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BW Businessworld

Launch The Rupee

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From their separation till 1980, Pakistan had grown faster than India on the whole. In the 1980s there was not much to choose in the performance of the two countries. Then there was an overhaul of India's economic governance; state control on industry and trade was dismantled, and they were given freedom to grow. The result was remarkable. In terms of gross domestic product at purchasing power parity, India began to overtake one country after another. Today it has the world's fourth largest economy. Pakistan languished where it was. Since Pakistan's rulers had only one objective — to compete with and defeat India — they lost heart. They lack self-confidence today; the bravado and rudeness in their encounters with our rulers are an indicator.

But international rivalry is seldom a two-horse game. After its liberalization in the 1970s, China consistently beat India in the growth stakes. Pakistan befriended China. Their alliance has paralysed India's Pakistan policy. Not that a special effort has to be made to defeat Pakistan; its rulers are masters in the art of scoring self-goals. But they play the world's two biggest powers, China and the US, against each other; each strives for Pakistan's friendship, and tries to buy it with various freebies. The US would like to sign up India as a friend; but Manmohan Singh has played hard-to-get. For him, China is too close, and American friendship is not a high enough reward for making an enemy of China. And India needs oil, and the US cannot make India independent of Iranian oil.

That left one possible ally for India to court, namely the European Union. The two had a good fit. Both are extremely bureaucratic and slow-moving; their bureaucracies would have enjoyed meeting repeatedly in pleasant resorts and negotiating without hurry. Over a few years they would have negotiated 21 different agreements with 678 annexes.

But again China has stolen a march over India; it has offered to help the EU cope with the sovereign debt crises of its members. The EU unified its financial markets without unifying its public finance. Every member country can run as big budget deficits as it likes, and finance them by borrowing on the EU financial markets. This is what Greece did, until the banks that were buying its debt realized that there was no hope of it being able to repay its debt. Ireland did not run fiscal deficits; but its banks went bankrupt, and their baleout cost the government more than it could afford. The bonds of both governments were bought up by European, mainly German banks, which are now wondering if they will ever be repaid. These fears have affected the markets; the risk premium on Greek debt has hit new peaks.

Portugal needs to float new bonds soon; there are fears that it may face difficulties in selling them. Altogether, fears are accumulating that the EU is ripe for another series of fiscal crises. With a perfect sense of timing, Li Keqiang, one of China's numerous vice premiers, has assured the Europeans in an article he wrote in a German newspaper of China's help in dealing with the sovereign debt crisis. India cannot, of course, match China's fire power; nor can it find effective responses to China's dirty tricks. But it has to live in the same world, and find its own place among the nations. It needs to do some fresh thinking about how to make friends and influence countries.

One of the problems to which it has to find its own solution is of trade with Iran. Till now, the trade was settled through Asian Currency Union headquartered in Teheran. Without any warning, Reserve Bank of India sent all authorized dealers a circular on 27 December which required transactions with Iran to be settled "outside the ACU mechanism"; State Bank of India consequently stopped handling them altogether. Madras Refineries, which gets all its oil from Iran, started counting how many days its stock of crude would last; Mangalore and Vadinar refineries are in similar trouble. Then an RBI official, who refused to be named, said that the Reserve Bank was actually trying to be helpful. If that is being helpful, importers could well do without such help.

The solution is obvious: Iran should be paid in Rupees. Iran has suggested this. It imports much less from India than it exports at present, so it would accumulate Rupees in an account with RBI. But it is prepared to do this; and seeing how difficult the US is making for Iran to trade, Iran will find a use for the surplus Rupees. And why just Iran? India should offer the facility of Rupee trade to all its trading partners. It is time to launch the Rupee as an international currency.

The author is Consultant Editor of Businessworld. ashok dot desai at gmail dot com

(This story was published in Businessworld Issue Dated 24-01-2011)