Mumbai: World Bank chief economist Kaushik Basu Wednesday said the USD 354 billion of forex war-chest is not sufficient to fight a crisis and advocated accumulation of more currency assets as the right strategy.
"In today's world where China has USD 4 trillion in foreign exchange reserves, USD 354 billion is not enough in case an exchange rate-related issue breaks out," Basu, who was the chief economic advisor to the finance ministry in the UPA government, said during a lecture at IIT Bombay.
The comments come within two days of Reserve Bank Governor Raghuram Rajan allaying market concerns, saying we have a strong forex reserves to fight any external stress arising from the present turmoil in the market following the crisis in the Chinese economy.
"I just want to indicate that we have plenty of reserves which was USD 355 billion (at the last count), plus USD 25 billion that exist because some of our forward sales. We have got USD 380 billion to play with," Rajan had said on Monday on a day when the market saw its worst fall tanking close to 6 percent and the rupee hitting a 2-year low of 66.65 a dollar.
Basu, however, said we have not entered a phase of "competitive devaluation or a currency war where what you do is you lower your exchange rate to try and give a boost to your exports."
There is, however, a risk of the same, he warned and said if the Chinese yuan falls further, other countries like Taiwan, Thailand and Vietnam which are dependent on exports may be impacted.
"I think as far as possible you must resist competitive devaluation," Basu said.
"Overall on exchange rate policy, my suggestion will be roughly what used to be done till 2008, when we accumulated foreign exchange reserves," he added.
It can be noted that after losing over USD 20 billion in the crisis triggered by Fed's taper tantrums in 2013, the RBI has been building its reserves and the kitty has swelled to lifetime highs of over USD 350 billion now. Between March 2014 and July 2015, the RBI amassed a whopping USD 106 billion in reserves.
On GDP growth, which was cited as another strong factor by Rajan, Basu said, "World Bank and other international organisations are feeling optimistic that India may turn out to be one place that holds on to a decent growth."
He also acknowledged that there are "multi-faceted" challenges before the country on the growth front.
Without mentioning the ruling regime, he said, "The challenges are multi-faceted. You have to understand that slogans and things like that are important, but with that you also need a lot of strategic thinking."
Among the big challenges that the country faces he listed corruption, permit raj and difficulty in doing business as the main ones, in ease of doing business the country ranks a low 142 in a list of 189 nations.
"If we can cut down the bureaucratic transaction cost, I think we are going to unleash a lot of energy, entrepreneurial energy, ordinary people's energy small self-owned enterprises will be much more happening here," he said.
Basu further said agriculture cannot lead the growth charge, which has to come from manufacturing and services sectors.
He said he does not doubt the new system of computing GDP growth, saying it is "reasonably well calculated".
