C. Rangarajan: Why the World Must Stay Integrated

C. Rangarajan tells Forbes India why the growth of India and other BRIC economies will help global recovery

Updated: Oct 1, 2010 04:39:08 PM IST
C. Rangarajan: Why the World Must Stay Integrated
Image: Arko Datta / Reuters

Age: 78
Designation: Chairman, PM’s Economic Advisory Council
Education: PhD in Economics, University of Pennsylvania
Career: Governor, RBI (1992-1997); Governor, Andhra Pradesh (1997-2003); Rajya Sabha Member (2008-2009); Member, Planning Commission (1991-1992); Founding Chairman, C.R. Rao Advanced Institute of Mathematics, Statistics and Computer Science
Interests: Reading, Carnatic music

What should the Indian economy’s threshold level be for 2010-2011, and how will this impact price levels versus growth targets?

The threshold level of inflation is that level of inflation beyond which the costs of inflation to the economy begin to rise sharply. It is important to recognise that India’s inflation rate cannot be very much out of alignment with what is happening in the rest of the world. This is so because differential rates of inflation have implications for the real effective exchange rate.

The inflation rate so far in 2010-2011 has remained at a double-digit level. It has to be brought down. It is expected that by the end of March 2011, the inflation rate will come down to 6 percent.

The World Bank recently urged South Asian economies to stay globally integrated. Your thoughts with regard to India?
India firmly opted for a policy of upward orientation in 1991-1992. The balance of payments position since 1992-1993 has been stronger than it was in any previous period. The policy of integrating with the rest of the world has done India good. While we opted for current account convertibility, we have not adopted full capital account convertibility.

Capital account is however being liberalised in stages. But the fact remains that “openness” has helped, not hindered, the growth process.

You’ve said earlier that you expect the global economy to chart a U-curve. Will the US economy also post a U-curve?

The pace of recovery in the US has been slow. It was earlier expected that the growth rate in 2010 in the US would be 3 percent. Given the performance of the economy in the first two quarters, it is unlikely that this growth rate will be achieved.

More likely, the US economy will grow at 2.5 percent. The process of recovery of the US will be U-shaped with an extended bottom. However, it does appear that the world will avoid a double dip recession.

Should policy makers relook at fundamental macroeconomic models being followed?
The contagion effect becomes stronger when the economies get closely integrated. This process of integration will continue. In fact, even in the aftermath of the current financial crisis, policy makers are keen to avoid protectionist trade policies. Thus international trade in goods and services will continue to grow. This aspect of the “openness” of the economies will not change and perhaps should not change. However, there is an increasing concern over the functioning of the financial markets. The flow of funds across countries is far in excess of the underlying trade and investment transactions. Policy makers, particularly in emerging economies, may want to control the flow of funds into their economies and may, at times, impose controls on capital inflows, which are considered to be temporary and speculative in character. For this reason, the architecture of the international financial system may need a re-look.

With the rise of the BRIC, how has the global economy changed in terms of convergence or decoupling?  
The recovery process in the US and Europe has been very slow. The emerging economies, on the other hand, have shown a strong recovery. This cannot, however, be described as “decoupling”. But emerging economies have also shown that by expanding domestic demand of both consumption and investment, they can raise their growth rates. This has happened in India and China. In fact, the strong growth of the emerging economies is having a favourable effect on the growth of the global economy.

(This story appears in the 22 October, 2010 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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