Sanjeev Sanyal, Principal Economic Adviser in the Ministry of Finance, believes there is no such thing as ‘normal’ exchange rate value.

As debates continue on the new normal for the rupee, Sanyal, in an interview with BusinessLine, said: “This whole idea of an equilibrium is outdated. There is no natural or normal exchange rate. What there is a market-determined rate. The Reserve Bank has a well established policy of managing volatility in the short-term, and allowing market adjustment in the medium-term. The rupee is stable against almost all global currencies, and should not chase a sharply strengthening US dollar.”

On the political debate on the back-series of GDP numbers, Sanyal, who is part of the core team that is involved in cleaning up the country’s banking system, said: ‘let the technicians do their job. This is a report which is yet to be accepted by the Advisory Committee on National Accounts Statistics. And there are some kinks in this back-series which they need to look at.”

When asked to elaborate on the kinks, he explained: “we needed a back series for the new 2011-12 baseline. We are using this for GDP estimates going forward but we need a back series for longer-term comparison.”

There are some quirks, as with any methodology, which need to be looked into, he said adding: “one of them being the series causes all growth rates before 2002 to be tempered down and those after 2002 to be increased. All methodologies have quirks. We just need to study it and be clear about what it is, before it is officially accepted. Remember we have to accept that this is technically correct at least.”

On the debate about the economy being stronger in the back-series than at present, if one goes by the said report, he said, “Irrespective of this back series, the fact is that GDP growth was very strong in mid-2000s even in the previous series.”

Sanyal argued, “No one is denying that growth in the mid-2000s was good, but it was good period of growth for the whole world. So if one blames global growth after 2008, then one has to give it credit for the period before 2008.”

Sanyal feels while some part of the 2004-2009 growth was due to benign international developments, a major part was due to reforms that happened in the Vajpayee period.

“This growth acceleration (being spoken about) had happened already in the last year of the Vajpayee regime. Besides, the gains from major reforms take years due to lags and are not reflected immediately. So the high growth being spoken about in the mid-2000s could not have been due to of any sudden improvement in policies. So even the first year or two of the UPA-1 would have been because of the previous regimes’ policies,” he said.

“Moreover,the acceleration in credit did not happen after the crisis as a stabilisation measure. Data for 2005-06 show massive expansion in credit,” Sanyal pointed out.

Growth factors

Summing up the growth indicators, he said, “Three factors led to the growth during the mid 2000s — extremely good external environment, impact of Vajpayee era reforms, and a credit tap that opened up by 2005-06. It is very difficult to point out which of these is the most important.”

Then comes the question about what happened in the period 2009-2014, when growth rates were extremely choppy and there was an anti-cyclical response. “I think just like credit in the previous period is to be given to global growth, here it is fair to say that some part of the choppiness came from a genuine external environment problem. I am, therefore, not criticising the fact that there is some anti-cyclical response, the question is how responsibly you do it. There was a sharp spike in the fiscal deficit, a massive expansion in credit and a jump in inflation to double digits. I would argue that macro-stability was allowed to go out of control.”

As a result, growth had already slowed down by 2012-13 and 2013-14, Sanyal pointed out adding, “So given the leads and lags, this government inherited serious macro instability even as growth had slowed down significantly.”

Structural reforms

However, instead of following the previous regimes’ policies, this government decided to take some significant structural reforms which came with some pain.

Every time inflation is brought down there is a price to pay, but the government brought it down by 600 basis points while simultaneously introducing GST and carrying out a clean-up of the banks using the insolvency bankruptcy mechanism.

“All these measures were necessary for unwinding the legacies left behind. If any other country would have introduced these simultaneously, it would have had a recession. Instead, we have continued to be the world's fastest growing economy in a global environment which is not as positive as it was 10 years ago. This is a very good performance,” he argued.

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