Raghuram Rajan Cautions Against Import Substitution
Raghuram Rajan, former governor of the Reserve Bank of India. (Photographer: Tomohiro Ohsumi/Bloomberg)

Raghuram Rajan Cautions Against Import Substitution


Former Reserve Bank governor Raghuram Rajan on Wednesday cautioned against import substitution under the 'Aatmanirbhar Bharat' initiative of the government, saying the country has gone down this route earlier but could not succeed.

"If the focus (under Aatmanirbhar Bharat initiative) is on import substitution by erecting tariffs, which we have done lot of in the last few years, then I think it is a direction we have tried before and it has failed. I would caution against going in that direction," Rajan said.

He was addressing a webinar organised by the Centre for Financial Studies at Bhavan's SPJIMR.

Rajan said in order to export, one needs to be able to import things that go into those exports as cheaply as it can.

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"China's rise as an export power came on the back of assembly. It brought in the stuff, put it together and exported it out.

"In order to export, you have to import. Don't erect huge tariffs and focus on creating right environment for production in India," he said.

According to Rajan, targeted spending by the government can be fruitful in the longer term.

"I think it is good to keep an eye on the overall spending and to be careful. This is not the time to have a free cheque book. But targeted spending can repay a lot if it is done wisely and carefully," he said.

He further said the country's growth has been significantly hit but it is more important to understand the consequences of that slowdown on the economic system.

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"If a number of firms have shut down never to reopen again, the supply side of the economy is affected. If a number of households have stopped sending their kids to school because they can't afford to do so, that again inhibits our growth potential for the future as these are going to be poorly educated kids who are going to be capable of much less quality jobs," he stated.

He said reforms undertaken by identification of real problems are good but the process needs to have consensus of all stakeholders.

"People, critics, opposition parties have some ideas and if you could build more consensus in them... you make sure they are rolled out in a more effective way. I am not saying one needs to debate forever... but it is important in a democracy to build that consensus," he emphasised.

Rajan said one big impediment to infrastructure development is the land acquisition process and that requires some technical changes, including better land mapping and clearer ownership.

"Some states have moved ahead on this but we need to move ahead across the board," he pointed out.

Rajan also said fixing the financial system is another area where the country needs to improve and there should be a steady process for reforming the sector.

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"It is pathetic that at 50% credit to GDP, we still don't have a healthy financial system. We are failing both in quantity as well as in quality," he said.

Rajan said retail inflation at 7.34% in September is on the higher side.

"How much of that is temporary and how much of that is longer term is hard to understand and which is why I think the RBI is in wait-and-watch mode," he said.

Asked about the monetary policy, Rajan said he does not want to opine on future RBI policy, but added that it is very accommodative.

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