February 22, 2020
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Know Your Euro

India's lack of interest is dangerous EU is its largest trade partner

Know Your Euro

QUIETLY— and ignored, typically, by India— 11 European nations last week decided to move towards the final stage of the Economic and Monetary Union by adopting, from January 1, 1999, a single currency that might even rival the dollar someday. Beginning next year, all financial business and wholesale trade will be conducted in Euro in the European Union (EU), except in Greece which didn’t make the tough criteria and in Britain, Denmark and Sweden, which have opted out for now. However, coins and notes in Euro will come only in 2002, giving the countries enough time to make a smooth transition to the new integrated economic and fiscal system.

Where does India stand in this economic watershed? At the farthest periphery. As a senior government official comments, lamenting the lack of any Euro-related  government measures, political or economic, so far: "We don’t act, we react and only after a global event hits us." True, a decision has been taken to hold the first EU-India Partenariat in March next. Such partenariats are organised by the EU to promote business partnerships between its own small and medium enterprises and of other countries. Commendably, however, the External Affairs Ministry has undertaken a study by a joint secretary on the Euro’s implications for India.

The government’s lack of  interest is dangerous because EU, as a bloc, is India’s largest trading partner. Euro has implications for all three economic fronts for India— trade, investment and aid, and EU is a global partner India can ignore or choose not to woo at its own cost.

Trade: EU accounts for 33 per cent of India’s exports ($11 billion out of $33 billion in 1996). In 1996, two-way trade came to 18.5 billion Ecu (European currency unit, one Ecu=Rs 44.8) or $23.67 billion, leaving a trade gap of $1.6 billion in EU’s favour. India, however, has only about a half per cent share in EU’s total imports or exports. India’s imports from EU have grown by 60 per cent since 1993, while exports are up only by 46 per cent, allowing the trade gap to more than triple in the last four years. Major items of import are electronics, precision and heavy equipment, pharmaceuticals and organic chemicals.

Investment: In 1995 and 1996, EU accounted for 18-19 per cent of all foreign direct investment flows into India. According to Eurostat, EU is the largest source of FDI in terms of actual inflows.

Aid: India is one of the largest recipients of EU’s development grants, totalling 2.1 billion Ecu ($2.6 billion) between 1976 and 1996. India is also the only Asian country so far to have accessed the European Investment Bank, for a Ecu 55 million loan for Powergrid Corporation. EU has been moving towards stronger ties with India for quite sometime now. In 1995, when it came out with its Asia strategy, India was peripheral. Not being a member of ASEAN, it has been left out of ASEAN-Europe Meetings (ASEM). But in 1996, EU approved a long-term strategy paper on enhanced partnership with India; this came right after similar EU communications with Japan and China.

For India, the implications of the single currency go much beyond the simple reality of Indian exporters receiving trade remittances in Euro from January 1. For one, in a borderless Europe with common standards, the cost of transaction and tranportation (the freight rates have already halved) will come down allowing the exporter to sell the same product everywhere with minimum effort. For another, rising competition inside EU will result in lower prices for importers.

Unification demands may lead to a boom in software exports from India, aleady at $250 million and growing at 75 per cent annually. Provided Euro remains stable— it probably will with 11 nations backing it with direct reserves of £33 bil-lion— importers will be able to minimise currency risk hedging.

The flip side is that, to raise its paltry share in EU trade or even to maintain it, India needs to bone up on several policy fronts. One, EU wants India to remove quantitative restrictions fast, especially for a priority list of products. In textiles and leather products, India is facing a tough fight from China and Brazil. Two, the non-tariff barriers to exports— stringent quality, health, sanitary and environment norms, child labour, export subsidies, plus anti-dumping investigations, which resulted in penal duty in 23 cases in 1996, may rise further.

Three, a post-Euro EU will be more strident in demanding protection of intellectual property rights and liberalised economic and capital market policies. Lastly, the advantages enjoyed by India, those of cheap labour and other costs, will also be enjoyed by a unified Europe, where unemployment is acute, debt high and growth receding. The same reasons may lead to the emergence of Fortress Europe. Within Europe, multinational corporations may merge, restructure and relocate to minimise costs and maximise gain. A rainbow of an opportunity may turn into a formidable problem, if Indian industry and government do not wake up now.

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