The government must restrict imports of luxury goods to tackle a widening current-account deficit and support the rupee, instead of resorting to raising interest rates, according to an adviser to Prime Minister Narendra Modi.
"We need to actively send signals to disincentivize or discourage increase in consumption of what I describe as explicit luxuries," Rathin Roy, a member of Prime Minister's Economic Advisory Council, said in an interview. Imports of mobile phones such as iPhones or spending on services such as higher education overseas has gone up, he said.
The government on Wednesday raised import taxes on $12 billion of goods, from jewelry to footwear, as it sought to pare the current-account deficit from a five-year high. Electronic goods and gold are among India's biggest imports after oil and the rupee's slide to Asia's worst-performing currency has worsened the nation's finances as economic growth picks up.
Oil has risen to the highest in four years, threatening to stoke inflation and unnerving global funds who've pulled $2.45 billion from local bonds and stocks in September. The withdrawals have sent the rupee to multiple record lows, and prompted most economists in a Bloomberg survey to call for a 25-basis point rate hike by the central bank this week.
Roy says bumping up borrowing costs is not an answer to the nation's currency woes.
"There's a consensus across the central bank and other authorities that the circumstances are not such as to warrant using the interest rate as an instrument to manage the exchange rate," he said. "That's very welcome."
The government and the central bank have successfully warded off attempts by speculators to short the rupee, he said, referring to RBI's measures on Thursday to improve cash availability with banks. India's move to raise import tariffs follows similar steps taken by Indonesia, which also runs a current-account deficit. The Southeast Asian country has delayed import-heavy infrastructure projects and boosted taxes on imports of luxury goods.
Some other views Roy expressed during the interview:
Current-account gap widening due to imports to meet demand of top 10 percent of the population Spending on recreational travel, education abroad have gone up to $5.4 billion a year Demand is not falling even with higher retail fuel prices Government and RBI should do what they are doing: make sure there's no shorting of the rupee Confident that the government will stick to budget goals.