A mix of policy changes and push for real growth would make the rupee more acceptable, something no official circular will be able to achieve writes Shivaji Sarkar
India has to find new ideas to rave up the economy – one being rupee-rouble trade with Russia-— even as the currency slides below 80 to a dollar. Will the dream of former Prime Minister Atal Behari Vajpayee come true? Would Bangladesh, Sri Lanka, Myanmar, and ASEAN accept it despite Reserve Bank paving the way for currency swapping?
These are good dreams to enable the rupee to become an international currency through the RBI circular does not make it convertible. The goals are not easy to achieve when the rupee continues to slip rapidly impacting the economic scenario and growth. It may come as a boon for exporters, but India is a net import country, and the overall impact of the deprecation of the rupee will be highly negative for the country.
The downward slide of the rupee calls for policy changes to strengthen the purchasing capacity of citizens and protect the importers.
The Soviet Union had a rupee-rouble trade arrangement ( The Rupee-Rouble trade arrangement is an alternative payment mechanism to settle dues in rupees instead of Dollars or Euros} with India. The idea was first conceived in 1953 under the Indo-Soviet trade agreement, but Russia scrapped it in the 1990s. India has renewed the Rupee-rouble trade arrangement offer to Russia as the communist country struggles to come to terms with an international sanction in the wake of its invasion of Ukraine. Russia has not expressed much interest in accepting the rupee and wants payments in the rouble, post-Ukrainian war. It does not help India much as only through a dollar conversion it can pay in the rouble. The practice of escrow accounts that existed during the Soviet era is less practical for Russia.
Interestingly, Iran accepted rupee payment in a world of sanctions levied by the US. But this was undone by India under the US pressure. Iran still may work it out provided the US sanctions do not deter it
But neither Bangladesh nor Sri Lanka despite high trade ties ever accepted the swap. Would Indians accept Bangladesh ‘taka’? The rupee is accepted unofficially in legal or not border trades but Rs taka’ is still not a preference. The enabling provisions apart, Sri Lanka through its worst crisis took a $ 3 billion foreign exchange loan, though a large part of it may be repaid as deals for oil and other goods from India.
India feels that being a large country it would have ready acceptance of its offer from small neighbors. Sri Lanka got into the trap of China and today it is ruing its fate. Bangladesh with over a dozen large projects with Chinese assistance is witnessing discontent within. Despite a favorable Awami League rule under Sheikh Hasina, sentiments are still less pro-India.
However, Myanmar has recently agreed to accept the Thai baht in border trade dealings and reportedly plans a similar arrangement for the Indian rupee seeking to limit reliance on the US dollar.
The Russia-Ukraine war has led to the shortage, protectionism, and a wave of defaults. It has led to a weakening of world growth, high inflation, and uncertainty for India with myriad issues like consistent trade deficits of $ 20 billion a month or almost a year. The currency reserves have now gone down to $ 588 billion as 50 percent of imports have seen a price surge. Total trade deficits may touch $ 250 billion.
India’s trade with Gulf countries crossed $ 175 billion in 2021-22, much of its oil imports and cumulative investments $ 16 billion. The Comprehensive Economic Partnership Agreement sealed by India and the United Arab Emirates in February 2022 is expected to facilitate Indian exporters to gain access to the Arab and African markets besides increasing the two-way trade to USD 100 billion in the next five years from the current USD 60 billion. But the region does not seem willing to rupee trading.
The latest RBI move is not a new deal. In 2013, the UPA government had finalized a list of 23 countries with which India could have traded in “local currencies to save precious foreign exchange and strengthen the rupee. The list included Angola, Algeria, Nigeria, Oman, Iran, Iraq, Venezuela, Qatar, Yemen, and Saudi Arabia. A task force was set up under the then special secretary Rajiv Kher. The Kher committee in 2014 had discussed two models to settle bilateral trade in local currency - the Vostro and Nostro accounts, and the traditional swap model. It preferred the traditional swap model.
In 2011, India and Japan agreed to a limited $ 15 billion currency swap line, a positive move for the troubled Indian rupee, Asia’s worst performing currency that year at Rs 48.24 to a dollar. It was proposed to be increased to $ 75 billion in 2018 by the NDA government. These are linked to London inter-bank rate, called Libor. It meant that a conversion rate is decided and later both the countries repay the amount at the same exchange rate. The fixed amount is held in rupee terms in a Japanese bank and a similar amount in Japanese yen with an Indian bank to settle trade payments.
Japan has done this with several countries like China, Malaysia, Singapore, Indonesia, and Thailand. Madan Sabnavis, chief economist of CARE Ratings had said that such arrangements were there but never used. While it did not impact the market, it gave s some leverage to RBI.
India’s free trade agreements with the ASEAN, Japan and South Korea have not turned out to be favorable for the country as these resulted in growing deficits in merchandise trade, according to a study published by the think-tank Third World Network.. It is not just a loss in business terms but also impacts the value of the rupee. It means the FTAs need a review
It is erroneous to believe that rupee is losing only because of the present Ukrainian war. There are many other reasons which need to be studied in detail. The inherent conditions in the country, the 7.1 percent retail and 15.18 percent (down from 15.88 percent) wholesale price rises, 32 percent hike, in a year, in commodity prices and flight of foreign manufacturers significantly contributed to the crisis. One may wonder why despite 9.1 percent US inflation the dollar values increase. It is attributed to the US Fed Reserve's decision to increase real interest rates. It assures higher returns to the investor. India has yet to develop that intrinsic strength.
Some peculiar policies also affect India’s economic performance. The quixotic idea of junking cars every year does not add to the value of the rupee. Forcing people to junk Rs working’ Euro IV and VI cars hit people below the belt. Another 9.5 lakh diesel cars are to be forcibly scrapped this year for supposed air quality improvement. Regardless of international pressure, India has to apply fewer cosmetics and act more to empower the people.
It must be remembered that building each new car will require new components that have to be imported. This will cause further erosion in foreign exchange value. Of course, rach new car will also impact the air quality, even it in a reduced manner. The UPA rule brought this draconian provision through the National Green Tribunal. Prime Minister Narendra Modi should personally intervene to scrap it.
A mix of policy changes and push for real growth would make the rupee more acceptable, something no official circular will be able to achieve
( The writer is a regular columnist of The Pioneer)
