T N Ninan: Soft (on the) currency

India has been completely silent even though it is as much a victim of the yuan's deliberate under-valuation as the US and EU

China has a 2:1 trade balance with Europe (Chinese exports being twice Chinese imports). It also has a 4:1 balance with the United States (it used to be 6:1). With India, too, it is 2:1 — about $29 billion of Chinese exports, and $14 billion of Chinese imports. India’s trade with the rest of the world does not follow the same pattern; indeed, if you take away oil, the country has no trade deficit at all. Clearly, India’s economy is not out of whack, whereas China’s currency stance is. What makes matters worse for India is that its exports are mostly raw materials while what come back are finished goods — mirroring the old colonial pattern of trade. Meanwhile, given China’s large trade surplus with all its major trading partners, the end result is predictable: an over-all trade surplus that is about 9 or 10 per cent of GDP! No large, rapidly growing economy has enjoyed such a trade surplus in the last century and more, if ever.

The odd thing, though, is that while the US has been openly pushing China to do the obvious thing (revalue its currency upward), and the Europeans have been conveying the same message more privately, India has been completely silent even though it is as much a victim of the yuan’s deliberate under-valuation. Instead, India has preferred sectoral defensive action — shut out Chinese telecom manufacturers on national security grounds, crack down with anti-dumping action in other areas, and so on. But as the power sector shows, Chinese firms have sewn up the bulk of the orders for coal-based power equipment — to the detriment of domestic players like BHEL and L&T. The bilateral dialogue, meanwhile, has focused on issues like the disputed border. The closest that India came to discussing the glaring trade imbalance was in January, when Anand Sharma went to Beijing and pressed the Chinese to get rid of some non-tariff barriers.

But what about the yuan, which is the core issue? The yuan was pegged to the dollar for many years, which was ok till about the mid-1990s because China’s trade used to be alternately in surplus and deficit. But from 1994 to 2004, when the Chinese economy gained real muscle, its trade surplus zoomed to reach $68 billion. In the next four years, that figure shot up to an astonishing $426 billion. This is after Beijing took the yuan off its dollar peg in 2004, for while the Chinese currency rose against the dollar over the next four years by 17 per cent, so did the euro; even the rupee gained 8 per cent. In the last two years, the yuan has once again been steady against the dollar. It is obvious that the currency problem has not been addressed.

Beijing may have its reasons. It has to manage the transition from export-led growth to growth that is fuelled by domestic consumption, and many sectors will have to switch from export to domestic markets. Not all will succeed, and there will be frictional unemployment, even as a rising yuan feeds import-led inflation. But these are typical of the challenges that confront macro-economic managers and, therefore, not valid excuses for inaction. Indeed, Chinese leaders say that they do want to trim their export sails and start looking inward, to spread the benefits of growth to the relatively neglected hinterland. Which is all very well, but why do Indian leaders continue to fight shy of raising the currency issue, in an act of generosity that matches letting Beijing off the hook on carbon emissions?