Here is a contrarian view from an nri doing business in both continents - America and India and making home both places;

1. US is not “yet” falling into the ocean - trust me - the market reported “bearish” hype notwithstanding;
2. US has many many eco-systems and grounds for excellence, and there is no second player in sight - not as yet anyhow; China and India included (and I see none being formed either, so no emerging threat);
3. The RBI, (who is lauded here in these posts) is out of funk. With a Bad (or poor) Leader. To stifle capital formation (as they are actively doing) in a “flattening” world is exactly the wrong thing to do; restricting full capital account convertibility in the face of the obvious is to illustrate myopia. Controlling commodities is what the GOI wants to do - fdi “this” and fdi “that” - all bogus Marxist thoughts. I guarantee that if the capital account was deregulated tomorrow, all manner of INR’s would be traded for the $ and they shall make a bee-line for US shores - The US is studiously the least cost producer for many items and services (risk adjusted); In the US, as an example I can freely buy a first class office building for around $250 per square foot while I can restrictively buy (after a ton of hassle its “apology” equivalent in Mumbai for $1,000/sf or London for $4,000/sf! India is great buy I ask?? Hello??
4. The Indian worker has become “silly” in their MTV enhanced expectations - all India has (woefully) is/was a marginal labor cost advantage, contained English speaking workers and so Companies came - trust me (and as a Cross Border Chief Executive) now it is cheaper and better for me to recruit in the US rather than hire an Indian. And to top it off, the average Indian CEO is pathetically inadequate in skill sets, untrained and mainly a “shop-keeper” - wholesale to retail cycler. Show me 10 products “Made-in-India” on global shelves that people jump to buy…. I have found none so far! Tata’s Nano at $2,500?? a global best of class product - shoots In saw it too - and it was pathetic! a piece on non ingenuity!
5. So, in my humble opinion, and while I too may be accused (and am guilty) of following momentum in some sense, India is sadly, still, a basket case and chances are that is where it will remain. And this “hot” money will flee as soon as the foreign investor has to deal with the ITO and the RBI official, as an example. Which mostly are staffed by corrupt, hollow, inadequate, un-skilled, marginal, thoughtless, non-customer centric folks, and whose factories produce poor quality and the country persists to be home of many ills - even after 50+years of independence.
So ladies and gents, lets us get real - the US is best of class, great value and true promise. All others have to wake up pretty early in the AM, to catch up with the average US worker - the current political leadership in the US notwithstanding. As an Indian NRI. I still feel compelled to root for the US and the $! Good folks will see its value. Many technology wonders are emanating from the US (and I know so), and there is a good chance that many of these technologies will continue to make large wealth through enterprise in the US and not in China nor India.

All in all, we cannot expect the US to change its reserve management policies. So most other countries will have to adjust to this reality. India and China are lucky in that we have a huge captive market. So the best answer is strong domestic organic development rather than export-led development formula.

Dustu, good point about having the growth and infrastructure along with the headaches related to the peg. China’s accumulated dollar reserves are not completely bad either. It will continue to have the same buying power as the US. If the dollar goes down both countries will lose some purchasing power and vice-versa. The result is that China is already competing in buying assets and lending international capital. All the while, it is developing at a breakneck pace and accumulating skills and resources. I am not sure if we can pull it ourselves though.

I am interested in Edward’s views. Thanks for this superb post Edward.

India has many ways to drive down the value of the rupee if it really wanted to. I am thinking of the central gov and RBI working very much in cahoots on this one. It is only that all of these measures involve making India a worse destination for capital.

Thailand had a solution where a certain percentage of money had to be kept in non-remunerative deposits. THis was sought to keep speculative “hot money’ away. This could be tried here.

The rbi/sebi/finance ministry circular asking every fii to register is a positive step. Keep it up.
Eliminate the maldives tax loophole. You’ll immediately see how much of this money is not recirculated.

Fiscal loosening. Build infrastructure like no one’s business. Improve oversight so that it doesn’t end in the wrong pockets. I am personally in favour of a large fiscal infusion into building judicial, education and health infrastructure.

Another “out-of-the-box” solution. Treat the RBI as a institution owned by all the taxpayers. Send a dividend to the accounts of all those who hold a PAN card. Your money is printed and distributed fairly.

But if you ask an economist, he will will invariably give you all that mumbo-jumbo about inflation etc etc, things they memorized from economics classes in college.

In a growing economy, inflation is not that bad. I would rather peg rupee to dollar and have China’s problems. Have you ever been in China. If currency peg were so bad, how did they grow so much? Their economy is now 3 times the size of India’s. I would rather have China’s infrastructure and income along with their headache.

The G-8 does seem archaic in this day and age, doesn’t it? Although not intentionally a white club, decades of mindset does take time to change. Kind of like the Dow Jones INDUSTRIAl Average as an index.

I am more sanguine about inflation in China. A lot of it is seasonal or one-off. Besides, China seems to have found a roundabout way to get rid of its dollar reserves (its SWF).

The RBI is probably one of the best managed central bank in the world. It shows why political control is not always bad for central banks.

As for the G-8, it is just a grouping of White people + Japan (interestingly the Japanese were considered honorary whites by Apartheid South Africa). Just like before World War II. I suspect that racism is still strong at the upper echelons of power in the Western world. Another way to look at it is that China and India are very sovereign/independent countries. Even Russia was added to the G-8 when it was under Yeltsin. Would it have been added under Putin? I don’t think so considering the reluctance to add it to the WTO. The G-8 should be disbanded. It is meaningless now.

Hi Floridian. I’m not laughing. It’s a reasonable question, but I think this is both undesireable and impossible. And this for two priciple reasons.

Basically, as I will argue in next week’s post, currencies in the developing world are in many ways substantially undervalued. This is why people developed the Purchasing Power Partity measure to try to assess comparative living standards. Now by dollar valued GDP the developing world only account for 20% of global GDP, but on a PPP basis they account for 40%. They are also growing very often now in the 8-10% pa region. So this is the “imbalance” which is now going to unwind very quickly. Within a very short space of time (hard to say exactly how short, but it could be as little as 5 years) the developing economies will start to be responsible for over 50% of the global economy, and the lions share of growth in the global economy (they nearly have this already).

This change is huge, since the 1990s and the ongoing debate about “economic divergence” bigtime. My feeling is the consensus discourse and mindset has yet to get its mind round the implications of all this.

So that is the background. I said there were two reasons why the rupee couldn’t peg.

The first is the undesireable one, look at China. China is struggling with a severely undervaluaed currency, a major inflation problem, low internal consumption growth when compared to export growth, excessive concentration in fixed capital investment at very rapid rates, and now I think (Aha!) a significant danger of overheating. They need to loosen the yuan. I mean I’m not saying that this is all as obvious as some people seem to think it is.This won’t be the one stop solution to all China’s (and the US’s) problems that many seem to think it will, since taking the lid off at this point and floating will undoubtedly only attract an even greater increase in the incoming flow of funds. Especially if they keep raising interest rates to try and choke inflation at the same time as the Fed is lowering. Basically, having spent a long time studying the growing inflation problem in Eastern Europe and susbsequently in Russia I would say that without a shadow of a doubt China is going to have a serious problem with the decline in the volume of the 15 to 19 age group that is happening right now after so many years of low fertility. This will only stoke up inflation even further.

So the undersirebility argument is simply this, you can let your currency rise, as India now is, at, say, 12% per annum (vis a vis a dollar which is constantly falling in relative terms, it has to, and possibly a euro which has to now have a downward correction too, for the same reasons basically), or you can wait till you get to where China now is and have a real headache. Sound sense indicates the former path is better, although not easy. This is why we do need an expanded G7 and collective policy on the undesireability of “violent” currency movements, and we need it now.

Then there is the impossibility argument. Well I think I have also been making this already. You can’t fight history, and you can’t drain an ocean with a teaspoon. India is going to get comparatively richer, and this will mean the currency will have a higher value. Local, central bank driven, monetary policy is increasingly impotent in the face of globalised capital markets and fund flows, as we are seeing in country after country. Indeed since the rupee (or rupee denominated instruments, property) is going to become one of the currencies it is desireable to hold given that there is guaranteed economic growth and currency rise, the big problem may well come when some of those large central banks start to do the rational thing and hold a significant share of their reserves in rupees.

Now, I would wish to emphasise one more time that this is not simply a one way street. There are pluses and minuses here. Those, whom you mention, who are trying to develop export oriented industries are undoubtedly going to have a hard time of it, of the “just feel the pain” variety. But there is little realistic to be done here. You can’t simply turn the clock back, and return to the India of the early 1990s, even if you wanted to. So it isn’t clear what kind of development process India is going to have, and what kind of balance (eg) there will be between services and industry. I have no answers to all this, I’m afraid, simply questions.