ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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India's 'Dutch Disease'

Can SMEs Provide the Medicine?

A V Rajwade (EPW, 3 May 2014) rightly complains about how capital inflows are leading to an appreciation of the rupee, which, in turn, is rendering Indian manufactured goods internationally uncompetitive. Besides tackling this problem, the new government must put in place a micro, small and medium enterprise-focused development strategy to overcome the problem of "jobless growth".

The article, “India’s ‘Dutch Disease’ and the Exchange Rate” by A V Rajwade (EPW, 3 May 2014) raises some important issues of current relevance in the context of economic policymaking in India. This is especially important and timely in a context where the country now has a new government and a new team of policymakers. According to Rajwade, finance capital inflows and inward remittances constitute a kind of “Dutch disease” which is rendering Indian manufactures uncompetitive. He also points out that the extensive focus on the financial economy and the neglect of manufacturing have put India in a precarious position.

The term “Dutch disease”, to the economist, implies an experience of poverty amidst plenty. The experience of the Netherlands half a century ago demonstrated such a phenomenon. At a time when unbounded natural gas output brought in foreign revenues, the competiveness of the domestic economy declined on account of a rising exchange rate. The symptom of “Dutch disease” is the inability of the domestic economy to compete globally, because of a bloated exchange rate.

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