Internationalisation of Indian Rupee (INR)

Our response to the RBI report with editorial assistance by Warren Mosler.     

Internationalisation of INR should be a natural progression from strengthening the local economy; that is, without realizing the full productive potential of the country, thereby making the country attractive for investors, internationalising the currency is like putting the cart before the horse.       

Understanding the currency system, as that is the one which determines the fate of the economy, is the basic prerequisite before even thinking about the policy options for the country. Any policy structured without this understanding results in totally wrong direction, affecting the livelihood of every single person in the country, particularly the downtrodden.

If internationalisation of INR is structured based on policy options & market responses of foregone currency system, then it could lead to negative consequences.

Internationalisation of INR happens to the extent non residents want to net save INR, as evidenced by a country that runs persistent trade deficits. That desire to save INR, evidenced by net exports to India, is what makes the INR what's called a reserve currency.

Most important, however, is to keep one's eye on optimizing India's real wealth which 
=Total domestic output + imports - exports. 
So, how do we optimize real wealth?

First and foremost is to optimize domestic output, which means sustaining full employment. India’s lost real output from underemployment and unemployment is beyond imagination. India’s labor force participation rate indicates real output could be increased substantially simply by adapting a true full employment policy, with living standards increasing accordingly.   

Domestic full employment is India's low hanging fruit. Nearly 800 million, out of working age population of 1 billion, being underemployed or unemployed, wealth gain from full employment would be approx. INR 192 Lac Cr ($2.3 trillion) and then the multiplier impact from that wealth means a giant leap forward in the real standard of living, that is what awaits with that fundamental policy change to true full employment.

External economy follows from there. With the leap forward in domestic employment and profitability, foreign direct investment likewise increases as global firms are always on the lookout for profitable investment opportunities, even with relatively higher wages, transforming India from a nation dependent on low wages for exports to one that attracts foreign investment based on its profitable opportunities. The US, for example, with low unemployment and high wages, attracts the most foreign investment due to prospects for profits.  

The dynamics of full employment policy will further result in the exporting nations targeting India for their exports. To do this, their central banks accumulate the currencies of their target nations which would then include the INR, allowing India to further benefit in real terms with increased low cost imports, again following the US model. And as imports increase, exports, though a bit lower, also increase at a high and rapid rate, as a proportion of the INR held by non residents from India's imports are in turn spent on buying India's exports.   

The above model not only makes INR a desired currency to save by Central banks and non residents, but the country would achieve growth of tremendous proportion with full employment, stable prices and high standard of living.

Rajendra Rasu