Yokohama: A stronger rupee is unlikely to impact India’s export competitiveness and growth momentum and Asian economies, including India, may not be adversely affected by noises of protectionism in the developed countries due to rising intra-Asian trade, Asian Development Bank chief economist Yasuyuki Sawada said on Wednesday.
Speaking to reporters ahead of the 50th annual meeting of ADB beginning Thursday, Sawada said even though the rupee may have appreciated, export prices and market environment will positively impact India’s export competitiveness.
“Overall export performance of India is quite positive,” he added.
The rupee has gained about 5.5% this year, the most in Asia barring the South Korean won and the Taiwanese dollar, as foreign investors bought $14 billion of local equities and debt.
Typically, this level of appreciation should have seen the Reserve Bank of India intervening in the market. But excess liquidity in the money markets has made the central bank reluctant to buy dollars. Even the government seems to be willing to tolerate a stronger rupee.
While commerce minister Nirmala Sitharaman recently said rupee appreciation is not a big drag on Indian exports, chief economic adviser in the finance ministry Arvind Subramanian has argued the reverse, advocating for a weaker rupee to boost exports and growth.
Sitharaman, in an interview with Mint published on 17 April, said a stronger rupee reflects the strength of the Indian economy and is made up by cheaper labour, nullifying the adverse impact on exports.
However, chief economic adviser in the finance ministry Arvind Subramanian on 28 April said it is a “mistake and misguided view” that strong currency is a sign of national or economic strength.
“That is a mistake that we should not make and that is something we should be careful about. If you look at the last two years, our country has lost competitiveness from exchange rate by 10-15% and that is a huge loss in competitiveness that is effecting our exports,” Subramanian said speaking at a CII event.
Subramanian said all the evidence shows that India needs a supportive currency. “If the currency becomes too strong, it is not easy to keep open markets because a lot of goods come in and industry feels the pressure,” he added.
On growing noises about protectionism, Sawada said like China, the rest of Asia is also seeing the trend of more domestic consumption and investment which is going to drive economic growth more than external demand.
“This emerging orientation of US and Europe (towards protectionism) is a little bit worrisome situation but it is unrealistic that global economy will move towards a broken economy that was happening during intra-war period and I don’t see that scenario as happening,” he added.
However, the International Monetary Fund (IMF) recently observed that in a scenario of rising protectionism in developed countries, the greatest deterioration in corporate balance sheets would occur in China, India and South Africa. “If protectionist pressures increase, the combination of declining global trade and growth would increase corporate vulnerability and borrowing costs that may lead to financial stability risks in these economies,” it said in its Global Financial Stability Report released earlier this month.
The ADB has projected India’s economy to grow at 7.4% in financial year 2017-18 against 7.1% the previous year, on the back of a pick-up in consumption demand and higher public investment.
Sawada said apart from improved terms of trade, the newly adopted bankruptcy law that is likely to improve business environment is likely to accelerate India’s short- to medium-term growth momentum.
The reporter is in Yokohama on the invitation of the ADB to cover its annual meeting