The Hindu Business Line : Rangarajan moots recipe to tackle big capital flows

Growth story: The Union Finance Minister, Mr P. Chidambaram (second from right), with (from left) the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, Prof Michael Spence, President of the Commission on Growth and Development (Nobel Prize Winner), and Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister, at the South Asia launch of the ‘The Growth Report : Strategies for Sustained Growth and Inclusive Development’ , in the Capital on Tuesday. —

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New Delhi, May 27 The Chairman of the Prime Minister’s Economic Advisory Council (EAC), Dr C. Rangarajan, on Tuesday said that a combination of currency appreciation and sterilisation was the right approach to handle strong capital inflows.

“When capital flows are strong, some element of currency appreciation is inevitable. At the same time, some part of it should be absorbed in the form of reserves and sterilised.

“It is a combination that is actually required. You may call it pragmatic approach. That I think is the way to do it,” Dr Rangarajan said at an event organised by ICRIER for the launch of the ‘Growth Report’ of the Commission on Growth and Development.

Report’s observations

He was responding to observations made in the report that countries should not allow their currencies to appreciate beyond what the productivity increase would demand.

Dr Rangarajan said that he could not clearly get, from the report, the view of the commission on currency appreciation issue.

The Finance Minister, Mr P. Chidambaram, was also present on the occasion.

On whether a country should go for big bang or gradualist approach to economic reforms, Dr Rangarajan said that a big-bang followed by gradualism may be an appropriate thing.

He, however, quickly noted that one cannot avoid the big bang.

The commission’s report seems to be against the big bang approach, Dr Rangarajan said.

“Very often reforms are undertaken only under the shadow of crisis. When shadow of crisis loomed over a country, you have to do something strong.

“That’s where big bang is required. May be big bang followed by gradualism may be an appropriate thing. You cannot avoid the big bang,” he said.

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