A rupee wish for India@100

Context: We need to set the wholesome and achievable goal of the rupee becoming a global reserve currency by 2047. The journey is the reward.

Need for becoming a global currency reserve:

• It is a wholesome goal because it indirectly aligns fiscal, monetary, and economic policy. T
• It acts as an indirect way of accomplishing goals: Like overcoming the “five giants of want, disease, ignorance, squalor, and idleness” that needs education, health, infrastructure, low inflation, financial inclusion, high GDP per capita etc.
• It’s a legitimate goal because democracies like ours recognise success to be the outcome of fair voting; reserve currency status involves voting by impartial wallets.
• Concentration of reserve currency: 
  • Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies: 55 % in US dollars, 30 % in euros, and 15 % in six other currencies. 
  • This concentration is inevitable given exploding trade, rising capital flows, and motivates against protecting your reserves from your currency’s volatility.  
• Chinese overconfidence: Being a close competitor of India, China still faces transparency issues, and this creates an opportunity for India to take over.
• Benefits:
  • A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account. 
  • The main property of a reserve currency country is trust, and the main upside is the “exorbitant privilege” of lower real interest rates.

Way Forward:

• Getting countries to store their reserves in rupee requires luck and skill –
  • Our luck arises from: 
    • A multipolar world (America now accounts for less than 25 % of global GDP).
    • The need for diversification (central bank reserves in dollars have fallen to 55 % from 71 % in 1999).
    • New US thinking about indebtedness (in the last 13 years, their debt increased by $20 trillion equivalent to 90 % of GDP).
    • Central bank credibility (lower-for-longer creates a quantitative easing addiction).
    • Demographics (25 % of the world’s new workers in the next 10 years will be Indian).
    • The UK’s secular decline.
    • A global shift of economic gravity to Asia and the challenges of trusting China.
  • Our economic skills have a strong opening balance: India has never defaulted, and the 1991 reforms have been accelerated by big reforms like GST, IBC, inflation targeting, education, labour, and agriculture.
    • Pursue full capital account convertibility as suggested by the Tarapore Committee in 1997.
    • Advocate trading partners to start rupee invoicing and raising corporate rupee borrowing offshore and onshore.
    • Accelerating our CBDC (central bank digital bank currency) plans and taking our UPI payment technology to the world (the dollar gets heft from global networks like Visa, MasterCard and Swift).
• Role of Fiscal Policy: It must raise our tax to GDP ratio, raise the share of direct taxes in total taxes, and keep our public debt to GDP ratio under 100 %.
• Role of Monetary Policy: It must control inflation while moderating central bank balance sheet size.
• Role of Economic Policy: It must raise the productivity of our regions, sectors, firms, and individuals to reach goals in formalisation (400 million workplace social security payers), urbanisation (250 cities with more than a million people), financialisation (100 % credit to GDP ratio), industrialisation (less than 15 % farm employment), internationalisation (higher share of global trade) and skilling.
• Reinforcing institutions: That signal rule of law; cooperative federalism, press freedom, civil service effectiveness, and judicial independence.