Common Currency in South Asia

Introduction

The issue of consolidating the South Asian economies, and have stronger economic relations in the region, is not new. However, the idea of having a common currency in South Asia was encouraged after a successful launch of EURO by European Union in 2002. The talks for a common currency in South Asia began in 2004, when then Prime Minister of India Mr. Atal Bihari Vajpayee went to Pakistan for SAARC summit. It was termed by economies as a visionary initiative which would bring businesses in South Asia closer to each other, kick-starting closer economic ties. This was followed up by the commitment towards economic integration through free trade agreement in the Twelfth SAARC Summit, Islamabad. However, not many empirical studies have taken place to suggest the framework for launching a common currency for South Asia.

Many industry stalwarts and economists have put forth the prospective benefits and problems of having a common currency. The aim of this article is to summarize these benefits and problems and to have an introspection of each of these factors in order to have an understanding of the issue.

Economic Structure of South Asian Nations

In order to have economic integration, the potential member nations should have a similar level of economic development. This includes comparable average literacy level, similar work force productivity and working standards, in order to ensure that the flow of manpower across borders is minimal. If this is not the case, it would lead to an increase in the social and fiscal strains on the immigrant country.

In case of South Asian countries, the level of development of individual economies is more or less the same, with countries like India and China leading the way towards becoming developed economies. However, there are a few countries like Bangladesh which still have a long way to go. Looking at the structure of production, it comes out that the level of contribution of the Industrial sector is reasonably similar across the South Asian countries. The Industrial sector constitutes approximately a fourth of the GDP in all the countries. However, the contribution of agriculture varies across countries.

Although this intra-regional disparity is not much, it still makes the case of South Asia different from that of Europe, where the level of development of countries is even more similar. However, few studies claim that the similarity of economic structure may make the countries vulnerable to similar shocks, which could require a similar policy response. This strengthens the case for a common currency on the grounds of similar shocks.

Feasibility of having Common Currency in South Asia

Apart from the point being mentioned regarding the economies being at similar stages of development, there are two other points which strengthen the case for launching a common currency. Most South Asians already use currency called “Rupee”. Sri Lanka, Pakistan, India and Nepal have currency called Rupee. Bhutan has both Indian Rupee and Ngultrum as legal tender. Maldives’ currency is Rufiya. So it should be easy to have a popular consensus for a unified currency. Second point is that under British rule we all had a common currency which extended to Middle East and to South East Asia. Now, Globalization and freer trade is taking South Asia back to its economic history.

But on the other hand, we need to put an emphasis on the fact that Europe emerged as a common currency economic zone after more than half a century following the end of hostilities in 1945 (End of World War-II). It took fifty years of political, economic and social negotiations for it to become a Union. In the given context, if the situation is compared for South Asia, the efforts for consolidation have only been started recently. This presents a pessimistic picture which weakens the prospect of launching a common currency.

Prospective Benefits

The common currency regime, when achieved, will confer substantial benefits to the region. It will remove the uncertainty about exchange rates and reduced transaction cost will result in providing a big boost to trade and investment in the region. Also, there would be better prospects of synchronization of inflation, interest rates and GDP growth by having a centralized control on money creation. This will contribute to accelerated growth and poverty reduction.
Also, from a business perspective, it will lead to reduction in transaction costs as they increasingly trade with each other. It will provide a bigger market for foreigners to invest in and a bigger market for savings will result in lower interest rates for all borrowers, which is beneficial for businesses everywhere.

Looking at it from another angle, this economic cooperation can prove helpful to bridge political differences among a few countries in the region, especially India and Pakistan.

Issues and Problems

One fundamental problem of having common currency is that individual countries do not have their own currency and monetary policy is agreed on regional level with agreement on national component of currency and money creation. Therefore, the system requires surrender of monetary sovereignty and of seigniorage associated with currency creation and monetary expansion.

Conclusion: The way ahead

The objective of common currency can be achieved only in an incremental manner. The Governors of Central Bank of each country should convene to develop a roadmap for currency union. The process has to begin with the initial step to introduce a parallel currency and utilize that instrument to promote regional cooperation in trade and investment. Parallel currency does not require surrender of sovereignty and individual countries retain control on their currencies and monetary policies. In addition, there is a currency created jointly, according to weightage of different currencies in the basket and assigned a value, and allocated among member countries. This common currency can be created for South Asia and will be fully convertible into any international currency. It will be used as a unit of transactions on account of trade and investment in South Asia and will be legal tender for cross-country transactions in the region. Also, South Asian countries can create a pool of forex reserves to meet emergency Balance of Payments needs as well as development needs in the region. Then, each of the Central Banks should eventually merge all their operations relating to the issue of currency, foreign exchange and interest rates. Finally, mutual trust and confidence has to be built in the parallel currency among all partners in the region, so that it becomes integrated in the economic system of the region, in order to ensure its conversion to common currency, over time.

Rupee appreciation and its after-effect

The rupee has witnessed around 12% appreciation last year, the most since at least 1974. On 16’th Jan 2008, it was quoting at 39.068 per US dollars (USD) against 44.28 at the end of 2006. The strong economic fundamental is one of the major factors for attracting Foreign Direct Investment (FDI). The appreciation got further strengthened by the sub-prime crisis in US. The sub-prime crisis in US led to fall in US market and investor started taking their money out. They looked for the best market to invest and found Indian market more attractive. According to Security and Exchange Board of India (SEBI), the net investment in India by FII was 19.53 bn USD in 2007 as compared to 8.87 bn USD in the year 2006, a 120% increase in the FII inflow. As per the data from commerce ministry, Foreign direct investments through august last year totaled $12.9 bn USD as compared to $11.1 bn for the whole of year 2006. This high inflow of money from the international market has increased the demand of rupee significantly and that has propelled the sudden surge in value of rupee against dollars. This could have impact on various aspects including trade, inflation and government policy as well.

International Trade:

The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.

Petroleum Prices:

The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.

Impact on Inflation:

January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.

As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.

Tata Motors launches the People's car at dealer's price of Rs 1 lakh

Tata Nano, the name for the Tata's new Rs hundred thousand car was unveiled today in Auto Expo in New Delhi. This is by far the lowest priced car and has a price tag comparable to luxury two wheeler. At Rs. 100,000 ($2500) this will create new trend for Auto Manufacturers in developing countries. It was like a dream come true for Tata Motor's chairman Mr. Ratan Tata. He was confident that his new car will be a hit in the Indian Markets. While presenting the first glance of the much talked people's car to people Mr. Tata said:

"I observed families riding on two-wheelers – the father driving the scooter, his young kid standing in front of him, his wife seated behind him holding a little baby. It led me to wonder whether one could conceive of a safe, affordable, all-weather form of transport for such a family. Tata Motors’ engineers and designers gave their all for about four years to realize this goal. Today, we indeed have a People’s Car, which is affordable and yet built to meet safety requirements and emission norms, to be fuel efficient and low on emissions. We are happy to present the People’s Car to India and we hope it brings the joy, pride and utility of owning a car to many families who need personal mobility."

Tata Motors claims that Nano is stylish, comfortable, efficient and meets the safety and environments norms including the Euro-4 emission norms.

The car would be manufactured in Singur plant and will be launched in the second half of 2008. Tata Motors are also looking at Africa, Latin America and ASEAN countries for prospective markets for Nano.

So far the project has cost more than 1500 crore rupees (Rs.15 billion / $375 million).

Tata Motors is India's largest automobile company, with revenues of US $ 7.2 billion in 2006-2007. With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and the second largest in passenger vehicles. It is also the world's fifth largest medium and heavy truck manufacturer and the second largest heavy bus manufacturer. For more information about Tata Motors, please visit http://www.tatamotors.com/.

Dollar continues to fall against major currencies

The dollar maintained its fall and reached a record low against Euro amid the speculation that US subprime worries may further force Fed to cut interest rates even more.

Hedge funds are dumping dollars heavily and the fall looks like a long term trend with lots and lots of uncertainties surrounding the short term outlook. So its fair on the Brazilian supermodel Gisele Bündchen's part when she preferred to be paid in Euros. Bündchen joins the millions who have lost faith in dollar. Earlier Warren Buffet had expressed that his faith on dollar is dwindling.

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