India may not endorse common BRICS currency

India may not endorse common BRICS currency

Subject :Economy

Section: External sector

In News: BRICs to develop a serious alternative to the dollar.

Key Points:

• With Russia facing western sanctions, Brazil urged BRICs to develop a serious alternative to the dollar using the combined weight of their economies.
• India is unlikely to endorse a common BRICS currency, as it fears that it would increase China’s dominance in the bloc and also further strengthen the yuan.
• Though India may not block discussions at present as not much movement on the proposed common currency is expected at the BRICS Summit in Johannesburg.
• Why likely to benefit China?
  • In case of the euro the idea was driven by Germany, the largest economy, and the Deutsche mark became more of an intervening currency.
  • China, which is the dominant economy in BRICS, will have major control.
  • The BRICS currency will likely be linked yuan and since yuan is already an international currency and is in the SDR basket, a BRICS currency will bring China closer to realising its dream of internationalising the yuan and challenging the dominance of the US dollar.
• Why a difficult idea?
  • All BRICS members have different economic situations and exchange rate plays a big role in the macroeconomic space to manage volatility, one of the biggest problems would be to determine the value of the currency.
  • To operationalise the proposed BRICS currency, one would need a Central Bank kind of arrangement where China would be taking the decisions.
  • It would be like a fixed exchange situation which members will not be able to manipulate to suit their particular needs.
  • Would also be difficult for BRICS members to have harmonisation of financial rules and regulations, that a common currency calls for, such as the debt-to-GDP ratio, volume of trade and hard currency reserves.
  • The weaker economies in the EU, like Greece and Portugal, suffered so much pain when the Euro was introduced despite the fact that there was free mobility of labour in the region and a strong social security net existed.
  • BRICS is not geographically contiguous nor is there adequate social security for weaker countries to allow their economies to contract by accepting strict debt-to-GDP ratios