“One can see how the Indian rupee could become a vehicle currency for some of the trade that India does with the rest of the world, especially 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, the rupee over time could become one of the variety of global reserve currencies in the world,” says Nouriel Roubini, Professor Emeritus at New York University Stern School of Business.

You may have observed that Indian policymakers are taking a lot of steps to beef up manufacturing. PLI was one. In this Budget also, we hiked capex overall and in railways. Do you think this is the right approach for infrastructure and manufacturing scale-up? What else would be required to scale up our manufacturing capabilities to global levels?

Developing a manufacturing base is important and having the right industrial policies is essential. However, India is at risk of making some mistakes. Mistake number one is that attracting global firms that produce for this market is good but you also need to have goods that are competitive in international markets.

Instead, what is happening in India is that the attraction of foreign capital is used as more like an import substitution industrialization, the restriction to tariff is on either raw materials, intermediate inputs, or final goods, which implies that actually if you are a foreign firm wanting to produce for the global market if the imported inputs are expensive, you cannot exploit the global value and supply chains are part of an integrated production process.

Going in the direction of protectionism of domestic firms and of domestic industries as opposed to production for export-led growth may be a challenge and the fact that India has not recently joined either FTAs or regional trade agreements is a signal that you are doing something slightly not right.

The other dimension is that the comparative advantage of India is not in traditional labor-intensive industries, not even in things like cars, tractors, or locomotives. It is in high-tech, it is in IT and within IT, there are products like iPhones and other types of tech products. Some of those productions may not be as labor-intensive as traditional manufacturing. Still, if you are going to give preference to subsidies to more traditional manufacturing, you are not going to exploit your comparative advantage with these technologies.

I am all in favor of industrial policy even of subsidies and so on but they have to be done clearly in a way that makes firms and products competitive in global markets rather than in a protected domestic market, and that is one risk you are facing.

How have you analyzed the steps taken so far by the central bank to keep the currency stable, tilting towards growth, while still making all efforts to manage inflation?

So far the RBI has done well. They thought that they probably were done with the last policy hike of 25 bps in February. Unfortunately, the data about headline inflation and core, since then have come up slightly higher than expected even if wholesale inflation is lower. There is a state of the world in which unfortunately inflationary pressure may be persisting, and therefore the RBI may be forced to hike slightly more and withdraw further liquidity if the world is a weaker one.

If the world is going to be one which will have financial pressure on the currency, on the balance of payment, and so on, then the policy trade-offs are going to be challenging because either you prevent the currency by doing forex intervention that has cost and benefits or you let the currency weaken.

If it weakens too much, that may be a source of important inflation or you can hike policy rates in a way that weakens economic growth. I think you have to manage it carefully. I would say that while the currency is weakened on a number of measures, real exchange or the equilibrium, there is probably still room for some depreciation, especially if we are thinking about having export-led growth either of manufacturing or also of services.

A gradually falling currency may not lead to significant imported inflation especially because some of your raw material like oil and energy from Russia is bought at discounted prices. And the benefit of having a slightly weaker currency like in the case of the Asian tigera, might outperform any kind of concerns about imported inflation. So maintaining a competitive currency should be one of the important objectives of the RBI.

We are trying to conduct international trade with a lot of partners across the world – be it Russia, Iran, Africa, parts of Southeast Asia. Do you see that gain momentum?
I am of the view that overall there will be a process of de-dollarisation over time. Part of it is the structure of the share of the global economy of the US. It has fallen from 40% to 20%. It does not make sense for the US dollar to be two-thirds of all international financial and trade transactions, part of it is geopolitics. The US is weaponizing the US dollar for national security and foreign policy objectives that, of course, makes the rivals of the US uncomfortable. But even some of the friends and allies of the US whether in the Middle East or even in Asia are a little bit queasy about that.

One can see how the Indian rupee could become a vehicle currency for some of the trade that India does with the rest of the world, especially the 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, the rupee over time could become one of the varieties of global reserve currencies in the world

That is amazing. You have made a comment that India has the potential to grow 7%. McKinsey says it is India's century. Some other similar agencies say it is India's decade. When you say 7% plus is our potential growth rate, what is the durability of that? Are we talking about many years of around 7% growth, is that possible?
Well, certainly it is possible. When China was growing very fast for three decades, it grew at about 10% and of course, with the aging population and catch-up of growth, once you reach middle-income levels, it is not sustainable. The per capita income of India is low enough that actually with reform certainly 7% is possible but even more than 8%.

But you have to do many more economic reforms that are structural to achieve that growth rate and if you achieve it, you could maintain it for at least a couple of decades but it depends very much on policies.

But at the same time, let us talk about some global challenges. In your recent book Mega Threats 2023 Beyond, what have you talked about as the three biggest threats for global policymakers and individual leaders of countries like ours? All of them have to bear in mind and have to make their policies anti-fragile so that these risks do not hamper their overall plans.
The one that is key is relevant for the world but also specifically for India is the issue of climate change. Under some scenarios, a good chunk of India would be either underwater or too hot to live, or subject to major natural disasters. So investing in the green economy, the green transition, and making energy more renewable or alternative to fossil fuel is going to be very important to have a better planet and a better world.

India is as much at risk as any other part of the world. The nexus of overall macroeconomic stability, maintaining low inflation, maintaining sustainable private and public debts, and external debts so that you do not have financial pressures that occur when you have excessive indebtedness is going to be a nexus of economics that maintains macroeconomic stability. It is required for stable economic growth.

The third one is really investing in a variety of capital – human capital, physical capital, infrastructure capital, institutional capital, and also global soft power as a way of sustained economic growth. The future of the world is digital and knowledge is innovation. The benefit of India is that it already has a comparative advantage in tech and it can do much more in those industries of the future. But good policy frameworks and implementation are necessary in order to achieve that particular success.