Indian rupee | Nouriel Roubini: The rupee could become one of the global reserve currencies over time: Nouriel Roubini

You may have observed that Indian politicians are taking many steps to boost production. PLI was one. In this budget, too, we have increased investment spending overall and for the railways. Do you think this is the right approach for infrastructure, production scale-up? What else would it take to scale our manufacturing capabilities to a global level?
Developing a manufacturing base is important, and having the right industry guidelines is important. However, India runs the risk of making some mistakes. Mistake number one is that it is good to attract global companies that produce for that market, but you also need to have goods that are competitive in global markets.

Instead, what is happening in India is that attracting foreign capital rather than import substitution industrialization is being used, the limitation of tariffs applies to either raw materials, intermediate products or finished products, that actually means if you are a foreign company working for the global market when the imported inputs are expensive you cannot take advantage of global value creation and supply chains are part of an integrated production process.

Going towards protectionism of domestic companies and domestic industries, as opposed to producing for export-led growth, can be challenging, and the fact that India has not recently joined either free trade agreements or regional trade agreements is a signal that you are not in order.

Also Read: With the Right Policies, India’s Growth Can Potentially Exceed 7%: Nouriel Roubini

The other dimension is that India’s comparative advantage does not lie in traditional labor-intensive industries, not even things like cars, tractors or locomotives. It’s high tech, it’s in IT, and within IT there are products like iPhones and other types of tech products. Some of these productions may not be as labor intensive as traditional manufacturing, but if you favor subsidies over more traditional manufacturing, you will not be using these technologies to leverage your comparative advantage.

I am fully in favor of industrial policy, even subsidies and so on, but clearly they must be done in a way that companies and products are competitive in global markets and not in a protected single market and that is a risk you face.How have you analyzed the central bank’s steps so far to keep the currency stable and trending toward growth while still making every effort to control inflation?
So far, RBI has done well. They thought they were probably done with the last 25 basis point policy hike in February. Unfortunately, headline and core inflation data have come in slightly higher than expected since then, even if wholesale inflation is lower. There is a state of the world where inflationary pressures can unfortunately persist and therefore the RBI could be forced to add a bit more and withdraw further liquidity if the world is weaker.

If the world is going to be a world that is going to have financial pressures on the currency, balance of payments, etc., then the policy trade-offs will be challenging because either you prevent the currency by conducting FX interventions that incur costs and benefits, or you weaken the currency.

If it weakens too much, it can be a major source of inflation, or you can raise interest rates in a way that weakens economic growth. I think you have to be careful with it. I would say that although the currency is weakened due to a number of actions, the real exchange rate or the equilibrium, there is probably still room for some depreciation, especially if we are talking about export-led growth in either manufacturing or services as well ponder.

A gradually falling currency may not lead to significant imported inflation, especially because some of your commodities like oil and energy are bought from Russia at discounted prices. And the benefit of a slightly weaker currency, as in the case of the Asian tigers, could outweigh any concerns about imported inflation. Therefore, maintaining a competitive currency should be one of RBI’s most important goals.

We try to do international trade with many partners around the world – be it Russia, Iran, Africa, parts of Southeast Asia. Do you see this gaining momentum?
I believe there will be an overall process of de-dollarization over time. Part of this is the structure of the US’s share of the world economy. It has dropped from 40% to 20%. It makes no sense that the US dollar accounts for two-thirds of all international financial and trade transactions, part of which is geopolitics. The US is upgrading the US dollar for national security and foreign policy goals, which of course makes US rivals uncomfortable. But even some of America’s friends and allies, be it in the Middle East or even in Asia, feel a little uneasy.

One can see how the rupiah could become a vehicle currency for some of the trade India does with the rest of the world, particularly South-South trade. It could be a unit of account, it could be a means of payment, it could become a store of value. Certainly, over time, the rupiah could become one of the many global reserve currencies in the world.

That’s great. You noted that India has the potential to grow by 7%. McKinsey says it’s India’s century. Some other similar agencies say it’s India’s decade. If you say that more than 7% is our potential growth rate, what’s the durability of that? Let’s talk about many years with around 7% growth, is that possible?
Well, certainly it is possible. When China grew very rapidly for three decades, it grew by about 10%, and of course, with the aging of the population and catching up in growth once you reach middle income levels, it’s unsustainable. India’s per capita income is low enough that 7% is actually possible with reforms, but even more than 8%.

But you still need to do a lot more structural economic reform to get that rate of growth, and if you do, you could sustain it for at least a couple of decades, but that depends very much on politics.

But at the same time, let’s talk about some global challenges. In your recent book, Mega Threats 2023 Beyond, what did you identify as the top three threats facing global policymakers and individual leaders of countries like ours? They all have to consider and make their policies anti-fragile so that these risks don’t hinder their overall planning?
The key issue that is relevant to the world but also to India specifically is the issue of climate change. In some scenarios, much of India would either be submerged, or too hot to live, or face major natural disasters. Therefore, it will be very important to invest in the green economy, green transition, renewable energy or alternatives to fossil fuels to have a better planet and a better world.

India is just as vulnerable as any other part of the world. Linking overall macroeconomic stability, maintaining low inflation, maintaining viable private and public debt and external debt so you don’t have financial pressures that arise when you have excessive debt will be a linking of economics that maintains macroeconomic stability. It is necessary for stable economic growth.

The third truly invests in the diversity of capital – human capital, physical capital, infrastructure capital, institutional capital and also global soft power as a path to sustainable economic growth. The future of the world is digital and knowledge is innovation. India’s advantage is that it already has a comparative advantage in technology and has much more to offer in emerging industries. However, in order to achieve this special success, general goods policy conditions and their implementation are necessary.