Feb 18, 2013, 03.38 PM IST | Source: CNBC-TV18

Combat CAD by making exchange rate flexible: Bimal Jalan

At a time when India's increasing current account deficit(CAD) has become a point of concern for all economists, former Governor of Reserve Bank of India, Dr Bimal Jalan says making the exchange rate flexible could be a solution to easing the CAD.

Bimal Jalan

Former Governor, RBI

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At a time when India's increasing current account deficit (CAD) has become a point of concern for all economists, former Governor of Reserve Bank of India, Dr Bimal Jalan says making the exchange rate flexible could be a solution to easing the deficit. In a move to lower the deficit, Finance Minister P Chidambaram also increased the import duty on gold from 4 percent to 6 percent in order to decrease demand for the yellow metal.

"Your imports are much higher than your exports and part of that can be a monetary issue. So, the exchange rate certainly has to be flexible and we should manage it in that way," he adds.

Also commenting on the current state of governance in the country, Jalan says the country is troubled by systemic political problems. According to Jalan, every country and its economy faces ups and downs. What is of prime significance is whether the problem is structural or not. "In economic terminology, it means if there are some fundamental bottlenecks which are generating the kind of downside that one is seeing, or is it cyclical," explains Jalan.

Jalan opines India is a great democracy, however, it is marred by corruption committed by ministers cutting across all party lines. "The issues that we are facing today are systemic and political in nature because ultimately, in a vibrant democracy like ours, the policy making must be with the political system," he adds.

Also read: India's 2013/14 Budget to be most austere in years

In an interview to CNBC-TV18, Jalan shares his views on the Indian economy, and the complex entwined nature of politics, business and economy.

Given below is the edited transcript of Jalan's interview to CNBC-TV18.

Q: We are perhaps not in a crisis today, but the environment is froth with risk. The twin deficit; the current account and the fiscal deficit and with the growth slowing down and inflation being very stubborn, how long do you think it will take to get out of the situation?

A: One thing that we must remember is that there are ups and downs in an economy always. It is all the time, in all economies. The issue is, whether it is structural or not. In economic terminology, it means if there are some fundamental bottlenecks which are generating the kind of downside that one is seeing or is it cyclical.

In any system, one would see growth rate go up. It can come down and so on and so forth. So, at the moment, we are in transition and the real issue is that the political shape of India has changed quite dramatically. I cannot talk too much about it but we have fractious politics and it is not a coalition per se. Lots of countries have coalitions but they share an ideology, they have a programme. In our coalition, we have to worry, but there is not very much that one can do.

Q: So you are saying that the fact that inflation is stubborn high and growth rate is falling are symptoms of a possible structural problem?

A: One can just look around. If one just sees the political shape of our country as it has emerged, we are a great democracy, we are very fortunate to have free and fair elections, yet if you see, the same country has corruption in any allocation decisions being made by ministers. These are ministers belonging to different parties without any accountability, without responsibility. I am not pointing a finger at one person. The issues that we are facing today are systemic and political in nature because ultimately, in a vibrant democracy like ours, the policy making must be with the political system.

The RBI can execute, different agencies can execute, one can allocate coal through auctions or one can allocate coal to backward areas. While policy can be decided and debated, administration is the best way to implement the policy.

Q: That perhaps explains why although after the present finance minister, Chidambaram came back in September, sentiment picked up, the market is possibly near all time highs but the mood is still cautious because everybody realises the political reality in which he operates. What would he need to do to transform the mood or nurture the green shoots of the optimism that is coming back again?

A: I am not in a position to comment on that part. I have great regards for P Chidambaram. So far, he has done extremely well and he has infused a sense of confidence in our economy both on investment side as well as on the fiscal side. We have lot more confidence now, than would have been the case earlier. We earlier had a jam, retrospective taxation and all. There was a complete confusion and so, I must compliment how the present finance minister has taken some measures.

However, the primary issue is not about that. The problems we are facing are systemic. For example, we have different parties allocating public resources. There is expectation that elections will be held six months hence, nine months hence. There is a whole situation of who will win the election and who won't win the elections. So, we are going through that kind of a period and whatever you do, you find different voices.

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