Moneycontrol Bureau

Reserve Bank of India governor Raghuram Rajan Friday cautioned policy makers and industrialists that the ‘Make in India’ campaign should not be too focused on a manufacturing model for export markets.

He disapproved of any move to pick a particular sector such as manufacturing for encouragement, simply because it had worked well for China.

“India is different, and developing at a different time, and we should be agnostic about what will work,” he said in his speech at the Bharat Ram Memorial Lecture.

Rajan’s view is that the ‘Make in India’ policy should strive to create an environment that makes firms able to compete with the rest of the world, and encourage foreign producers to come take advantage of this environment to create jobs in India.

A drawback of the export-driven approach was that it may not work because of the sluggish global economy, Rajan said.

“Slow growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future,” Rajan said.

“Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China,” he said.

In addition, many industrialized economies were strengthening their own manufacturing capabilities through a flexible approach to the process, Rajan said. This could prove to be an added hurdle for emerging economies like India eyeing export markets, he said.

And then there was China also to reckon with.

“When India pushes into manufacturing exports, it will have China, which still has some surplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as it was for the Asian economies who took that path before us,” Rajan said.

According to the RBI governor, India companies should focus on producing for domestic consumption, given muted external demand.

Excerpts from Rajan’s speech:

“We have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country. A well designed GST bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.

Domestic demand has to be financed responsibly, as far as possible through domestic savings. New institutions and new products to seek out financial savings in every corner of the country will also help halt the erosion in household savings rates, as will a low and stable inflation rate. The income tax benefits for an individual to save have been largely fixed in nominal terms till the recent budget, which means the real value of the benefits have eroded. Some budgetary incentives for household savings could help ensure that the country’s investment is largely financed from domestic savings.”