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India Plans to Float Rupee
But will China revalue the yuan?
Bhuwan Thapaliya (Bhuwan)     Print Article 
Published 2006-03-22 11:55 (KST)   
India's parliament officially approved the national budget, which pledges to help cut poverty by boosting economic growth and spending on various social programs, in a country where almost 300,000,000 people live on less than a U.S.$1 a day.

Keeping in mind the mantra of the worldwide neo-liberal revolution --economic growth -- the lower house of parliament passed the budget finance bill for the fiscal year ending March 2007 by a voice vote, after finance minister P. Chidambaram replied to issues raised during a two-day-long debate.

Fired by rising aspirations for economic, social, and over-all progress, the budget, according to the experts, is based on the optimistic expectation that the Indian economy, in this era of financial hyperactivity, will move forward by leaps instead of steps.

Meanwhile, it has been reported by the Indian media that the social measures included more generous farm credit, as most Indians still make their living from farming.

Also included are a 32 percent hike in education spending (most rural Indians are illiterate), a 22 per cent rise in health and family welfare outlays, and a 54 percent increase in funds to improve the infrastructure and bring basic amenities to rural India.

Most importantly, the media quoted officials and analysts as saying that Prime Minister Manmohan Singh's plans to end India's remaining currency controls will boost confidence and investment in a fast-growing economy, which now allows the government more leeway on the rupee.

"The prime minister has made a very definitive statement on a rupee float and the reserve bank, and the government will in the next few days announce the next step," local papers quoted Chidambaram as saying.

The rupee, which currently trades at almost 45 to the dollar, is now convertible on the current account, which allows companies and individuals to buy foreign currencies to pay for imported goods and services. "However, it is not fully convertible on the capital account, which includes fund and investment flows that are now restricted," according to analysts.

Singh and Chidambaram, riding on the accommodating back of foreign currency reserves of more than $144 billion, said that allowing the rupee to trade freely would enable the easier repatriation of earnings and so boost foreign investment.

Most analysts cheered the latest economic shift and said the move would facilitate foreign investment, helping India bridge chronic budget deficits and lower inflation with increasing competition.

"By any definition, a hypothetical monetary policy is bound to be arbitrary, and India is no exception," some analysts are saying. For the purpose of analysis, however, it is necessary to have some hypothetical definition for planning.

Meanwhile, India's economy is expected to grow by 8.1 per cent in the year ending March 31, up from 7.5 per cent the previous year, with foreign direst investment (FDI) put at around $7 billion.

Yet India remains an economically divided state, where thriving cities prosper alongside depressed small towns and rural regions. Worries remain about the effect of World Trade Organization policies on small farming and industrial operations scattered across the countryside. As elsewhere, small farmers and small business leaders are anxious that jobs will disappear, leaving no alternative employment behind.

In 2005 however, India saw a record $10.7 billion in foreign portfolio investment, mainly in its stock market, and has chalked up $3.4 billion in new investments since the start of 2006, according to official Indian economic reports.

Yet, India lags China in foreign investment levels. China, however, has a closed circuit monetary system, so that many of its global trading partners, primarily the U.S., are vocally condemning China's unfair trade advantage.

In the meantime, however, it has been reported that two U.S. lawmakers have conveyed a warning to China from Washington to express mounting anger in all quarters of the U.S. government over China's exchange rate.

The senators said that Beijing must undertake decisive reform of its currency regime or face trade sanctions in the near future.

"Democratic Senator Chuck Schumer and his Republican associate Lindsey Graham said China must revalue the yuan now if it wants to avert a vote by March 31 that could impose a hefty tariff of 27.5 percent on its U.S.-bound exports," according to the Associated Press.

The senators' arguments revolved around the yuan's reform. They argued that the yuan is undervalued by as much as 40 per cent against the dollar, which is driving U.S. companies trying to compete against Chinese rivals out of business because of cheap Chinese goods flooding American markets.

"The currency exchange rate helped to drive up China's trade surplus with the United States to $202 billion in 2005, the largest bilateral trade gap in history," according to the critics.

There are so signs, however, of the Chinese bowing down to the U.S. demand, as China till now has ruled out any more reforms in the yuan exchange rate. Critics say, though, the time has come for it to revalue the yuan.

Meanwhile, it has been learned that China would approve such reforms; but politics, and not economics, has discouraged China from trying them out. The Chinese government fears revaluing the yuan, in case it works to the detriment of its own people.

Grounds exist for such worries. But the biggest risk is that Chinese goods will be dumped if the exchange rate crisis becomes a dispute about whether trade quotas should be amended to partially forbid Chinese goods from flooding the American market.
©2006 OhmyNews
Other articles by reporter Bhuwan Thapaliya

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