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Focus on deficit, not exchange rate: Sachs

Vinson Kurian

THIRUVANANTHAPURAM, Aug. 10

THE noted economist and Director of the Centre for International Development (CID), Harvard University, Prof. Jeffrey D. Sachs, has observed that Indian policymakers should not be worried so much by the unfavourable rupee/dollar exchange rate, which appa rently does seem to be their wont, as instead by the sheer size of the intractable fiscal deficit the country is saddled with.

Speaking to Business Line on his maiden visit to Kerala, Prof. Sachs said he would suggest to these policymakers that, firstly, to the extent that a weaker rupee is really a sign of dollar strength rather than rupee weakness, it is really not a cause for worry.

Secondly, to the extent that the weaker rupee is a reflection of the underlying fiscal problems, their focus need to be directed at devising ways to containing the fiscal deficit, not on the exchange rate.

Thirdly, trying to defend the rupee by raising interest rates would have a more direct negative consequence on the economy than by allowing the rupee to find its own level.

Fourthly, they should aim to take advantage of a relatively weakening rupee by promoting exports to the extent possible. And in practice, that boils down to finding every opportunity to eliminate the administrative barriers in the export sector. Or, such as in not limiting foreign direct investment in the export-oriented sector. What is required is an export boom which is now becoming increasingly central to any viable strategy for prospective economic growth.

``Let the rupee find its own level,'' Prof. Sachs said and added that the size of the fiscal deficit called for immediate rearguard action from the policymakers. It did not behove them to keep raising the interest levels. Asked if the declining rupee wil l not add further to the fiscal deficit by way of adversely impacting the intricate oil pool mechanism, for instance, Prof. Sachs said whatever the exchange rate, the dollar value of oil is going to stay where it is -- which is high even by dollar term s. ``This is a problem no matter what the bilateral dollar/rupee exchange rate is going to be,'' he added.

Prof. Sachs sounded optimistic about the future of the Indian economy, in general. ``If one were to make a broad projection about the country, one feels that the prospects for a solid economic growth are obtaining currently. The question for me has alway s been whether India can achieve not just the six per cent growth which is more or less being talked about as achievable but the eight per cent or even 10 per cent growth which could truly make a difference in much shorter a period of time. This would me an drastically reducing poverty and raising the income levels.''

But, the fiscal deficit provided a threat of posing a major risk. It continues to be large and is piling on to the existing debt burden which is becoming ever more complicated. ``So this is one area where I see not just as an opportunity but as a real ri sk as well. The question of how to deal with the problem would depend on marshaling the available resources to strengthen the two strong pillars on which any effective economic development strategy rests -- simultaneous development of the social inf rastructure and prosperity at the micro-level,'' he said.