Showing yet again his willingness to diverge from the government's views...
Showing yet again his willingness to diverge from the government’s views if required, Reserve Bank of India (RBI) governor Raghuram Rajan on Monday sought to re-define the much-touted “Make in India” campaign, saying the world might not accommodate another “export-led China”, adding, instead, Indian manufacturing should rely on huge and expanding needs of the domestic market.
At a time when the government is looking to attract more foreign investment, Rajan has suggested budgetary incentives for household savings to ensure the country’s investment is largely financed from domestic savings. “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,” he said justifying his suggestion.
Delivering the Bharat Ram Memorial Lecture organised by industry body Ficci, Rajan, who has braved a crescendo of criticism against the perceived delay in starting monetary easing, said a central bank focused primarily on keeping inflation low and stable would ensure the best conditions for growth.
“In reacting to developments, however, the RBI has to recognise that emerging markets are not as resilient as industrial economies. So the path of disinflation cannot be as steep as in an industrial economy because an emerging market is more fragile, and people’s buffers and safety nets are thinner.” he said.
Rajan said that RBI, going forward, will discuss an appropriate timeline with the government in which the economy should move to the centre of the medium term inflation band of 2-6%.
The consumer price inflation dropped to 4.38% in November — the lowest since inception of the relevant index in January 2012. It was 5.52% in October. Wholesale price index inflation had decelerated at its fastest pace in five years at 1.77% in October — compared with 2.38% in the previous month. The latest industrial production data, which showed a negative growth of 4.2% in October, added to the pessimism about the economy. In its recent monetary policy review, the RBI had maintained the repo rate at 8% as it keeps an eye on the January 2016 CPI inflation target.
Pitching for the concept of “Make for India”, Rajan said: “If external demand growth is likely to be muted, we have to produce for the internal market. This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country.” Stressing that he was not advocating export pessimism, Rajan said he was cautioning against picking up manufacturing for encouragement, simply because it has worked well for China.
“India is different, and developing at a different time, and we should be agnostic about what will work. Instead of subsidising inputs to specific industries because they are deemed important or labour intensive, a strategy that has not really paid off for us over the years, let us figure out the public goods each sector needs, and strive to provide them,” he said.
On foreign investment, he said India should not be railroaded into compromising its interest to attract FDI. However, he said if the government makes it easier for young Indian companies to do business, it will also be making 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. Both are issues the government has taken on,” he said.