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Currency depreciation is actually good for growth: Pronab Sen

Wednesday, 28 August 2013 - 8:21am IST | Agency: DNA
All eyes are riveted on the rupee right now, when the focus should really be on inflation stemming from the currency depreciation, believes Pronab Sen, chairman of the National Statistical Commission. What we need now is a tight monetary policy, he told Neeraj Thakur. Edited excerpts:

Do you think that we are in a 1991 like crisis?
No, it is not even close to 1991. But these are not normal times. Talking about the value of the currency does not make sense. What makes sense is to ask what effect the depreciation will have on the economy. By and large, depreciation of currency is actually good for growth. However, it can lead to inflation and you need to control it. And therefore the suggestion that comes out is to have a tight monetary policy. This is what RBI was trying to do.

Doesn’t tight monetary policy affect growth negatively?
What I am saying is that depreciation of the currency has a positive effect on growth, but it also pushes up inflation, so you do a tight monetary policy to contain inflation at a somewhat lower growth than would otherwise have been the case. That is the tightrope walk.

But the fall in the currency value is not helping exports...

It will help, but not instantaneously. When you have such a sharp fall in the currency value, even existing export orders can get affected, because what happens is, the buyer wants to renegotiate the price, so in the short run, a sharp depreciation of the currency can lead to a negative effect on exports.

Some suggest the use of foreign exchange reserves to prop up the rupee.

The point is, the rupee value is an effect and not the cause. Propping up the rupee, trying to defend a particular rupee value is really not an option. If there are strong expectations that rupee can actually get weaker, then any effort to prop up the rupee, which means selling dollars, is going to end up in a situation where people are going to punt against you and you will lose control. You will lose a solid amount of foreign exchange as well, and it is an unstable game.

Was it wrong on the part of the RBI to have intervened in the forex market in recent days?

No, there are two things. It is one thing to defend a level of rupee and another to moderate a rate of decrease. The RBI needs to  come out very clearly and say that we are not defending a particular level. The RBI has said, “We are agnostic about any particular level of rupee”. But they need to come out and make it clear why they are intervening in the market.

We have done everything to control CAD, opened up various sectors to FDI, increased import duty on gold. Still, nothing seems to be working...

This is not controlling CAD. Whatever has been done is just to finance the CAD.
The only thing which has been done to address CAD is a little bit on the fiscal front, particularly on the oil pricing, but even there it has not been much. A CAD in the short run can be a problem with the trade sector. But in the medium-to-long term, it is usually a problem of savings-investments balance, where your savings are too low for the investments. And the reason your savings are too low is because it is going into unproductive investments.

Will the increase in import duty help curb gold imports?
Not necessarily. All that happens is a step change. You raised the import duty 5%. And the world gold price crashed. In effect, the domestic gold prices remained where they were. So, the incentive to hold gold even became stronger.
I personally do not believe that the increase in import duty will be of any help.

How will inflation impact consumers’ lifestyles and the Indian economy in the long run?

Initially, due to inflation, people start financing the increased cost of living through their savings. Which is why it spills over into CAD. But overtime, they start gradually dropping their consumption so that it becomes more consistent with their real incomes and target savings are gradually re-established because all of us are saving for our future and it cannot be ignored. But when this realignment takes place, what we see is a slowdown in the economy and reduction in the CAD.

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