South Asia is a region where some countries do not even have normal political relations. And most often the strained political ties weigh heavily on sound economic logic so much so that these countries were not able to sign a common free trade agreement for a very long period. In this situation, when Indian Prime Minister Atal Bihari Vajpayee spoke of a monetary union in South Asia it took many people in the subcontinent by surprise.

The seven-member South Asian Association for Regional Cooperation (SAARC) has been talking of common currency from time to time amid the push toward global economic integration. But this issue was put on an altogether different plane when Vajpayee mentioned it ahead of the SAARC summit at Islamabad

The idea of common currency has been practically implemented so far only in Europe, but even Europe struggles to maintain it despite a preparation of about 30 years. Its stability pact faces stress from France and Germany who post unacceptably high fiscal deficits. The problems faced by the Euro deter nations that dream of a common currency and encourage them to settle for a lesser form of monetary cooperation.

This being the situation in Europe, problems in South Asia could be well imagined. It is still a turbulent region where the political commitment for a currency union is lacking. The monetary union would also be difficult due to economic reasons. South Asian economies vary widely in structure and size. Gross national income in 2002 ranged from Nepal's $240 per person to more than $2000 in the Maldives. The exchange-rate policies of member countries are different. In a region where economies vary so much it would be difficult to maintain a single interest-rate policy. The sizes of the economies also vary greatly. It would be difficult for the bigger economies to let their monetary policies be set to accommodate their smaller neighbours as their needs are completely different.

Due to a number of hurdles, intra-regional trade is less than four per cent of the regional income in 2000. Most economies are characterized by protectionism and face different kind of econ structural crises making the creation of common currency further difficult as it would need to balance competing economic needs. These countries are required to do more to adjust against each other than against a common partner.

Despite these problems, however, a monetary union also has its advantages. A common currency can unleash the region's potential and accelerate economic growth. It would lead to the formation of a common market with no fluctuating exchange rates. Industries could be located where conditions are most suitable.

Smaller economies too benefit from closer economic integration. Indian free trade agreements with Nepal and Sri Lanka have resulted in narrowing the trade deficit of both these countries with India. In fact, the success of the India-Sri Lanka Free Trade Agreement has inspired both countries to expand its scope to cover services and investment in a comprehensive economic partnership agreement.

The apprehension about monetary union is largely due to the scant progress made by SAARC members in economic cooperation since the group's founding in 1985. SAARC has been bogged down because of the tensions between India and Pakistan over Kashmir. But once SAFTA is successful there would be a need for central banks to coordinate policies to enable economic integration. The member nations would have to follow sound fiscal and monetary policies. A common South Asian bank would also be needed before long. But before that member countries would have to develop mutual confidence without which a common currency is difficult.

There is no denying the fact that a common currency would bring immense benefit to the region. It could help double trade among South Asian nations to 10 billion dollars but free trade is a necessary precursor to achieve this. Though South Asia has managed to sign SAFTA, a prolonged period of economic cooperation would be needed before the region hopes to move towards a common currency. The goal of common currency is not something impossible to achieve but the journey towards it is definitely going to be a long one.  The Indian reference to a common currency is more a kind of symbolic gesture or a kind of ideal towards which the member countries can work. In the short term even if these countries are able to achieve a common customs union facilitating the easy movement of goods and services and of capital and services then this in itself would be a commendable achievement.