The Union Finance Minister Arun Jaitley and the RBI Governor Raghuram Rajan have differed about Indian economic policy recently.
Raghuram had earlier said that our policy should be 'Make for India', rather than 'Make in India', and insisted in maintaining high interest rates. He said that the emphasis on exports is erroneous , as " the world as a whole is unlikely to be able to accomodate another export led China". He also said that " with external demand growth likely to be muted for at least the next 5 years, India has to produce for the internal market".
Jaitley has criticized Raghuram, and said that we should make for the whole world, not merely for India, and reduce interest rates. He said that people want the best quality products at the cheapest prices, and we should sell wherever there is a market, not merely in India.
I respectfully submit that both Raghuram and Jaitley are talking through their hats.
Let us take Raghuram first. He is correct in saying that.the world market is already saturated, and with the worldwide economic recession going on, and likely to continue for a long time ( see my article ' World Economic Recession ' on fb and on my blog justicekatju.blogspot.in ) emphasis on exports will be unsuccessful.
However, he is mistaken in thinking that the internal market will solve the problem. The fact is that our masses have little purchasing power as they are too poor. And as for our middle class, its purchasing power too has been greatly eroded by the skyrocketing price rise, and they have barely enough to purchase essentials like food and medicines, leaving little to buy other goods. So where is the internal market ?
In fact even in our internal market, deep inroads have been made by the Chinese in certain sectors e.g. electronic gadgets ( no doubt not all of a high quality ), house furnishings, toys, Diwali fireworks, hot water bottles,etc, many selling at 10 to 70% cheaper prices than Indian products. Chinese goods have resulted in closure of many manufacturing units in India. 60% industrial units in the industrial belt of Thane and Bhiwandi near Mumbai have closed down. Chinese goods have captured 30% of the Indian imitation jewellery market. Many more such examples can be given.
As regards Arun Jaitley, the reply to him has, in my opinion, been given correctly by Raghuram. A worldwide economic recession is going on, so where is the market for these exports ?
In my opinion reducing interest rates will have no significant effect. It will no doubt partially reduce the cost of production, and thereby give some fillip to industrial production, but where is the market for this increased production ? The problem is not, as I have repeatedly pointed out, how to increase production, which we can easily do with our huge pool of bright engineers and technicians, but how to raise the purchasing power of the masses ?
I repeat what I have said several times earlier : we must mainly rely on our domestic market, because over reliance on foreign markets is very precarious, as they may be captured by some other country,or there may be a recession ( as there is worldwide today,and likely to continue for a long time ). But for that we have to raise the purchasing power of our masses.
How this can be done is therefore the central question for us today. We have to use our creativity to find the solution.