The Reserve Bank of India (RBI) and the government don’t favour undervaluation of the exchange rate as a means to spur economic growth, RBI Governor Raghuraman Rajan said.
“There are those who argue that in countries such as China, Japan and Korea business enterprises grew via an undervalued exchange rate,” Dr. Rajan said at the India MSME Summit-2016 organised by the Confederation of Indian Industry(CII) on Monday. “Such people want the same to be tried out in India. However there are a lot of problems with undervaluing the exchange rate and some of these problems are reflected in the economic condition that these countries find themselves in today.”
The exchange rate will not be a source of either comparative advantage or disadvantage, Dr. Rajan said. “I personally believe that sustained undervaluation over a long period of time is not a feasible or desirable strategy. Which is why I firmly believe that the RBI’s philosophy of not focusing on the level of exchange rate and trying to manipulate it up or manipulate it down but trying instead to minimise situations of extreme volatility and intervening in situations when the exchange rate becomes extremely volatile in either direction is the right one,” he said.
The Indian rupee is one of Asia’s worst performing currencies against the U.S. dollar this year amid renewed concern about the health of the world economy and dwindling investor confidence in Prime Minister Narendra Modi’s ability to push through economic reforms. On February 12, the currency completed its biggest weekly decline since mid-January as overseas funds fled the nation’s stocks amid a global equity rout.
The RBI wants the exchange rate to be reasonably predictable and reasonably stable, Dr. Rajan said.
The advantage to Micro Small and Medium Enterprises (MSMEs) should come from their capabilities, cost-effectiveness and innovative ideas rather than from undervaluation, he pointed out. MSMEs can act as a means of social empowerment where disadvantageous sections of society can be empowered with money and wealth.
However, the idea should not be to reserve entire sectors for MSMEs.
“This would only ensure that they remain small always. There is a need to figure out a regulatory environment that facilitates the growth and expansion of MSMEs.
There needs to be a level playing field and an easy framework of regulations for the entry and growth of small industries,” he said.
Lack of infrastructure and logistics, lack of access to marketing, difficulty and the expense in acquiring land and financing are some of the impediments faced by MSMEs.
“It is necessary that large companies handhold MSMEs for the latter’s growth,” Dr. Rajan said.
It is also necessary to have a safety net for the workers in small business firms, the RBI governor said.
Kerala, with its literacy rate and educational achievements, is quite capable of triggering a revolution on the MSME front, he added.