{"id":243168,"date":"2025-08-28T15:26:12","date_gmt":"2025-08-28T09:56:12","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=243168"},"modified":"2025-09-07T17:20:58","modified_gmt":"2025-09-07T11:50:58","slug":"could-india-be-a-victim-of-its-own-ambitions","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/could-india-be-a-victim-of-its-own-ambitions\/","title":{"rendered":"Could India Be A Victim Of Its Own Ambitions?"},"content":{"rendered":"

By Hema Senanayake<\/a> –<\/strong><\/span><\/p>\n

\"\"

Dr. Hema Senanayake<\/p><\/div>\n

BRICS countries have a new ambition. India\u2019s Finance Minister Nirmala Sitharaman recently said that \u201cIndia firmly believes that trading in local currencies will not only protect our economies from external shocks but also empower BRICS nations to build more inclusive global financial architecture, \u2026 We invite our partners to join us in creating robust local currency trade mechanism that benefits all parties equally.\u201d This is theoretically a grave mistake and practical impossibility.<\/p>\n

International trade, even among BRICS countries, cannot be smoothly done without an advanced monetary corporation. This means that when there is an imbalance in trade there should be a mechanism that prevents the trade imbalance. As BRICS countries continue to trade in their separate national currencies, the mechanism must be the free float of exchange rate among those nations, allowing something called \u201cthe natural adjustment of exchange rate\u201d to take place allowing the shift of trade when there is imbalance. This is the fundamental condition to have an advanced monetary corporation among BRICS countries. Let us analyze this point a little further.<\/p>\n

As Nobel Laureate Robert Mundell suggested in 1961, in his landmark paper, \u201cA Theory of Optimum Currency Areas\u201d We can consider a simple model of two countries to understand this issue. At the beginning both countries, denoted as country A and country B, have a trade balance with full employment. Then terms of trade shifted from B to A. As a result, A is exporting more to B creating unemployment in B. \u201cTo the extent that prices are allowed to rise in A the change in the terms of trade will relieve B of some of the burden of adjustment. But if A tightens credit restrictions to prevent prices from rising all the burden of adjustment is thrust onto country B; \u2026 and (if) A will not raise, prices, it must be accomplished by a decline in B’s output and employment.\u201d (Mundell, 1961). This is a true problem in the global economy in regard to international trade and will have the same problem among BRICS countries too, if they become totally free from anchoring their national currencies to the present dollar based system. Accordingly, it is clear that any possible trade imbalances that could have taken place among BRICS countries cannot be resolved without a strong policy mechanism agreed upon for the natural adjustment of exchange rate in surplus countries ensuring a lasting balance in trade.<\/p>\n

Yet, the proposal put forward by BRICS does not address this critical fundamental economic issue. Instead, they propose some technical solution.<\/p>\n

Under the agreement, BRICS countries would establish bilateral and multilateral trade settlements in their respective national currencies. India has already initiated talks with the Reserve Bank of India and partner central banks to explore the creation of currency swap lines, digital payment bridges, and the possible expansion of the BRICS new Development Bank\u2019s role in supporting non-dollar transactions.<\/p>\n

Accordingly, the proposal ignores the fundamental question of resolving trade imbalances, instead they discuss creating a clearing system by national currencies and issuing credit by some prominent national currencies. The same fundamental mistake was made when Europe adopted common currency, the euro.<\/p>\n

When Europe created the euro, the architects of the monetary union deliberately avoided addressing the problem of trade imbalances among member states. Instead, they focus on fiscal rules, such as budget deficits and public debt level, not external trade imbalances. The Maastricht Treaty and later the Stability and Growth Pact insist that member countries must have less than 3% budget deficit and less than 60% of public debt to GDP.<\/p>\n

But Europe still lacks a strong system to manage trade imbalances. This has led to structural divergences among member nations. Some member countries maintain surpluses while others maintain persistent trade deficits.<\/p>\n

Before the euro, if a country like Greece or Italy had a persistent trade deficit, its national currency would tend to depreciate. This depreciation made exports cheaper and imports more expensive, gradually reducing the trade imbalance. With the adoption of euro, this adjustment mechanism disappeared. Deficit countries could no longer devalue, while surplus countries like Germany enjoyed a permanent competitive edge. However, four freedoms of the EU (goods, services, capital and labor) have had some positive impact on deficit countries\u2019 balance of payment, but it has not fundamentally resolved the problem of trade balances. Until EU get united to form a \u201ccommon taxation authority area\u201d which is more similar to IRS of Federal Government of the United States, the integration of the EU would not be complete. Similar arrangement for BRICS is very distant reality.<\/p>\n

Therefore, before going further, India has to learn from experiences of EU and fundamental theory of having the natural adjustment of exchange rate mechanism in ironing out trade imbalances that could possibly emerge in BRICS countries.<\/p>\n","protected":false},"excerpt":{"rendered":"

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