22 Oct 2020 19:54 IST

Raghuram Rajan cautions against import substitution

‘In order to export, you have to import,’ says Former RBI Governor, at SPJIMR webinar

Former Reserve Bank Governor Raghuram Rajan cautioned against import substitution under the Aatmanirbhar Bharat initiative. “If the focus under this initiative is on import substitution by erecting tariffs, which we as a nation have practised in the past and failed, I would caution against going in that direction,” Rajan said.

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

Economic revival

Talking at a webinar organised by the Centre for Financial Studies at Bhavan's SPJIMR, Dr Raghuram Rajan, said: “Despite the terrible loss of lives and hardships brought by the pandemic, some silver linings might emerge for India. One possible opportunity for India is that now we can reform in ways that can both, enhance growth and also improve the quality of medical institutions across the country. Secondly, the Indian economy has been facing external threats since the last few months. From a demand growth perspective, India was previously thought of as a competitor to China and the investor population outside rated us highly. However, now, that glamour associated with India has faded. This is the time to assess our relative growth performance and take steps towards increasing our productivity.”

US-China relations

On the US-China relations in current times, Dr Rajan said, “There has been a realisation in both Beijing and Washington that the US-China relationship has largely been a commercial relationship rather than a strategic one. Given China’s rising dominance in the global politics, it is important that both the sides resolve strategic issues by resorting to bilateral negotiations. Currently, both Democrats and Republicans are fearing a rising China, and I hope for a better dialogue with China post the US elections. Certainly, a more democratic approach by China will help both the sides.”

Speaking of the upcoming US elections, he said, “Currently, the polls suggest that it will be a convincing victory for the presidential candidate Joe Biden. However, given our experience from the 2016 elections, it would be wise to not get ahead of ourselves.”

Global economic scenario

Sharing his views on the global economic scenario from the lens of Emerging Market (EM) and Developed Market (DM) economies, Dr Rajan opined that the policy of large fiscal spending followed by the DM economies cannot be replicated by the EM economies. The reason behind is that the EMs face far higher inflationary pressures in the longer run than the DMs. Hence, fiscal prudence along with targeted spending towards enhanced growth avenues should be the policy resorted to by the EMs.

Consequences of economic slowdown

“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, capable of much less quality jobs,” he stated.

RBI’s monetary policy

Lastly, commenting on the monetary policy of the RBI, Dr Rajan said that the policy adopted by the RBI is very accommodative. “The overnight repo rate is close to 3.25 per cent and the inflation figure has reached 7 per cent, which implies a real interest rate being close to negative 4 per cent. A negative real interest rate scenario of this magnitude is hardly seen across the world which goes on to show the degree of accommodativeness of the RBI. However, we need to wait and watch the future course taken by the RBI in order to balance the inflation and growth in the country.”