NEW DELHI: The rupee could well be too robust for India’s long-term economic wellbeing, Chief Economic Adviser Arvind Subramanian suggested, drawing a direct correlation between a strong currency and weakness in exports, the latter being a vital link in the government’s economic revival strategy. He acknowledged there were sections that advocated a stronger currency.

Part of the community out there. wants a strong exchange rate, but that would be very detrimental to our exports, Subramanian told ET in an interview on Sunday. No country in history has grown at 8-10% for 30-35 years without roaring exports. And remember that a flat exports to GDP ratio also reflects the fact that the external environment is actually less favourable to absorbing exports than it used to be.

However, he also said that the nuanced manner in which strong currency flows need to be managed is linked to the need for higher reserves, which in turn would mean a strong currency. One of the lessons from China is that foreign exchange reserves have been a big source of (power) — $4 trillion. It’s allowed China to behave like the World Bank and the IMF put together, he said.

I think we should be targeting $750 billion to $1 trillion of reserves. I am not actually advocating that but I think one needs to think in those terms if we are a rising power, Subramanian said. He said achieving all these ends would be a complex exercise.

The way you accumulate reserves is by actually having a very competitive exchange rate. When capital is coming in, the challenge is. going to be to prevent it (rupee) from going up, he said. I think we have to be opportunistic, when there is a chance to allow it to drift down, maybe a little bit it drifts down but when a lot of capital is coming in, intervene to keep it stable. So we have to be very pragmatic in our approach to the exchange rate. And the more successful we are, the more complicated it is going to be.

He also warned about money flooding into India from overseas. Surfeit rather than scarcity of capital can be the problem going forward, Subramanian said. If you see in 2014 the rupee has become uncompetitive by about 9%, 6.5% of that is because of capital inflows. It is going to be a problem. Prime Minister Narendra Modi wants to drive up investment, put growth on the fast track, turn the country into a global manufacturing hub with the ‘Make in India’ initiative and generate jobs as he looks to lift millions out of poverty. Making sure that the strategy works for India will mean getting the many moving parts to work in harmony.

‘RBI HAS DONE A GOOD JOB’

I think so far RBI has done a good job of balancing capital inflows, Subramanian said. One of the points we make in the Economic Survey is that while the current account deficit coming down is a good thing, there is a flip side. the money that comes in is going to put more of pressure on the exchange rate.

That would make Indian exports uncompetitive in the global market, he said, echoing concerns he voiced in the Economic Survey that was released on February 27.

During India’s rapid growth phase between 2002-03 and 2008-09, the ratio of exports of services to GDP increased dramatically, from 4% to nearly 9%, the survey said. In contrast, manufacturing exports were less buoyant. After the global financial crisis, however, the roles seem to have been reversed; manufacturing exports seem to have done better than services exports. More worrisome, however, both have slowed down in the last five years which does not augur well.