Economic
Highlights
New
Delhi, 18 July 2022
Rupee For Global Leap
NEIGHBOURS KEY TO DREAM
By
Shivaji
Sarkar
The
Rupee is on at least an 11-year-journey in its quest for quasi international
status, even as it slides below a record 80 to a dollar. The Reserve Bank of
India circular is testimony of an anxiety for raving 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 the 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, softer taxes to
strengthen the purchasing capacity of individual citizens and protect their wealth
to contend with the mighty dollar.
The
erstwhile Soviet Union had a rupee-rouble trade arrangement but reincarnated
Russia scrapped it in 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-Ukrainian war. It does not help
India as only through a dollar conversion it can pay in rouble. Iran till
recently, having a close relationship, accepted rupee payment amid the US
sanctions. This was undone by India due to the US pressure. Iran still may work
it out provided the sanctions do not deter.
But
neither Bangladesh nor Sri Lanka despite high trading ever accepted the swap.
Would Indians accept Bangladesh Taka? The Rupee is accepted unofficially, in,
legal or not, border trades 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 got into the trap of China and today in turmoil.
Bangladesh with over 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 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 price surge. Trade deficits may touch $250 billion
this year.
India’s
trade with the 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 gain access to the Arab and African markets besides
increasing the two-way trade to USD 100 billion in the next five years from
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 London inter-bank rate, called Libor.
Japan has done this with a number of countries such as China, Malaysia,
Singapore, Indonesia and Thailand. Madan Sabnavis, Chief Economist CARE ratings
observed that such arrangements were there but never used nor it impacted the
market but gives some leverage to the RBI.
India’s
three free trade agreements (FTAs) with the 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
elude.
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. It adds to severe plastic pollution.
Blasting
of Himalayas and forests has become a fad for development. It hurts every
citizen, the image of the country, great wealth loss and impoverishes the
country. It overlooks that each new car have components that have to be
imported and cause further erosion in foreign exchange. Each new car production
also hits air quality. The silly UPA rule brought in through the National Green
Tribunal has destablised the market. Prime Minister Narendra Modi should
personally intervene to scrap it.
A
mix of policy changes and push to the real growth would make the rupee more
acceptable and not a mere official circular.---INFA
(Copyright,
India News & Feature Alliance)
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