Asian Currency Unit minus Indian rupee?

Even though Asia has been slow to respond to the global trend in regional trade blocs in different parts of the world, from the EU to Nafta to Mercosur, functional cooperation in Asia has progressed quite well over the past decade. Intra-regional trade has grown to account for more than half of Asian countries? total trade. India is a part of that trend, with East Asia emerging as its largest trading partner, accounting for more than 40% of the country?s trade. Even among individual countries, China has emerged as India?s second largest trade partner and may shortly become the largest, overtaking the US.

Another feature of growing Asian regional economic integration is the growth in intra-regional investment and emergence of regional production networks. Asian countries are becoming large sources of investment for each other. The growing trade and investment integration in Asia will receive a further boost from the emerging web of bilateral and regional free trade arrangements being evolved by Asian countries.

In particular, Asean and its full dialogue partners?Japan, China, Korea and India?are all involved in creating FTAs with Asean as well as among themselves. These countries, along with Australia and New Zealand, also launched a new forum called East Asia Summit (EAS) in Kuala Lumpur in December 2005, which may facilitate the formation of a broader regional community in Asia.

Against this backdrop, it is important to take some steps in monetary and financial cooperation to facilitate intra-regional trade and investment. In the area of monetary cooperation, the creation of a regional unit of account or an Asian Currency Unit (ACU), a la the European Currency Unit (ECU) preceding the launch of the euro, could be an important initiative. It could enable invoicing of intra-regional trade and financial transactions in ACU, reducing the region?s dependence on extra-regional currencies such as the dollar, as well as transaction costs. By stabilising, in relative terms, the intra-regional exchange rates and facilitating the conduct of mutual trade in local currencies, ACU could greatly facilitate intra-regional trade.

The Asian Development Bank (ADB) is planning to launch an ACU as a step towards creating a unit of account or a parallel currency, for facilitating intra-regional trade in Asia. ADB will begin by publishing the rates of ACU against the US dollar and the euro, as well as among the participating currencies, before making it an effective unit of account.

This is an important initiative of ADB President Kuroda, assisted in the task by M Kawai, his special advisor and head of a new office on regional economic integration. This initiative could be formally announced at the coming annual meeting of ADB in Hyderabad in early May.

While ADB?s initiative needs to be lauded, the present conception of the ACU seems inadequate and would not allow it to exploit its potential. ADB proposes to include in the basket of currencies for determining the value of ACU the currencies of Asean+3 countries, namely, Japan, China and South Korea.

It is not clear why ADB is thinking of leaving out the Indian rupee, considering India?s growing role in Asia as an engine of economic growth and its growing economic integration with East Asian countries, reflected in her participation in the East Asia Summit.

India is the third-largest share-holder of ADB in the region after Japan and China. Her economy of over $700 billion is growing at 8%, and trade of over $240 billion is growing at 30%. And, her exposure to intra-regional trade is growing faster than her global trade. This makes one wonder about the basis of ADB?s choice, especially when currencies of minor shareholders with very insignificant trade and economic size, such as Lao PDR, Cambodia, Myanmar and Brunei have been included.

Further, unlike the currencies of many East Asian countries, the Indian rupee has a market-determined exchange rate. In fact, currencies of a number of leading players in Asia, such as Hong Kong, Singapore and Malaysia, are still pegged to the US dollar, and the Chinese yuan has just been floated within a very narrow band. The Indian rupee is convertible on the current account and is moving towards full capital account convertibility. Indian financial and capital markets have considerable depth and are prudently regulated. India?s foreign ex-change reserves of over $150 billion are among the largest in the region.

From India?s point of view, exclusion from the ACU basket could be costly, as it may increase transaction costs of trading vis-?-vis other players. In view of the emergence of the East Asian countries as our largest trade partners, it may not be prudent to remain outside the ACU basket. In view of the fact that India is working on FTAs/CECAs with Asean, South Korea, Japan, China, Singapore, Thailand and Malaysia, among others, the importance of the region for India?s exports is likely to grow in the coming years.

To conclude, ACU is likely to become an important aspect of the emerging monitory and financial cooperation in Asia. However, ADB?s plan to leave out a currency as important as the rupee from the basket would not deliver an optimal outcome.

Perhaps, it would be more inclusive and desirable to extend the scope of the ACU basket to all EAS countries, rather than limiting it to Asean-plus-three. India, with its deep commitment to the Prime Minister?s vision of building an Asian Economic Community, can hardly afford to stay out of such an initiative and should seek to be a part of it.

The writer is DG, Research and Information System for Developing Countries (RIS). These are his personal views