There is something really nostalgic about India's foreign trade this year — but there is a twist in the tale. Up until the 1980s, India had a closed economy in which foreign exchange was scarce, the Dollar was God, imports were tightly controlled and the notifications from the commerce and industry ministries were full of ifs, buts, and other conditions guaranteed to confuse the average citizen.
Memories of the 1980s came flooding back last week as the ministry of commerce and industry (now merged in a post-1991 reform scenario) issued complicated notifications under which some categories of exporters and importers could do their trade settlements in the Indian Rupee.
Rupee Goes Global!
The dense language was the stuff of Indira Gandhi-era socialist controls as the categories were spelt out: "Imports for exports (Para 2.46 of FTP), Export performance for recognition as Status Holders (Para 3.20 of FTP), Realisation of export proceeds under Advance Authorisation (AA) and Duty-Free Import Authorisation (DFIA) schemes (Para 4.21 of FTP) and Realisation of Export Proceeds under Export Promotion Capital Goods (EPCG) Scheme (Para 5.11 of HBP)."
Don't worry about the abbreviations and details above. It is just a sample of the labyrinthine rules that emanate from the corridors of Udyog Bhavan.
The Bureaucratic Babu is still around decades after liberalisation began, but honestly, this time, it is about the "Internationalisation of the Rupee" —in which the currency is trying to stand up like Brave Little Asterix against the might of Uncle Sam's Dollar stomping the planet like the Roman Empire.
This is not a reversal of liberalisation but baby steps towards further globalisation for a day when Atmanirbhar Bharat has a currency to stand up firm in global markets.
Reality check: There is a long, long way to go, as the Rupee's 10% plunge against the US Dollar this calendar year, showed following America's interest rate hikes that sent the greenback soaring against most major currencies.
Finance Minister Nirmala Sitharaman took solace in the fact that the Rupee has been bruised not battered when compared with other currencies but that is hardly the great stuff for a country wanting to stagger a currency of its own.
Indian Rupee’s Foreign Valuation
The US Dollar is mighty for a variety of reasons. America is a technology and military superpower that maintains a tight watch on its budget and inflation.
Good inflation management with periodic interest rate hikes to squeeze the economy, a strong rule of law and very little state controls make the US dollar a dependable currency. In general, strong economies blessed with technological or export chutzpah, efficient fiscal management (low deficits) and well-managed inflation tend to have stronger currencies.
But nothing can stop a currency from being supported if there is a demand for it, and there are reasons to believe India's Rupee may have its own inherent strength that could go up in the coming years—if the cards are played right.
For the Indian traveller, the Gulf and Singapore are two places where the Rupee holds its own. This has been so for decades now. Formal channels such as airport shops in Singapore and informal channels like the hawala trade in the Gulf have always honoured the Rupee, but the world is a much larger playground.
The Ukraine war this year, strangely enough, has presented India with a fresh opportunity to revive its Soviet-era nostalgia, though the communist union of republics has given way to a strongman Russian state under President Vladimir Putin. During the Cold War years, India enjoyed a cosy Rupee-Rouble trade arrangement with Moscow: they needed our consumer goods and pharmaceuticals and we, their defence supplies.
India-Russia Currency Trade and the Way Forward
Both goods were considered relatively shoddy by the western standards, but for both the Soviet Union and India, it was a case of mutually gaining to strengthen their respective economies—until both came falling apart. Coincidentally, India's economic reforms started in the same year, 1991, as the collapse of the Soviet Union, and both countries thereafter embraced west-friendly, free-market reforms.
Both countries are now in the throes of fierce nationalism, and it looks like the Rupee trade, carefully dismantled after 1991, is crawling back— this time as part of India's larger global ambitions.
Extensive sanctions imposed on Russia by the West after Putin's forces invaded former Soviet republic Ukraine brought back the advantages of Rupee trade for India— indirectly strengthening the hands of the Modi government nurturing ambitions of a stronger Rupee.
India's assertive purchase of Russian oil is only part of the resurgent framework. The 1953 Indo-Soviet Trade Agreement is now being given a 21st Century makeover through special bank-to-bank 'Vostro' accounts enabled for Rupee trade. The Reserve Bank of India(RBI) last July, announced guidelines for overseas trade in the Indian Rupee.
The government says Sri Lanka and Maldives, besides South-East Asian, African and Latin American countries, are showing interest in Rupee-enabled Vostro arrangements.
Can India’s Rupee Ambitions Be Realised?
Where do we go from here? In some senses, a lot of the Rupee trade talk somewhere is only a throwback or a bounce-back to Cold War equations. However, it is undeniable that India now has some advantages.
Nearly two years before Putin invaded Ukraine, the RBI had set up a plan to allow derivatives trading in the Rupee for qualified foreign entities as part of Prime Minister Narendra Modi's ambition to have an Asian Wall Street of sorts in his home state. The 886-acre Gujarat International Finance Tec-City (GIFT) saw monthly volumes in Rupee derivatives surging to USD 27 billion in May this year, in an apparent vote of confidence for the domestic currency.
India's software and IT-enabled service exports crossed USD 150 billion last year, a figure almost unthinkable in the Soviet era. Inward remittances from overseas-based Indians crossed USD 87 billion in 2021. But merchandise trade has had a yawning deficit, with India relying heavily on imports for its crude oil needs. India imported USD 570 billion worth of goods in 2021, of which USD 170 billion was accounted by mineral oils—nearly 30% of total imports.
Fuels have a knock-on effect on everything from transport to vegetable and foodgrain prices and thus, inflation. When economic growth does not match rising prices in a nation of 140-crore people, that can be difficult both socially and politically for the government. Electronic imports from China, meanwhile, are both hurting and helping the economy, depending upon how you look at smartphones everywhere. That was about USD 26 billion in 2021.
India has lost more than USD 115 billion in foreign exchange reserves in the past 12 months, mainly on account of attempts to defend the Rupee from falling too much. The current forex reserves pile is around USD 530 billion, down from an all-time high of USD 640 billion towards the end of 2021. That is a real roller-coaster in challenging times.
In sum, India has some advantages that help it defend the Rupee from collapsing and managing its external account from facing a 1991-like crisis, but Rupee trade is now more about tapping a nostalgia-laden opportunity than making the domestic currency roar in global jungles. Keeping it real is not a bad idea though we have come a long way from 1991.
(The writer is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He can be reached on Twitter @madversity)