Economy

Industry paying price for a strong currency: CEA

Our Bureau Chennai | Updated on February 19, 2018 Published on February 19, 2018

Chief Economic Advisor Arvind Subramanian with BusinessLine Editor Raghavan Srinivasan at the ‘Breakfast with BusinessLine’ event in Chennai on Monday   -  BusinessLine

The world is turning ‘nativist and protectionist’, says Arvind Subramanian

Indian industry is paying the price of a strong currency, partly driven by a political economy that equates it “with national strength”, according to Arvind Subramanian, Chief Economic Advisor, Government of India.

Indian policy-making, he said, has not confronted the fact, in the way that the Chinese and East Asians have done, that a competitive currency is important for industry. A corollary to that is to not open yourself up to capital inflows.

Interacting with a cross-section of industry leaders and diplomats at an event, ‘Breakfast with BusinessLine’, in conversation with BusinessLine Editor Raghavan Srinivasan, he said the capital account had been an issue between him and policymakers of the past. They had wanted to open up capital account “at the drop of a hat,” he said.

Explaining the reasons for the government allowing the currency to appreciate, he pointed out that the exchange rate policy is determined by macro economics, government policy and the political economy.

It is clear from international macro economics that the more open the capital account is, the less is the control on exchange rates, he said.

Protectionist mode

Responding to a question on whether the hike in customs rates in Budget 2018 marked a reversal of the long-standing policy of unwinding the tariff regime, he said this should be seen as a fallout of the global backlash against globalisation. “It is sad that the world is turning nativist and protectionist,” he said.

Also, protectionism happens because “our exchange rate is too strong”. Consider what is happening to export industries such as textile, clothing and software. It is the equivalent of a 20 per cent subsidy for importers, he said.

The tariff instrument is a tool to encourage domestic manufacturing. Possibly, it is also a reaction to China’s ‘disproportionate role’ in the global market driven by free subsidy and flooding imports, he said.

However, Subramanian cautioned that such protectionism should not become the cause for inefficiency as was the case earlier. Maybe it should be made “conditional on international competitiveness,” he said.

 

Published on February 19, 2018
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