Economic Highlights
New Delhi, 9 September 2010
Dollar-Yuan
Battle
INDIA NEEDS TO WIN
By Shivaji
Sarkar
A war is raging in the world economic arena. The US is not only fighting a war in Iraq and Afghanistan, it has also engulfed
its dollar. The BRIC countries are worried about it and so are others. But so
far the dollar continues the fight.
As the dollar and yen continue
soaring high, other currencies are facing a huge depletion in their fund value.
This vulnerable situation is seen as a loosely handled economic affair which
has been affecting the world economy in a destructive manner. The dollar,
despite a crisis in the US
economy, has emerged as the sole winner amongst all major currencies including the
Indian rupee. This global financial crisis has left corporate heads, investors,
share holders and many other business entities completely stunned.
The US
has launched a sharp attack on China
demanding it up-value the yuan. A U.S. Treasury report almost labelled Beijing a “currency manipulator” and
threatening a deepening rift between the world's biggest and third-biggest
economies. Washington’s
concern is legitimate. Its market is providing a value for all Chinese products
affecting its own products. The US
views itself as subsidising the Chinese economy.
Japan is facing an upsurge in its
yen. Direct
currency intervention, though not yet tried, looks likely. Yet the yen’s
trade-weighted exchange rate, corrected for differences in inflation, remains
about 6% below the average of the last 20 years. True, the yen did hit a
15-year peak of 85 against the dollar this week and remains far stronger than
its 20-year average of around 100. But the comparison with the trade-weighted
figure underlines the extent to which it reflects the dollar’s overall
weakness.
Brazil is concerned about the US bid to keep the
dollar at a lower value. It avers that
the problem is not a strong yuan but a weak dollar. Brazil’s Finance Minister Guido Mantega said he was “very
worried” about a plan by rich countries to boost their exports via weaker
currencies, which could lead to unsustainable current account deficits in
emerging economies.
“They want to re-balance their
economies at our expense. That is not possible and we will not accept that
game,” Mantega told reporters in New
York after a presentation to investors organized by
the Brazilian-American Chamber of Commerce. “The main problem is the dollar. A weak dollar
feeds the carry trade. People come to the US
to borrow cheap money to invest in Australia or other higher-yielding
countries,” he added.
India is in a quandary. It does not
know whether to opt for a weak or strong dollar even as the rupee continues its
downward journey. A stronger rupee is not in the interest of its exports and a
weaker rupee means higher out-go for imports. Despite being a part of BRIC, it does
not share the views of Brazil about the yuan. In New Delhi’s view the yuan must
be up-valued as cheap Chinese imports are severely affecting its industry.
Brazil’s outburst against neighbour
US should be viewed with concern. So also India’s disquiet about China, perhaps
a bit more. When it comes to the yuan, New
Delhi should tow Washington’s line of action not only for economic reasons but
also for strategic concerns. A stronger yuan would act as bait against some
close but unfriendly neighbours as their investment cost would go up. But India
is shy of taking a diplomatic offensive against China as the US is doing.
Possibly New Delhi need not try to strengthen its
rupee till Washington can force Beijing to up-value the yuan. India’s interests
are not the same as the US. Though in the long run a weak rupee has wider
ramification, till such time that China re-values its currency, India should
keep quiet. New Delhi has to pressurise both Washington and Beijing to set a
higher price for the yuan. It is necessary to stop dumping by China in India
through official and unofficial routes. Cheap Chinese imports are the greatest
threat to India’s economy, thus for sometime it can allow the dollar to suffer
as part of its short-term economic strategy.
This calls for subtle
political and diplomatic action. India should aim at creating a conducive
atmosphere for its economy to outshine that of China’s. It should also use BRIC
for this purpose. Russia would support India as presently its currency too is closely
pegged to the dollar, notwithstanding close association with the Shanghai
Cooperation Group.
Clearly, New Delhi needs to
achieve this fast as a falling rupee is not in its long-term economic interest.
A lower rupee rate fuels inflation as India has to import petroleum products at
a higher price. Its capital goods import also becomes expensive which hits
infrastructure and other development projects. Besides, its foreign exchange
value keeps changing, often falling, adding to problems in the international market.
There are other tribulations of
a falling rupee. As it falls, foreign investors would want bigger returns for
their money to compensate for the higher risk. This means that the Indian Government,
companies and individuals would have to pay more for the money they borrow,
plainly, higher interests.
A major problem with a falling
rupee is that it would increase the burden on the Government of repaying and
servicing foreign debt. This would increase the fiscal deficit. Another concern
is that it might discourage foreign institutional (FII) investment from pouring
funds into the Indian markets. There is also risk to Indian companies. A weak rupee
may add to woes as their overseas borrowings at cheaper rates to finance import
and exports might be adversely hit.
Undoubtedly, the war against the
dollar would continue till either the US economy regains health or loses it
completely. Till such time the dollar would remain in a flux. A likely
scenario. Even the Euro is fighting the
dollar. The US is in high debt but manages its affairs politically and by
flooding the market by printing dollars despite a low, virtually no reserve.
Signalling danger for international markets.
Indeed, remaining pegged to the
dollar for long might be detrimental. India needs to hedge against it by
boosting the rupee. It is its insurance for the future. New Delhi has to win
the battle against the dollar and keep the yuan further up-valued to sustain
its growth. ---- INFA
(Copyright, India News and
Feature Alliance)
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