France: An economic adviser to Prime Minister Manmohan Singh, Suresh Tendulkar, said he is urging the government to diversify its $264.6 billion (Rs12.7 trillion) foreign exchange reserves and hold fewer dollars.
Sound counsel: Suresh Tendulkar of the PM’s economic advisory council has urged the government to diversify its foreign exchange reserves. Subhav Shukla / PTI
“The major part of Indian reserves is in dollars—that is something that’s a problem for us,” Tendulkar, chairman of the prime minister’s economic advisory council, said in an interview on Saturday in Aix-en-Provence, France, where he was attending an economic conference.
Singh is preparing to join leaders from the Group of Eight (G-8) industrialized nations—the US, Japan, Germany, Britain, France, Italy, Canada and Russia—at a summit in Italy this week that is due to tackle the global economy. China and Brazil will also send representative to the summit.
As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.
“There should be a system to maintain the stability of the major reserve currencies,” former Chinese vice-premier Zeng Peiyan said in a speech in Beijing on Saturday, highlighting China’s concerns about a global financial system dominated by the dollar.
Fiscal and current account deficits must be supervised as “your currency is likely to become my problem”, said Zeng, who is now the head of a research centre under the government’s top economic planning agency.
The People’s Bank of China said on 26 June that the International Monetary Fund (IMF) should manage more of members’ reserves.
Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency.
Russia’s proposals for the Group of Twenty (G-20) major developed and developing nations summit in London in April included the creation of a supranational currency.
“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on 8-10 July, Medvedev aide Sergei Prikhodko told reporters in Moscow on Saturday.
Singh’s adviser Tendulkar said that big dollar holders face a “prisoner’s dilemma” in terms of managing their holdings. “That’s why I’m telling them to do this,” he said.
He also said that world currencies need to adjust to help unwind trade imbalances that have contributed to the global financial crisis.
“The major imbalances which led to the current situation, the current account surpluses and deficits, have to be addressed,” he said. “Currency adjustment is one thing that suggests itself.”
For all the complaints about the dollar, emerging markets such as India remain dependent on the currency of the US, the world’s largest economy and a $2.5 trillion export market.
The IMF said on 30 June that the share of dollars in global foreign exchange reserves increased to 65% in the first three months of this year, the highest since 2007.
Tendulkar said that the matter needs to be taken up in international talks, and that it emphasizes the need for those talks to go beyond the traditional G-8.
“They can meet if they want to,” he said. “The G-20 has a wider role, has representation of the countries that are likely to lead the recovery process.”