Currency War-US, Europe are unjust in their demand for Yuan appreciation

15/10/2010

The rate of exchange between US$ and Chinese Yuan is around $1= Yuan 6.7. US(and other developed countries in Europe etc) thinks that Yuan is undervalued to the extent of about 25% i.e. their view is that the rate should be around $1= Yuan 5 or 5.5. The arguments of US is that since the Yuan is undervalued, products imported from China into US are cheap compared to local products, and this is detrimental to the US industry, and leads to job cuts estimated at around 0.5 million. Further, US products exported to China are expensive in China and hence US exports suffer. China’s foreign exchange reserves are very large (around $2650 billion) and this should normally make China’s local currency appreciate against other currencies but it is not happening. . According to US, China manipulates the exchange rate

US argument is not fully justified because,

i).it does not take into account, the fact the China exports to around 200 countries and the number of countries affected by current rate of exchange are only a few. Most of the developing countries benefit when prices of imported products are low.

ii) Many countries do not have the concerned industry and the question of the local industry suffering or workers losing jobs do not arise at all.

iii) Where local industry exists, Chinese equipments and products fill the gap between supply and demand, at comparatively low prices thus meeting requirements of importing country and helping industrialization of that country.

iv) Even in US, the general public will only be happy to get their requirements from China at a lower rate. The large number of consumers is not bothered about the job loss for a few hundred thousand people or manufacturers suffering loss.

v)To protect the local industry and save the jobs, US could think of means like imposing/increasing import duties on Chinese products, assisting the exporters with incentives like low interest rate for exporters, exemption from tax for profits from exports etc.

vi) US could think of means of making its industry competitive in relations to Chinese industry, by asking workers to increase their productivity, upgrading technology, minimizing overhead expenses etc..

vi) US(also European) industry being affected by Chinese exports or its inability to export to China is a bilateral issue and should not be made a multilateral issue as the US gain from appreciation of Yuan will harm many, particularly developing countries importing from China.


Why RBI should not lend US$1 billion to SBI?

25/07/2010

The State Bank of India has raised   US$ 1 billion through overseas bond issue at an interest rate of 4.5%. This money is for providing its foreign operations and also for supporting Indian companies with external commercial borrowings.

Reserve Bank of India has foreign exchange reserves of about US$ 270 billion. RBI has deposited the same in foreign countries with foreign central banks etc at much less than 1% interest rate. For any country foreign exchange required for meeting imports for 3-6 months is sufficient. This means that   the country needs foreign exchange of about US$ 75-150 billion. Thus RBI has excess foreign exchange. Instead of allowing SBI to raise funds through overseas bond issue at 4.5% interest rate, if RBI had lent this amount, the country could have saved foreign exchange of $45 million dollars per year.

RBI should consider lending money in foreign exchange to Indian commercial banks from its foreign exchange reserves instead of allowing commercial banks to raise funds overseas.


India- Government’s control of the economy

10/03/2010

In the initial years of independence, public sector had a large presence in the Indian industry and banking. This presence was further enlarged during the Prime Ministership of late Mrs. Indira Gandhi. Several private banks were nationalized. The managements of several companies were taken over by the Government. Several other companies were nationalized. This is how National Textile Corporation came into being. State and Central governments also set up many new factories. Now the situation is changing. Several government companies are being sold to private sector. Governments’ stake in many commercial and industrial establishments is being diluted. Thus the control of the governments over the economy has diminished.

Governments’ intentions should not only be to promote industries but also to have visible presence  for obvious reasons. In stead of inviting foreign equity participation in Indian companies, the governments (state and central) should set up investment companies which should take up equity in new companies as also in existing companies to induce Indian entrepreneurs to set up factories and commercial establishments and to expand existing ones. Indian companies should normally be allowed to seek technical collaborations only with foreign companies.

Governments  should borrow from Reserve Bank of India for setting up investment companies. Later on the loan amount could be monetized. This will lead to only as much inflation as bringing in equity from foreign countries.

Investment by Foreign Institutional Investors should also be restricted as ultimately, they would take away more foreign exchange than they bring in. As of now, the foreign exchange reserves of the country are more than adequate and there is no need to worry about this.


Overseas Investment Promotion Council of India

05/12/2009

India has been and continues to be a capital importing country. However, with large foreign exchange reserves of about US$280 billion, India should consider using these reserves to lend to Indian business firms investing in foreign countries. In this connection, it would be useful to  establish  Overseas Investment Promotion Council of India. (India Investment Centre focuses on attracting inward investment.)

To begin with, the council should facilitate Indian  investment in foreign countries in sectors such as exploration of oil and gas, mining of minerals including rough diamonds, lead ore & zinc ore, production and processing of edible oil seeds & pulses, and raw cashew nuts on production sharing system. India at presents imports all the above items and it would be useful to have reliable sources of supplies. The investment may be in the form of joint venture involving the Government of India, Indian business firms and companies in foreign countries where the projects are to be located.

India at present invests its foreign exchange reserves mainly in central banks of  developed countries with negligible interest rates.

Agricultural lands can be taken on lease countries like Guyana, Suriname and countries of East Africa as well as West Africa.