Currency Wars and India

Prime Minister Manmohan Singh in an interview to FT has said that he is “worried about the global situation” over rebalancing the global economy.

At the heart of the matter is what can be called currency warfare. Money is cheap in the western world. It seeks better returns. Better returns are in emerging growing markets like India and China. These countries are seeing huge capital inflows which put pressure on the currency.

China manages its currency. It is more or less pegged to the dollar and moves in a narrow range. This creates balance sheet issues for China – they need to keep sucking up dollars from the market, and buying US Treasuries with them, that offer low returns. But at least they protect their export competitiveness.

India on the other hand uses a much lighter touch on the rupee. Since September, the rupee has appreciated from 47 to nearly 44 rupees to the dollar. That has a tremendous impact on the profits and competitiveness of exporters like the Services industry.

Essentially, India is getting squeezed between an undervalued Renminbi and cheap money in the west.

I have never understood why informed opinion in the US defends the Chinese on this issue. Its not so much defending them as much as deflecting the criticism by saying “The Renminbi is not the problem. The US should look at itself to see what ails it – why are its students falling behind on Science and Math scores, what can it do to make its workers upskill etc. etc.” Which is hogwash. Yes, the US needs to look at these fundamental matters, but that’s not an argument for why the Renminbi should be undervalued.

None of this makes sense until you realize how much stuff big business in America manufactures or buys from China. Why would they want their dollar cost of imports to rise? US jobs be damned.

Some people argue that even if the Chinese loosened their grip on the Renminbi, and it rose say 10% overnight, it’s not as if jobs would whoosh back to the US. The difference in labor costs and the all-in cost of manufacturing is just too high.

So the undervalued Renminbi makes no difference to jobs in the US. But it does make a big difference to India. And other low cost manufacturing countries in Asia like Vietnam and Bangladesh. A fairly priced RMB could make India a very competitive destination for manufacturing.

Next month’s G-20 summit will see a lot of hot air, but almost certainly, no solution to this global quandary. The China-US game has reached a stalemate. India unfortunately is paying the price.

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