India’s exchange rate must remain competitive in order to have a healthy export-based industry, said Arvind Subramanian, Chief Economic Advisor, on Wednesday.
“It is clear that to have a competitive industry you must have competitive exchange rates. Evidence suggests that growth spurts have been sustained by competitive exchange rates,” he said.
He added that the country must be careful of the nature of foreign capital inflow.
“The more capital that comes in, the more difficult it becomes to maintain competitive exchange rates.
“Foreign Direct Investment is great but foreign currency denominated debt is very dangerous,” Subramanian said.
He was speaking at a media roundtable to discuss economic growth in India, China, Japan and the US, alongside Simon Cox, Investment Strategist, BNY Mellon.
Subramanian added that contrary to the perception among global economists, one has to be “quasi-optimistic about emerging economies”.
He pointed to the correlation between economic growth and political development.
While his study pointed to a trend that economic growth is fast in countries with a greater level of political development, India and China are two major exceptions to the rule.
“I do believe in the regression to the mean theory and according to it, India has to grow faster to converge towards the mean,” he said.
On the fiscal deficit, Subramanian said India is still consolidating its fiscal but at a slightly slower pace.