China's policy of keeping its renminbi artificially undervalued against the US dollar gives it an unfair economic advantage and adversely impacts the India-China trade balance, says a research paper released by the Reserve Bank of India on Friday.
In a paper titled 'The implications of renminbi revaluation on India's trade', S Arunachalaramanan and Ramesh Golait of the RBI have said, "By keeping RMB (renminbi) undervalued against the USD and depreciating it in line with the USD in the international market without taking into account the economic fundamentals of China, it invariably and distinctly provides competitive advantage over its trade competitors and trade partners including India."
It added that any revaluation of the RMB, also known as yuan, will have an impact on India's trade, particularly its imports.
"In this context, one of the factors favouring China is the cost advantage of its exports, influenced by various domestic factors. Factor like production-oriented subsidies for firms and industries does support China model. The cost of production as well as productivity of labour also becomes an added advantage in its export promotion," the paper said.
It said that while the unit cost of labour in China has declined by 20 to 80 per cent, in India increases in labour compensation outpaced increase in productivity which has led to an increase in the unit cost by 10 to 100 per cent.
Western countries, particularly the US, have been urging China for years to allow a more realistic float of its currency. This is probably the first time that India has officially joined the chorus.