What will the replacement of the European currencies by the euro mean for Indian business? There are two aspects to the question---whether trade will now be increasingly denominated in the euro, and what are the prospects for borrowing in the euro?

Exports and imports to the countries switching over to the euro on January 1, 1999, amount to around 19 per cent of India's trade, taking figures this fiscal up to August. Taking the 1997 figures too, the trade flow to the 11 countries changing to the euro was around 19 per cent of India's trade. According to RBI figures, only about 7.2 per cent of the country's trade is being invoiced in EU currencies, and this will also include the pound sterling, which is not switching over to the euro for now. It can be expected that the euro will be at least used for invoicing in trade to the 11 participating countries.

Will the euro be used to substitute some of the dollar invoicing? Invoicing in a currency is a measure of confidence in that currency.For exporters and importers to use that currency, it must be stable, and markets in the currency must be deep.

For the euro to be stable, one of the most important factors will be the attitude of the central bank towards inflation. The track record will have to be proved. In fact, there could well be an initial bias against the currency's stability, despite the legacy of the Bundesbank, as there is no political union, and political pressures could pull in different directions.

The other important factor is the size of the economy, and its impact on world trade. In 1997, the GDP of the euro area was 19.4 per cent of world GDP, against 19.6 per cent for the US. Moreover, the euro area will be more open to world trade than the US. The area generated 19.5 per cent of world exports in 1997, verus the US' 14.8 per cent. Imports were 11 per cent of the area's GDP, against 10.6 per cent of GDP for the US. There is, however, a caveat. A large part of these imports and exports are to other countries within the eurozone, which will be reclassified as domestic trade once the euro takes effect.

As far as borrowing is concerned, the markets for the euro will be wider and deeper than the individual European currency markets. That means transaction costs should come down, which, in turn, should result in more assets being held in the euro. Furthermore, if as a result of the euro's introduction the area becomes a more closed economy than the US, the euro will also fulfill the function of being a safe haven for financial assets. All this should result in borrowing costs coming down in the euro area. There may be a contradiction here in the euro's function as a unit of account and as an asset, which would be facilitated by a stable currency, and the tendency of borrowers to use the euro financial markets. Borrowers typically prefer a weak currency, other things being equal, and the euro's fragmented political nature could well mean more scope for depreciation.

However, even if the switch to the euro occurs, those who switchinitially should have an incentive as they will have to convince many others to make the switch. This "switching cost" is one reason why the pound sterling continued to be widely used in trade years after the UK lost its position as the world's great power.

Perhaps the biggest immediate benefit will be for travellers in Europe who will save on currency-exchange costs. Given a 10 per cent difference between the buying and selling prices of currencies, that saving could be 10 per cent per exchange.

Ultimately, the strength or otherwise of the euro will depend on the ability of the new area to politically pull together towards the goal of lower inflation. But properly managed, the euro has the capability to become an alternative to the dollar.

NTPC

The government has conceded to the long-standing demand of NTPC to bring it at par with other IPPs by increasing its rate of return from 12 per cent to 16 per cent. The obvious fallout of this will be increased internal resources for the company andhigher tariffs for the consumers.

Though NTPC has been asking for an increase in its rate of return, the demand for the rise has been more urgent in the recent past. This was mainly because the company has been facing severe payment problems from SEBs.

NTPC had refused to bear the interest costs on the bond issue proposed by the centre to recover dues from the SEBs, which NTPC says should be borne by the defaulting states.

The question is, by increasing the power tariffs, will NTPC's performance improve? No. This is because the corporation allots power to the state depending on the letter of credit issued by the SEB. As the cost of power rises, the states will be able to source less units from NTPC. Further, this hike will be penalising the genuine payers.

Thus, increasing the rate of return is not the final solution. What is needed is improvement of the SEBs by better collection. It is not only the subsidised power to the agriculture sector that has affected the health of the SEBs, but also thecollection. How else can one explain that nearly 60 per cent of Delhi's power is not paid for.

(With contributions from Shishir Asthana)