With inflation above 7 per cent and industrial production growing at 3 per cent, the Indian economy is in trouble. For many years, we envied China’s high growth of GDP and exports and tried to learn from them. Unfortunately, we learned the wrong lessons. This is especially so in the case of China’s management of currency and monetary policy.

We fail to see why some of the policies that can work in China cannot work in India. One, the economic structure is different. China has a large share of investment undertaken by former PSEs whose decisions are not based on market principles. In India private firms make investment decisions in a market economy. Two, the political structure is different. The Chinese Communist Party does not have to depend on political funding or votes to remain in power, unlike a ruling party in India. These differences are crucial in making the Chinese monetary policy model unsuitable for India.

Various commentators have reiterated that policies that work for China should work for India because both countries are poor and have large labour surplus economies. In managing the currency and prices, the Chinese policy of sterilised intervention was described as the perfect recipe for achieving high exports and low inflation. It has been argued that government only needed to allow the RBI to sterilise and the RBI would be able to keep the rupee weak and exports high. When the Chinese central bank, People’s Bank of China (PBOC), created bonds meant for sterilisation of its currency intervention, massively sold them to Chinese public sector banks and raised the Cash Reserve Ratio (CRR), the RBI followed.

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