Addressing the problems of Rupeezone

Financial Express, 12 May 2010

The Euro is probably not a good currency for Greece. Is the Rupee a good currency for Orissa? The answer is only a partial Yes. Much more needs to be done on intra-India mobility of goods and of people.

When the Euro was created, the countries of Europe were compared with states of the US. If the US gains a lot by being a single big country with a single currency, should Europe not do similarly? The bottleneck lies in stabilisation policy.

Before the Euro, when Greece experienced bad times, the most important element of stabilisation was exchange rate flexibility. In good times, a floating exchange rate appreciates. In bad times, a floating exchange rate depreciates.

By signing up for the Euro, Greece lost this powerful tool for stabilisation. But how does the US handle this? If there are bad times in Michigan or in Texas, there is no exchange rate which can depreciate. The story runs in two steps. When there are bad times in Texas, wages go down which brings more business to firms in Texas. And, when times are bad in Texas, people leave. The number of migrants does not need to be large, in order to deliver the desired result. But a significant scale of migration is essential.

What about India? If there is a downturn in Orissa, there is no currency which can depreciate. How can stabilisation be achieved? How can Orissa stave off a Greece-style protracted slump? The key answer is : through nationwide trade and through labour mobility. When Orissa has a downturn, wages go down. Firms in Orissa should get more business from all across the country, which requires India as a unified common market. And, people should migrate out of Orissa.

The US does this right, where a unified currency goes along with full mobility of goods and people. The Euro is not such a great idea for Europe because while they have a single common market for goods, they do not have adequate labour mobility. A single currency is not such a great idea for the states of India, since we lack full mobility of both goods and labour. Our currency unification strongly requires national integration on the crucial issues of movement of goods and people.

The agenda of India as a unified common market has come to be accepted. It requires building high quality infrastructure supporting intra-India trade including roads, railways, ports and airports. It also requires implementing the GST, accompanied by the removal of each of the myriad state and local taxes which interfere with intra-India trade.

The agenda of creating conditions conducive to migration is less understood. It involves five issues:

The language barrier.
Individuals who know English are more able to move between locations all across the country. The spread of English education (which, in turn, is associated with private schools) helps increase labour mobility.
Rented housing.
In pre-independence India, it was easy for a migrant landing in Bombay to rent a home. Today, this is not the case in most cities. By emphasising the rights of tenants, the legal system has led to a shriveling of the rental market. On a related theme, tax rules need to have a level playing field between renting and owning. A country with more renting has more labour mobility.
Tax impediments to mobility
The third dimension lies in transaction taxes such as stamp duty on the purchase or sale of real estate. To the extent that it is easy for a person to sell a home in one city and buy a home in another city, labour mobility goes up. This is yet another ramification of the deep idea in public finance that all transaction taxes -- whether stamp duty or securities transaction tax - must be eliminated.
The interface between citizens and the State.
Migrants often face considerable problems in accessing public services. This constitutes one element of the motivation for the UID project. In addition, State and local governments need to create a more migration-friendly framework by offering citizen interfaces in English rather than exclusively in the local language.
Mobility-enabling public goods
The fifth dimension is maps and road signs. There is a continuum in mobility from travel to migration. Out-of-towners and migrants are more easily able to get around when signage and maps are good.

In the past, India has got away with a migration-unfriendly environment owing to the domination of informal labour contracting. When bad times came to Orissa, migration did not take place and trade in goods was stifled, so wages fell sharply. In the future, the footprint of Indian labour law will go up, owing to a bigger formal sector. This will yield reduced wage flexibility and set the stage for Greece-style distress. Hence, it is important to push on three fronts: reform labour law, achieve a single common market, and create a migration-friendly environment.

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