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BW Businessworld

How To Make Gold For The Country

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The prime minister's invitation to heads of neighbouring countries to his swearing in was a superb move. It was a spectacular end to his predecessor’s policy of infinite caution and exquisite inaction. The drama in Islamabad after Modi’s invitation arrived has been widely reported: a row erupted between the chronically anti-Indian lobby and the handful of people with working minds, and the rationalists won. Narendra Modi can do this again: every time he offers Pakistan something, he will provoke a war between the two factions. If the latter wins frequently enough, Pakistan will develop a lasting interest in being a friend, and curb our enemies within itself.

It is nice for a change to have a Prime Minister who is an entertainer and a winner. For better or worse, our media give disproportionate space to national politics; if we have to see the same performance day after day, night after night, it is better to have an exciting and amusing one.

But economic relations are not just a matter of gestures. They are about billions’ worth of trade, investment and travel; they can make a huge difference to the prosperity of a country. They have done so to Gujarat already; although it has no deep-water coves, private enterprise has given it two busy deep-water ports and two huge refineries of imported crude.  Old-style populists may scoff at them, but the hugely corruption-prone handouts they are so fond of must be paid for. The more prosperous a country, the more money its government has to play populist with.

What then can the government do to enrich the country? I have this dream of a dozen new artificial deep water ports, matching logistic connections with the hinterland, and a fleet of a thousand standardised, cheap Panamax vessels carrying goods and tourists between India and Indian Ocean countries. It could cost as much as PDS and NREGA, but it would bring far better returns – in terms of employment, poverty reduction and well wishers abroad. But this time I would like to float a simpler, more practical idea.

Trade increases production and employment; it makes countries prosperous. International trade faces two manmade obstructions that domestic trade does not — different currencies, and trade barriers such as tariffs, customs rules and quotas. I shall leave trade barriers to another time.

Can we remove the other barrier — exchange rates? Different countries have different currencies, and for every pair of currencies there will be an exchange rate. But we can make the exchange rate between any pair irrelevant by fixing the exchange rate permanently. Economic relations between the two countries will grow faster (unless we let customs or the commerce ministry sabotage them with their restrictions). A large and ambitious country can also create a currency that the rest of the world will want to hoard. That should be us.

The fashion long ago was to align a currency to gold; that was called the gold standard. We should consider returning to it. Our people are inordinately fond of gold. P. Chidambaram thought it criminal of them, and placed all sorts of hurdles in their path. Knowing him to be a powerful threat to gold acquisition, the people hoarded more and more gold. To meet their demand, smugglers have come up in Dubai. If we went on the gold standard, and guaranteed a fixed gold price in rupees, people would know that they could get gold at that price whenever they want. They will dishoard gold; it will all end up in the Reserve Bank, which will have bigger reserves than it ever needs.  But it should buy all the gold offered to keep its rupee price unchanged.

It can then introduce a thousand-rupee gold coin. Modi’s Benarasi patrons will ask him to call it Suvarnasahasramudrika, but the common people will settle on calling it Mohur.  It will be a strong currency. Tourists will carry Mohurs home; our neighbours will make the Mohur their reserve currency; it will become a major export.

(This story was published in BW | Businessworld Issue Dated 30-06-2014)