher, then they can only become even better. So, offhand, I don’t see that this will necessarily mean a drastic change in the way we have been thinking about policy and the direction it needs to take.