A goal for India@100: Reserve the rupee

India will celebrate 100 years of Independence in 2047. We have magnificently created the world’s largest democracy on the infertile soil of the world’s most hierarchical society. But can the next 25 years combine this vibrant democracy with mass prosperity? We make the case that this prosperity is possible and best accomplished by the goal of making the rupee a global reserve currency by India@100.

Picking goals for countries is complex. Overcoming the “five giants of want, disease, ignorance, squalor, and idleness” needs education, health, infrastructure, low inflation, financial inclusion, high GDP per capita, etc, while navigating wicked trade-offs between current and future generations. In Obliquity, economist John Kay suggests that the best strategy for complex systems that change with engagement is accomplishing goals indirectly. Becoming a global reserve currency is a wholesome goal because it indirectly aligns fiscal, monetary, and economic policy. And 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.

Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies: 55 per cent in US dollars, 30 per cent in euros, and 15 per cent in six other currencies. This concentration is inevitable given exploding trade, rising capital flows, and the less acknowledged motivation of protecting your reserves from your currency’s volatility. 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.

Getting countries to store their reserves in the rupee needs luck and skill. Our luck arises from a multipolar world (America now accounts for less than 25 per cent of global GDP), the need for diversification (central bank reserves in dollars have fallen to 55 per cent from 71 per cent in 1999), new US thinking about indebtedness (in the last 13 years, their debt increased by $20 trillion equivalent to 90 per cent of GDP), central bank credibility (lower-for-longer creates a quantitative easing addiction), demographics (25 per cent 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.

The base camp for this ambition is full capital account convertibility, as suggested by the Tarapore Committee in 1997. The rupee is substantially convertible for foreigners. A 2030 deadline for finishing the agenda could be a nice interim milestone. Dollar investors in the last decade not experiencing the usual big bite out of rupee returns is useful for advocating trading partners to start rupee invoicing, 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)

The policy agenda is clear. Fiscal policy 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 per cent. Monetary policy must control inflation while moderating central bank balance sheet size. Economic policy 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 per cent credit to GDP ratio), industrialisation (less than 15 per cent farm employment), internationalisation (higher share of global trade) and skilling. These goals must be complemented by reinforcing institutions that signal rule of law; cooperative federalism, press freedom, civil service effectiveness, and judicial independence.

Being a reserve currency, like life, is a beauty contest — to win you don’t have to be perfect, just better than your competitors. Our competitor is China. The 2 per cent renminbi share in global reserves — despite a 25 per cent increase last year — doesn’t reflect their status as the world’s second-largest economy and biggest trading nation. While India has no interest in becoming China, it’s useful to understand competitors and reflect on the three reasons why the 100th anniversary of the Chinese Communist Party (CCP) last month got so much more global attention than the 100th anniversary of the Indian National Congress (INC) in 1985. First is the CCP’s skill and need for propaganda. Second is the INC in 1985 — it wasn’t the original party, it was no longer a meritocracy, and its global soft power was damaged by the Emergency. But the most important reason is China’s wealth and power — per capita GDP rising 80 times in the last 40 years has lifted 800 million Chinese out of poverty.

But this astounding success seems to be making China overconfident. Recent policy — border disputes with neighbours, asphyxiating Hong Kong, withdrawing the Ant IPO, and savaging the Didi IPO — calls into question the long rope China has received since Henry Kissinger flew secretly to Beijing from Pakistan in 1971. US investors who have bought “shares” in the roughly 250 Chinese companies listed on US exchanges with a $2 trillion peak market capitalisation don’t actually own equity. They own pieces of a Cayman “variable interest entity”, which has a contract with the parent company. Under Chinese law, foreigners can’t own Chinese shares directly. Like most things in opaque China, it’s one of those things that “works great until it doesn’t”.

Chinese overconfidence creates an opportunity for India. Prosperity for all Indians by India@100 — a precondition for a country where the mind is without fear and the head is held high — needs bold reforms in the next 25 years. These reforms are best measured by the wholesome and achievable goal of the rupee becoming a global reserve currency by 2047. The journey is the reward.

Sabharwal is co-founder, Teamlease Services and Vishwanathan is a former Central Banker