Our Forex Policy Is Elitist, Rupee Fall Benefits Outweigh Costs: NITI Aayog Chief
“Our exchange rate policy in some sense is a very elitist policy,” says NITI Aayog’s Rajiv Kumar.
The only way to turn around India’s flagging exports is to curb further appreciation of the rupee, according to Rajiv Kumar, the new vice-chairman of government policy think-tank NITI Aayog.
“We need to switch the Indian businessman from a domestic market player to a global market player,” Kumar said in an interview with Praveen Chakravarty, Contributing Editor, BloombergQuint. “That can happen only when we assure them that rupee will not appreciate in the next five years,” he said.
He argued that the pull of the domestic market is so great that businesses do not want to get into the hassle of exporting. This mindset can only be changed through an incentive structure, which comes by changing the underlying exchange rate regime, he explained.
Export benefits arising from a fall in rupee will far outweigh the costs, and may even push for some real import substitution, Kumar said.
The rupee was among the best performing Asian currencies last fiscal and continued its rally this year on the back of strong inflows in the debt market. The appreciation prompted concerns about the rupee getting overvalued on a real effective exchange rate basis, which is seen as one of the reasons for declining export growth. In September, however, the rupee has corrected 2.3 percent and is the worst performer in Asia.
Terming India's foreign exchange policy as “elitist”, Kumar said that the regime only benefits those “who have a large share of imported goods in their consumption basket”. Since exports also support employment, the regime is also discouraging those who generate jobs, Kumar added.
Here are edited excerpts from the interview.
On exports, the fact is that the real effective exchange rate (REER) has risen 11-12 percent since this government took over. What are some of the things that can be done for exports? Because even on the currency – the RBI has been intervening, in the last few months.
Yes, it has been. I want to say with all emphasis at my command that we need to switch the Indian businessman from a domestic market player to a global market player. That can happen only when we assure the Indian businessman that our rupee will not appreciate.
So, guarantee a REER rate?
Yes, that it won’t appreciate over the next five years. Because that’s the only way to turn them around. The pull of the domestic market is so large that most businessmen will say that they don’t want to get into the trouble of exports.
So, it’s the mindset?
It’s a mindset that can only change with an incentive structure. Which comes about by changing the underlying exchange rate regime that you’ve got. Michael Spence’s report did point to a depreciated currency as one of the key conditions for all economies that have achieved sustained 10 percent growth rate for 30 years. The second thing for exports is trade facilitation.
On the exchange rate, if you want to guarantee currency stability to exporters, there are costs associated with it. On imports, today we are lucky because oil is where it is. There are certainly costs attached to a depreciating rupee. Do you think the benefits will outweigh the costs?
Oh, far more! There is an assumption some people are making that our imports are price inelastic. I don’t accept that at all. In this case – given the Prime Minister’s insistence on import substitution in energy, which he keeps talking about all the time – I think if you got a depreciated rupee, which made your energy costs higher, you will get both lower consumption and less wastage, but also a nice kick towards producing your own domestic renewables and other sources that you can achieve. I am convinced in my mind. The encouragement to export means greater employment. There is no doubt about that.
Especially textiles and footwear, the most employment intensive.
Textiles, garments, handicrafts, agro-processing. We’ve not done enough for that.
Pardon my saying it, but I think our exchange rate policy in some sense is a very elitist policy. It benefits those who have got a large share of imported goods in their consumption basket. It discourages those who want to generate employment.
I think we must change it as soon as possible. The RBI is in charge of that, and I hope some people in the RBI are listening to our conversation.
Then you were talking about trade barriers, and trade facilitation agreements. Have you spoken to the Commerce Minister about this?
The facts are amazing. We take 96 hours on average to clear cargo, while in Singapore it takes less than 24 hours. And we’ve got ourselves a 5-year target to come there. I’m saying why can’t we do 48 hours in the next 1 year, or 6 months?
Is that possible?
Why not? After all, it is all governance, isn’t it?
Is it about governance, or is it infrastructure?
No, it is governance. Now, most of your things are on electronic databases, which are talking to each other. I think it is just about getting the right incentive structure there, on our port authorities, customs and the rest of the lot, and getting better coordination there. That can achieve this trade facilitation quite quickly. The other part of it, which is the logistics part of it, our logistics are far too underdeveloped. But that’s where too, growth will come. Once you get the foreign trade going.
So, for exports, you are very clear about rupee depreciation, and trade facilitation?
Also, some more sector specific granular policy support, identifying the critical constraints on that. I heard, for example, that in garments, you will be surprised to know that 80 percent of garment exports are concentrated in ladies’ dresses, blouses etc. We don’t do any mens’ suits, or outer-wear, and none or close to zero of synthetic fibre based sports-wear. That’s because our import duty on synthetic fibre is 11.5-12 percent. It’s 0.5 percent in Sri Lanka. Therefore, any garment that needs imported material is pretty much out of our scenario.
Watch the full interview here.