US Dollar as a mode of currency in India

Here are a few facts: The Indian Forex Reserves has been reaching unprecedented levels and is now around $150 Billion; NRIs the world over have contributed over $21 Billion in remittances in the past year. While these are statistics that reinforce the vision to make India a Superpower Economy in the coming decades, the question of how to make best use of this money still remains unanswered. The remittances, unlike the Forex Reserves are sent to the respective families and this money is converted to the Indian currency before use.

This is a major problem.It is because, each time such huge amounts of dollars are exchanged for the National currency, it necessitates the availability of commensurate amounts of the Rupee. This in turn necessitates printing of new currencies which leads to depletion of the gold stock. This process eventually results in inflation. This means that each time you exchange a dollar for the equivalent amount of Rupees, you are contributing to the Inflation that has plagued the nation for sometime.

It is not just the inflation concern. The Planning commission Deputy Chairman, Montek Singh Ahluwalia, sometime back, suggested that the enormous amount of Forex reserves could be used to assist in building the nation's infrastructure. This was resented by most Economists. Imagine what $145 Billion of Dollar to Rupee exchange will do to inflation? It cannot be used to buy materials from abroad as this will worsen the already ill fiscal deficit. All this have taken the talks of funding the nation's infrastructure building to square one.

It is at this context that we can take the example of our neighbour, Nepal. Nepal is very much dependent on its Southern neighbour for almost all commodities. If all this had to be bought from India using the Nepalese Rupee, it would be a hard beating on their fiscal deficit. After all Nepalese exports are very minimal compared to its imports. Also, frequent currency exchanges between the travellers between the two nations would sky-rocket the prices. To avoid these problems, the Indian Rupee is an accepted mode of currency in Nepal.

On similar lines, moving towards the west, we find the Euro unifying the currency of the European Union countries thereby reducing the complexities that would arise out of trading amongst the EU nations.

India should therefore think about implementing such a system so that we could make use of this enormous amount of cash lying dormant for the fear of escalating prices. The government must open up special zones throughout the country where trading could be handled in US Dollars in addition to the Indian Rupee. Setting up special zones inside the country where dollar trading could be done could help source materials from these regions for Infrastructure projects using the dollars in the reserves. This would not only help make best use of the Forex money , but also expedite the Infrastructure building which looks the very essential task for now.