Former RBI governor D Subbarao today cautioned against India’s deficit challenge and said the country is no longer the sweet spot due to rising oil prices.
He also said raising of import tariff in the Union Budget 2018-19 will hurt Make in India mission.
The country’s balance of payments crisis in 1991 and the near crisis in 2013 were consequences of unchecked fiscal profligacy spilling over into the external sector, he said.
Subbarao was addressing the 3rd ISAS (Institute of South Asian Studies) Lecture on “India in a Globalising World” here today.
India has been a sweet spot over the last four years because of the sharp fall in global crude oil prices, cushioning both fiscal and current account deficits. But that comfort has now come to an end with the prices firming up, noted Subbarao.
It is therefore worrying that Finance Minister Arun Jaitley has loosened up on fiscal consolidation in the Budget in the face of a rising current account deficit, he pointed out.
Subbarao was also critical of the Budget proposal to raise import tariffs on a host of items. Rather than bolster Make in India, these higher duties will hurt domestic manufacturing, he said.
This decision was ill advised also because it runs counter to the calibrated reduction in import tariffs over two decades, and is also in conflict with Prime Minister Narendra Modi’s speech in Davos where he decried the growing protectionist tendencies in the rich world.
“Not walking the talk raises a credibility gap, which will hurt India’s investment prospects,” he said.
He also challenged the stereotype that a country can get long-term trade advantage by manipulating its exchange rate, saying what gives sustained advantage in trade is improved productivity.
Citing Indo-China trade, he said during 2001-16, India’s trade deficit with China shot up from nearly USD1 billion to over USD 50 billion, and the tilt is a result of the latter’s mercantilist policies.
During this period, the rupee actually depreciated against the yuan by as much as 70 per cent which, if anything, should have given India an advantage, he said. Subbarao said globalisation has never been a totally benign experience, it offers immense opportunities, but also poses ruthless challenges.
The task for India, as it is for every country, is to maximise the benefits and minimise the costs of integrating with the world.
The challenge is to stay in globalisation and compete at the global level. That could potentially be a win-win situation for every country, he said.
“It(globalisation) lifts all boats, but does not lift all of them to the same level,” he said adding that governments at the Centre and in states should engage in energetic policies to reduce inequalities.
If that is not done, the alienation triggered by globalisation can threaten social order, Subbarao, a visiting research fellow at ISAS, National University of Singapore, said.
He added that in order to manage globalisation to its advantage, India also needs to hone its skills in negotiating on global issues in global forums.moneycontrol