Rupee union will mean fewer subsidies: Portes

The government must go slow on support to agriculture and industry through targeted credit and subsidised interest rates if South Asia was to become a free trade region with a single currency, Richard Portes, professor at the London Business School, said today.

Delivering a lecture on 'Monetary Union for South Asia: Lessons from the European Union experience' at the National Council of Applied Economic Research, Portes said such an unification would not be without its costs. Not only would the Reserve Bank of India be subordinate to a common central bank, the government would also lose control over the inflation rate.

"A strong political will across nations, gradual opening of capital markets and a willingness to give up national sovereignty to some extent will be needed for South Asia to have a free trade regime with a single currency," Portes said.

Co-ordination between varied interests of different countries would require a strong institutional set-up. Portes said in the European Union (EU), for instance, the economic and monetary union rested on institutions like the European Commission and European Central bank, which act as regulating and dispute resolving bodies. Moreover, the whole region will have to ensure democracy in the decision-making process.

He warned that the region should be careful not to rush into eliminating capital controls. For monetary unification and a single currency, trade integration was crucial, which needed the exchange rate to be stable. He said the removal of all capital controls together would make the exchange rates volatile.