A five-point formula that could shore up a sagging economy was unveiled by economist Venkatesh B. Athreya on Monday.
Delivering a talk on “Currency crisis in India”, at a meeting organised by the Department of Economics of Bharathidasan University here, Mr. Athreya said the situation could not blamed solely on the changes in the United States’s monetary policy in May. The crisis started much before as there was no attempt to ensure growth in key sectors such as agriculture and manufacturing.
The policy of liberalisation, privatisation, and globalisation, was ushered in when a similar crisis hit in 1991, was touted as the panacea for all economic ills. Now, 22 years down the line, India was facing a more severe crisis which only showed that the policy had aggravated the crisis and not mitigated it. The economy was more vulnerable now than in 1991, he said. Although the government believed that foreign direct investment (FDI) would bridge the current account deficit, recent experience had proved it to be otherwise. The net foreign exchange contribution through FDI so far was not significant, Dr. Athreya said.
He was not against FDI per se as it could help in some sectors, enabling increase in output, employment, and productivity. But “we should not get into a mindset of looking at FDI for everything.”
The other option of foreign portfolio investment, in which there was constant inflow and outflow of foreign exchange, did not result in creation of wealth. The two-way flight, which triggered the rise and fall of stock markets, was mainly a destabilising factor.
The Government’s move to desperately seek foreign capital inflow of any kind was dangerous and not sustainable as it would result in large outflows in future. The growth witnessed in 2004-08 was because of foreign portfolio investment in the stock market but the period did not register any corresponding growth in agriculture and manufacturing sectors.
He stressed that the current fall of the rupee was not only against the American dollar but also against major currencies. Not all countries faced a similar economic crisis and China’s economy was vibrant.
The external economic environment was going to be difficult for India for some more years. As a first step, all non-essential imports should be cut. There was an urgent need to look at import substitution. The second step should be to expand domestic output of key imports through public investment and improving capacity utilisation. In this context, there should be a huge improvement in infrastructure and domestic productivity.
The third step should be to build a strong infrastructure through public investment “which will help revive agriculture and increase exports by lowering costs.” The private sector should complement the efforts of the public sector in improving infrastructure.
He called for strong capital controls to prevent speculators from pushing the rupee down and restrict external commercial borrowings by companies.
Dr. Athreya said devaluation of the rupee would not guarantee improvement in foreign exchange earnings. Devaluation would accelerate inflation and benefit only developed nations.
As a final step, the government should make sure that when incentives were given to the corporates they were linked to growth in exports and foreign exchange earnings.