A stronger Yuan will help India bridge trade deficit with China

New Delhi, Aug 8 (IANS) India could partly bridge its growing trade deficit with China, which is expected to cross $20 billion this fiscal, as the east Asian country is expected to allow its currency to appreciate more against the US dollar, say economists in a survey by an industry lobby.

Also, an appreciating Yuan would help Indian heavy engineering and power sector units become more competitive vis-a-vis imports from that country, boost Indian investments and possibly open up markets for the service sector, they said in the survey by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The economists said the Yuan may appreciate as much as five percent against the US dollar in the next 12 months.

‘There is a feeling among economists that benefits will accrue over a longer period of time to developing economies, including India, as they will be able to garner a proportionately higher share of the gains resulting from global recovery in trade,’ said the survey.

The economists said China should allow appreciation of the yuan by at least by 8-10 percent and then follow it up with a floating currency regime to help balance the global economy.

In June, China had dropped the Yuan’s 23-month-old peg to the dollar in a move to make the currency more flexible. Since then it has moved up 0.7 percent against the dollar.

According to the economists, China took this step not to support global economic recovery but to invigorate domestic demand as well as deflect some criticism it has been facing from the international community.

For China, a stronger exchange rate would serve two purposes. It would help in transforming the growth structure from being export-led to domestic consumption driven as imports would become cheaper.

On the other hand, it would also help tackle the inflation situation, which is increasingly becoming a cause for concern, the report said.

The economists in the survey said that by allowing its currency to be a little flexible, China has managed to ease trade related tensions with the US and the European Union as well, at least for the time being.

‘China’s decision can thus be described as a marriage of convenience with both domestic and external compulsions being addressed to an extent through this move,’ said the survey.

Asked about the Yuan’s prospects of becoming an additional reserve currency, the economists said such a process would take a lot of time and efforts, including pursuing the International Monetary Fund. China will have to pursue inclusion of the Yuan in the special drawing right (SDR) basket.

SDR basket is an artificial ‘basket’ comprising of currencies of US, Japan, Britain and the EU. It is used by IMF as an international reserve for internal accounting purpose.

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