India may be in better economic shape to create a rupee trade zone

Source– The post is based on the article “India may be in better economic shape to create a rupee trade zone” published in the Business Standard on 13th January 2023.

Syllabus: GS3- Economy

Relevance: Issues related to trade

News- The article explains the possibility of the rupee becoming a trade zone.

What was the situation in the past?

In the early 1990s, the modus operandi was to prepare export shipment documents from India in the name of Russian importers.

Goods were switched to some other destination and then Russian were paid 70-80% of the consignment value in hard currency.

It was easy money. But as more traders piled in; the commissions shrank to 5%. As a result, the trade fizzled out.

What does the statistics reveal about trade with Russia?

A Business Standard analysis found that India’s merchandise terms of trade from Russia has been worsening.

In 1992, as the Russian Federation was rebuilding after the breakup of the Soviet Union, India was a net exporter of goods.

The situation reversed in 2003-04, and terms of trade have worsened since.

India’s exports to Russia have tripled in the last two decades, but imports from Russia have grown faster.

What is the journey of rupee trade so far?

In the past, India did not make concessions on investment in government securities. Then, starved of foreign exchange, India proposed bilateral rupee trade agreements.

These agreements enabled India to import critical defence goods, often on easy rupee payment terms.

Agreements concluded between 1953 and 1958 accepted the rupee as the unit of account, but imbalances were settled in sterling or convertible currency.

From 1959, payments for all transactions were to be affected in inconvertible rupees, and contracting countries agreed to hold rupee balances.

The value of the rupee was fixed in terms of gold for the purpose of these agreements until the devaluation of the rupee in 1966 created issues with Russia over the rate of the currency.

Why is a rupee trading zone distinct possibility?

Unlike in the past, India can supply many goods, commodities and medicines to Russia to better balance the rupee trade. Russia is facing western sanctions

Such an arrangement may not be easy due to China’s growing influence. In 2001, China accounted for 3.9% of Russia’s total imports, whereas India’s share was 1.3 per cent. In 2021, a quarter of Russia’s imports were from China, whereas India’s share had barely changed to 1.5 per cent.