Ajit Ranade is recommending India follow the Chinese example of keeping an undervalued currency (“Dancing with the Dragon”, April 27) and putting import barriers as well. The argument follows a similar one made by equipment manufacturers, such as L&T, that India allows duty-free imports of power equipment while China doesn’t. The other argument is as old as the hills, that an undervalued currency will allow Indian exports to take off and the boost this will give to employment and economic growth will be far higher than the loss India will have to suffer as it invests the dollars it buys in low interest-bearing US treasury bills.
There are various problems with Ranade’s arguments. First, the reason why India allows duty-free imports is that this lowers the costs for power plants and, therefore, reduces the overall cost of power. There is no reason why India should sacrifice the interests of millions of users for a few capital goods manufacturers. The conflict between the need of the common people and the need to protect local industry is a common occurrence all over the world.
The issue of currency undervaluation is easier said than done. India has such large inflows of capital that defending the rupee is not an easy task. If the Reserve Bank of India keeps buying dollars, it will have to sterilise them by selling bonds to those it buys the dollars from. This will, in turn, raise interest rates and attract more inflows. The way to raise India’s exports is to get more competitive, not by undervaluing the currency.
Arvind Sinha, New Delhi
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