Interview | India must let rupee depreciate, lower tariffs substantially: Arvind Panagariya

The Reserve Bank of India (RBI) must allow the rupee to depreciate and the government must slash tariffs to ensure exports remain relevant in a deglobalizing world, according to Arvind Panagariya, Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.

“Compared with our competitor countries, the rupee remains overvalued. Therefore, the RBI must let it depreciate it further,” Panagariya, former Vice Chairman of Niti Aayog, told Moneycontrol. “We need to lower our tariffs substantially while also completing free trade agreements with the UK and EU at the earliest.”

The great power tussle between the US and China, pandemic-led supply chains disruptions, vaccine nationalism and Russia’s war on Ukraine have led to several countries moving away from reliance on others for key inputs.

Over the last couple of years, India has raised import duties on a wide range of products and has been aiming to boost local manufacturing through production-linked incentive (PLI) schemes.

Under the PLI schemes, Asia’s third-largest economy has been offering incentives on annual incremental sales to boost local manufacturing in sectors ranging from automobiles to white goods and pharmaceuticals to solar photovoltaic modules.

Tariffs, protection  

The programme is part of New Delhi’s broader goal to help reduce imports and boost exports of manufactured products in an attempt to secure a foothold in the global supply chain that is undergoing a shift from China following the pandemic.

“You can buffer specific import-competing sectors through tariffs but not the entire economy. Protection to one set of sectors automatically de-protects the remaining sectors since resources move out of them into the protected sectors,” Panagariya said.

“This is why the sensible policy is to provide such protection through rupee depreciation which helps both exportable and import-competing sectors.”

The Indian rupee slipped to a record low of 80.065 to the dollar in July as several central banks across the world tightened monetary policy to curb record inflation rates, shrinking the global liquidity pool. Meanwhile, India’s trade deficit hit a record high in July.

When the rupee was plumbing record lows, top management at the RBI said that the central bank won’t allow disorderly movements in the rupee although it doesn’t target any specific level for the currency.

Since then, fears of a global recession have taken precedence. The Chinese central bank eased policy recently. The rupee has rebounded to trade at 79.85.

Panagariya is sanguine about India’s growth prospects. He finds the economic recovery to be robust and broad-based and sees scope for an upswing in outbound shipments.

“Even if the global economy slows down, we are still operating in a vast export market of $28 trillion (by 2021 export figures). If we are competitive, there are plenty of opportunities in the global market with or without global growth,” he said.

Reforms, fiscal stance

As the first vice chairman of Niti Aayog, India’s top federal think tank, Panagariya also led reform efforts in India’s economic policies.

For now, he thinks several more can be taken up, including the implementation of new labor codes, bank privatization and speeding up the sale of public sector units and asset monetisation.

He also suggests an overhaul of the higher education regulatory regime as well as reforms to personal income tax.

And it is also time for the Centre to begin preparing a new fiscal consolidation plan, Panagariya said.

The government’s fiscal deficit and debt soared in the wake of the pandemic with borrowing spiking to record highs. New Delhi has proposed fiscal consolidation to attain a level of fiscal deficit lower than 4.5 percent of Gross Domestic Product (GDP) by fiscal year 2025-26. The deficit is targeted at 6.4 percent of GDP this fiscal year.

“Our debt level is already quite high and we need to begin tapering down fiscal deficit in the coming years,” Panagariya said.