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A stronger macroeconomic framework is the best form of protection against volatility, said Reserve Bank of India (RBI) Governor Raghuram Rajan.
Replying to questions about the economy and impact of globalisation at Mumbai's St Xavier's College's annual festival Malhar (pictured above), Rajan pointed out that India does not have a reserve currency like the US. "Therefore, we have to hold substantial reserves as a buffer," he said, adding: "But I have to argue as I have said again and again that the best form of protection against volatility, not all forms of volatility, but you can protect against investors panicking out by a strong macroeconomic framework."
He noted that that if fiscal deficit, inflation, and current account deficit would be brought to reasonable levels, then the country would be safe from foreign capital outflows.
Rajan also said that global capital should not be demonised as it will be required to bridge the current account gap. He said there is nothing wrong in having a moderate current account deficit and relying on global capital. However, he said India has to be careful about taking more than it can sustain and having a large current account deficit that is not manageable.
When asked about the industrial sector and its growth, the governor explained that India's industrial sector, especially manufacturing, is smaller than other comparable markets.
"We need to create the enabling framework so that we can get strong industrial growth. Roads, airports, ports. railway lines and power need to be improved to get strong manufacturing," said Rajan.
He also said there is a need to bridge the education gap; while India has a lot of engineers, they need to be trained to world-class levels. "We have certainly done the quantity, but there is potential to improve quality, be it schools or colleges," he added.
The environment for doing business also needs to be freed up, according to Rajan. He said India should alter business regulation, not so much to deregulate but to make it better and more effective.
"It should be easy for an entrepreneur to set up a business. S/he should not be strangled by the enormous amount of paper-work and requirement for permission. I am not saying that we should do away with land regulations or environment regulations. But make it such that everybody can win," he said.
