October 28, 2018
One of the leading solutions for increasing foreign trade has emerged in the form of mechanisms such as ‘bilateral trade in Indian rupee’ and ‘barter system’ among others
Indian rupee-Russian rouble transactions date back to 1960s when India had entered into rupee payment deals with the erstwhile Soviet Union to acquire military hardware
As per the International Reciprocal Trade Association (IRTA), nearly 30 per cent of current world trade is happening through non-cash basis mechanisms such as barter
Such mechanisms have aided trade growth amid international economic challenges while improving deficit, boosting trade volume, income margins and saving forex reserves
In the first week of October 2018, the Indian Minister for Commerce and Industry, Suresh Prabhu, had chaired a meeting with officials of 16 government ministries and departments to discuss measures to reign in imports and promote exports to achieve better trade and current account balance. The nation has recorded sustained trade deficit since 1980 owing primarily to high import growth, mainly of mineral fuels, oils waxes and bituminous substances as well as pearls, precious and semi-precious gems and jewelry. In recent years, India’s biggest trade deficits have been recorded with China, Switzerland, Saudi Arabia, Iraq and Indonesia.
India’s foreign trade deficit jumped to US$18 billion in July 2018, the highest level in five years, and much higher than the forecast of US$15.9 billion. Since then the deficit had come down marginally to US$17.4 billion in August and further to US$14 billion in September 2018, but this was still around 50 per cent higher than the US$9.4 billion trade deficit recorded a year earlier in September 2017. Nearly all of the widening over the years have been largely on account of India’s strengthening crude oil imports as rising oil price inflation and weakening rupee against the US Dollar owing to certain critical international developments dealt a double blow.
Several ways were discussed at the recent meeting led by Mr Prabhu for easing the pressure on national trade deficit and the resultant current account deficit (CAD). One of the leading solutions that has emerged is utilisation of mechanisms such as ‘bilateral trade in Indian rupee’ and ‘barter system’ among others, to boost foreign trade. Incidentally, both these mechanisms are neither new nor unique to India.
Indian rupee-Russian rouble transactions date back to 1960s when India had entered rupee payment deals with the erstwhile Soviet Union to acquire military hardware. Although the volatility in exchange rate between the two currencies has been a contentious issue, the mechanism has survived the test of time. Similarly, in 2016, Iran and India had agreed to settle all outstanding crude oil payment dues in rupees in preparation for future trade in their national currencies. This mechanism has been helpful in increasing trade growth in face of international economic challenges while boosting trade volume, income margins and saving forex reserves.
In 2013, Indian Government had formed a task force with representatives from the Commerce Ministry, the Department of Economic Affairs, Reserve Bank of India, the Federation of Indian Chambers of Commerce and Industry (FICCI), the Confederation of Indian Industry (CII), and the Federation of Indian Export Organisations to draw up a list of countries, including non-oil exporting nations, with whom India could consider doing its trade in rupees. More recently, Russia’s Alrosa, the world’s leading rough diamond miner which last year supplied rough diamonds worth $700 million to India, successfully tested the rouble payment mechanism.
Russian state-run Alrosa tested the rouble payment system with select Indian clients in August 2018, and plans to expand this with more Indian clients. India is even pushing for an inter-governmental agreement for direct diamond imports. Similarly, in February 2018, the United Arab Emirates and India reached an agreement to trade directly in UAE dirham and the Indian rupee, a move that is expected to result in large savings for business communities on both sides. Meanwhile, India is also considering the possibility of rupee or barter trade for procurement of crude oil from Iran, Venezuela and Russia that will help bring down India’s crude oil import bills.
Venezuela is among the top 10 crude oil suppliers to India, and therefore a rupee trade system would enable a proper trade balance, making regular exports of non-basmati rice, pharmaceuticals and other products from India to Venezuela more attractive and feasible. Among the BRICS economies, Russia and China have been in favour of adopting a multi-currency arrangement which would facilitate development of bilateral trade and investment activities among the BRICS states, operating outside the realm of dollar denominated credit. However, India, South Africa and Brazil have been reluctant to go along, due to the existing IMF-World Bank commitments.
That said, suggestions made by the Department of Commerce have now signaled India’s readiness for exploring rupee-Renminbi trade as a means to check India’s trade deficit with China, which is the highest, at US$63 billion in 2017-18. The rising trade opportunities have also made way for increased foreign investment in India, evident in recent announcements made by Chinese firms such as Xiaomi and TCL.
In the context of global trade, the US dollar has enjoyed the status of unofficial global reserve currency since the 1944 Bretton Woods agreement. Financial commentators do not foresee any immediate danger of US Dollar losing its reserve currency status. However, with China pushing hard to have the Renminbi, or Yuan, lifted to a reserve currency status, and several countries advocating multi-currency trade, the days of dominance of US dollar in global trade may be numbered. In March 2009, China and Russia had called for a new global currency, disconnected from individual nations, to ensure long term stability. In addition, Russia has backed using national currencies, not the US dollar, in its trade with Turkey. Similar steps are being taken by Russia in its trade with Iran as well as China.
Although barter trade has been receiving much attention lately, it is not a new phenomenon. In 1980s, in the aftermath of the international debt crisis, barter had become prevalent in international trade with the developing countries as well as those in Eastern Europe. New technology has expanded the potential of barter, enabling swapping of products across a diverse range of sectors. The World Trade Organisation estimated that 15 per cent of the US$5.6 trillion international trade in 2012 was conducted on a non-cash basis. As per the International Reciprocal Trade Association (IRTA), nearly 30 per cent of current world trade is happening through barter.
IRTA states that around 65 per cent of Fortune 500 companies engage in barter in one form or another. China, France and Ireland are said to be considering launch of state-backed barter schemes. In India though, barter accounts for only about 10-12 per cent of trade. A significant leverages of barter came in 1972 when PepsiCo entered the Soviet Union, becoming the first American product inn the market there. Unable to convert its roubles into dollars, Pepsi entered into a long running deal with the government for payment in Stolichnaya vodka, to sell in the US. It is reported that Mercedes Benz once bartered buses for bananas in a deal worth US$65m.
Considering the recent developments in the manners in which international trade is conducted, and taking into account India’s own experiences, the current Indian Government’s focus on reinvigorating mechanisms such as ‘trade in Indian rupee’ and ‘barter system’ seems not only timely, but also imperative. Mr Prabhu has also hinted at exploring other options such as joint exports in partnership with other countries and deferred payment imports. Mainstreaming these approaches, India believes, would not only facilitate uninterrupted flow of trade, but also help to grow trade with many countries.