India refuses to side with US on trade imbalances

As a rancorous debate over economic imbalances and currency valuations clouds the G20 summit here, India has refused to side with the United States, which believes that cutting trade surpluses by countries like China is the solution.

In bilateral meetings with UK Prime Minister James Cameron and Mexican President Felipe Calderon, Prime Minister Manmohan Singh said that there was no agreed universal diagnosis to what was ailing the global economy. Disclosing this to the Indian journalists here for the summit, a spokesperson for the external affairs ministry refused to be drawn into its implications, saying the interpretation was left to the journalists.

According to reports, US President Barack Obama and his Chinese counterpart Hu Jintao spent “the bulk” of an 80-minute meeting here discussing exchange rates.

China’s record $28 billion trade surplus with the US in August heightened criticism that its government maintained an unfair cap on the yuan’s appreciation to the detriment of US businesses. Obama, who has pledged to double exports in five years, wants to broaden the currency debate by linking it to current account imbalances.

Germany and several other nations have hit out at the US plan to consider limiting current account imbalances.

India, on the other hand, finds itself in a uniquely happy situation and may rightly want status quo to continue. It has a trade deficit with China. A revaluation of the yuan upwards will only increase this deficit. Secondly, many Indian companies buy equipment and machinery — telecom, power — from China. A lowly-valued yuan works in their favour. The rupee’s rise, meanwhile, remains in check because the country has a current account deficit exceeding 3 per cent of the gross domestic product.

A meeting of finance ministers and central bankers last month agreed to move toward “more market-determined exchange rate systems” and make efforts on “reducing excessive imbalances”. A week later, the US Federal Reserve said it would buy $600 billion in Treasury bonds over the next few months to shore up the economy. Brazil, Germany and China said the move would drive down the dollar and fuel speculative flows of capital that risk asset bubbles.