The Indian Rupee is on at least a 11-year-journey in its quest for quasi-international status, even as it slides below record 80 to a dollar.
The Reserve Bank of India circular earlier this month permitting international trade settlement in Indian Rupees is testimony of an anxiety to rev up the economy by endorsing a bid that began in 2011. Since then India has taken many baby steps to keep the dollar at bay. A dream of former Prime Minister Atal Behari Vajpayee may come true if the neighbours do not envy, and the rupee and economy remain stable. Would Bangladesh, Sri Lanka, Myanmar and ASEAN accept it despite RBI paving the way for currency swapping?
These are good dreams for enabling having an international currency status, though the RBI circular does not make it convertible. The goals are not easy to achieve when the rupee continues to slip rapidly, slowing down growth to 4.7 per cent as per Nomura. It stresses on policy changes and softer taxes to strengthen the purchasing capacity of individual citizens and protect their wealth to contend with the mighty dollar.
The Soviet Union had a rupee-rouble trade arrangement, but the reincarnated Russia scrapped it in the 1990s. Recently too Russia was given the offer to go back to the old arrangement. It has not expressed interest in accepting the rupee, though it wants payments in rouble, post the Ukrainian war. It does not help India as it can pay in rouble only through a dollar conversion. Iran till recently having a close relationship accepted rupee payment amid US sanctions. This was undone by India due to the US pressure. Iran still may work it out provided the sanctions are not a deterrent.
But neither Bangladesh nor Sri Lanka, despite high trading, ever accepted the swap. Would Indians accept Bangladesh ‘taka’? Rupee is accepted unofficially, in border trades – legal or not – but taka still is not a preference. The enabling provisions apart, Sri Lanka through its worst crisis takes $ 3 billion loan from India in foreign exchange.
The country feels that it would have ready acceptance to its offer from smaller neighbours. Sri Lanka fell into China's trap and is today in turmoil. Bangladesh with over a dozen large projects with Chinese assistance is witnessing discontent within. Despite a favourable Awami League rule under Sheikh Hasina, sentiments are less pro-India.
Myanmar has recently agreed to accept 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 shortage, protectionism and a wave of defaults. It has led to weakening of world growth, high inflation and uncertainty for India with myriad issues like consistent trade deficits of $ 20 billion a month for almost a year. The currency reserves now reduced to $ 588 billion as 50 per cent of imports have seen a price surge. Trade deficits may touch $ 250 billion this year.
India’s trade with Gulf countries crosses $ 175 billion in 2021-22 for much of its oil imports and has investments of $ 16 billion. The Comprehensive Economic Partnership Agreement sealed by India and the United Arab Emirates on February 2022 is expected to facilitate Indian exporters' 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 want rupee trading.
The latest RBI move is not a new deal. The UPA government in 2013 had finalised a list of 23 countries with which India could have swap trade in local currencies to save precious foreign exchange. The list included Angola, Algeria, Nigeria, Oman, Iran, Iraq, Venezuela, Qatar, Yemen and Saudi Arabia, and a task force was set up under the then special secretary Rajiv Kher, which in 2014 endorsed the traditional swap model.
In 2011, India and Japan agreed to $ 15 billion currency swap as Japan’s then prime minister Yoshihiko Noda agreed to support the troubled Indian rupee, Asia’s worst performing currency then at Rs 55.39 to a dollar. It was proposed to be increased to $ 75 billion in 2018 by the NDA government. For this a conversion rate is decided and later both the countries repay the amount at the same exchange rate. These are linked to the London inter-bank rate, called Libor. Japan has done this with a number of countries like China, Malaysia, Singapore, Indonesia and Thailand. Madan Sabnavis, chief economist, CARE ratings, observed that such arrangements were there but never used, nor did it impact the market but gave some leverage to the RBI.
India’s three free trade agreements with ASEAN, Japan and South Korea have not turned out to be favourable for the country as these resulted in growing deficits in merchandise trade, according to a study published by think-tank Third World Network. It means the FTAs need a review as the perceived benefits are elusive.
It is erroneous to believe that the rupee is losing only because of the present Ukrainian war. There are many other reasons, and details have to be listed. The inherent conditions in the country, the 7.1 per cent retail and 15.18 per cent (down from 15.88 per cent) wholesale price rises, 32 per cent hike in a year of commodity prices, and flight of foreign manufacturers significantly contributed to the crisis. One may wonder why, despite 9.1 per cent US inflation, the dollar values increase. It is attributed to the US Fed Reserve 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 performances. High taxes on fuels, and the quixotic idea of junking two crore Euro IV and VI cars by 2025 does not add to the value of the rupee. It hits below the belt on its march to atmanirbhar Bharat, and adds to severe plastic pollution.
Blasting of Himalayas and forests has become a fad for development. It hurts every citizen as well as the image of the country, leads to great wealth loss, and impoverishes the country. It overlooks the fact that each new car has components that have to be imported and cause further erosion in foreign exchange. Each new car production also hits air quality.
A mix of policy changes and push to real growth would make the rupee more acceptable, not a mere official circular.
The writer is a veteran journalist, an observer of the socio-political economy, and a media academician
