India being hurt by undervalued yuan: RBI

MUMBAI: China's policy to keep its currency, the renminbi or yuan , artificially undervalued gives it a huge economic advantage and impacts India's trade, says a research paper released by the Reserve Bank.

In the paper, 'The Implications of Renminbi Revaluation on India's Trade', S Arunachalaramanan and Ramesh Golait of the RBI have said that an artificially undervalued currency gives China a distinct advantage in the export market.

"By keeping renminbi (RMB) undervalued against the US dollar (USD) and depreciating it in line with the USD in the international market without taking into account the economic fundamentals of China, it invariably and distinctly provides competitive advantage over its trade competitors and trade partners including India," the paper said.

It added that any revaluation of the RMB, also known as yuan, will have an impact on India's trade, particularly its imports.

"In this context, one of the factors favouring China is the cost advantage of its exports (imports for India) influenced by various domestic factors. Factor like production-oriented firms/industries subsidies does support China Model. The cost of production as well as productivity of labour also becomes an added advantage in its export promotion," the paper said.

Western countries, particularly the US, have been urging China for years to allow more free flow of its currency. In fact, during the G20 Finance Ministers meet held earlier this week it was suggested that the RMB could have a bigger role in the global system in case China shows more flexibility.

India had a trade deficit of USD 19.2 billion with China in 2009-10 and the RBI said the country should diversify its imports, particularly electronic and machinery goods, and start securing them from other countries.

"In India, the share of the imports from China has significantly risen to 10.7 per cent during 2009-10 from 7.3 per cent five years ago... To avoid the implications in terms of imports, there is a strong need to diversify imports of these items," the RBI paper said.

It said that while the unit cost of labour in China has declined by 20 to 80 per cent, in India increases in labour compensation outpaced increase in productivity which has led to an increase in the unit cost by 10 to 100 per cent.

The apex bank said there is a need to address the issue of labour improvement in productivity.

It further said that China's current currency policy gives its exporters a distinct advantage over other countries that have to deal with currency volatility .

"Given the fact that the policies of China are export-oriented, pro-FDI and keeping the exchange rate undervalued etc., the emerging market economies which have allowed their currencies to float will have to face distinct issues in their management of balance of payments," RBI said.

Source: EconomicTimes