Wanted: Some prudence & a lot of foresight

Currency arrangements need to be thought through carefully lest India is left holding dues against partner countries

As economic affairs secretary in the ministry of finance, Manmohan Singh had signed a protocol with the then Union of Soviet Socialist Republics on November 25, 1978, laying the foundation of a currency arrangement between the two countries that lasted 15 years till 1993. The arrangement was applicable to all commercial and credit transactions. The Indian rupee was valued at 10 to a rouble. It was linked to a basket of 16 currencies including the dollar and more than 3 per cent change in the rupee value to this basket on any day was to accordingly reflect in the rouble-rupee exchange rate.

With the rupee depreciating 10 per cent to Rs72.22 in September this year over last year’s average of Rs64.45 to a dollar, a debate has ensued on whether India can purchase oil in rupee. On the face of it, the idea is attractive with 38 out of the 39 countries from which India imported crude oil last year not using the dollar as their official currency. The 39th country is the United States from which India started importing gas and crude oil last year after a gap of over four decades.

India’s current account deficit widened by 5 per cent at $15.8 billion during the April-June 2018 quarter over the same period last year, on account of a higher trade deficit of $45.7 billion. Since then, oil prices, the biggest contributor to this deficit, have averaged $80 a barrel in October and rupee has depreciated to almost Rs73 a dollar.

Assuming that India’s entire oil import was done in rupee, a neat saving of $88 billion in foreign exchange would have accrued to India in 2017-18 when the rupee was Rs64.45 to a dollar and oil purchases were made on an average price of $54 a barrel. That was 17 per cent higher than the $75 billion swap arrangement that India concluded with Japan on October 29. 

This year, the savings in foreign exchange could be even larger — at $125 billion — taking $58.7 billion as the actual import bill in April-September 2018, and assuming an average crude oil price of $77.88 a barrel and a six-month rupee average of Rs72.22 for the rest of the year.

Non-dollar trade in oil and even in non-oil commodities, however, will mean that the other country uses rupee to pay India for the goods that it buys from us. And if the idea is extended to trading in respective currencies, it could mean, for instance, Saudi Arabia, the largest oil importer, paying India in riyals for the $5.4 billion worth of goods the kingdom buys from us. But India will be able to pay back only about half of the $11.2 billion ($2.8 billion worth of oil bought during April-June 2018 annualised) in riyals. The rest must be paid in rupee, which would be of no use to Saudi Arabia. 

Even in the case of Iran, India will find it difficult to put in place such a payment arrangement since it imported $3 billion worth of oil from that country in the first quarter of the current year, which is higher than what India exported to that country all of 2017-18. When sanctions were imposed on Iran by the US during the Obama regime, Iran had an outstanding of over Rs430 billion with respect to India in 2013-16 for precisely this reason. The rupee trade option in this case, however, will be more out of necessity.

Besides the Indian rupee, China’s Yuan (renminbi) has also depreciated against dollar and hence, both the countries have discussed a non-dollar trade. China is India’s biggest trade partner but here, too, trading in local currencies is not exactly feasible since India’s imports at $76.38 billion in 2017-18 are more than six times its exports to China. 

One option is to arrive at a three-way arrangement wherein a third country, with which we have a surplus, buys in rupee from India while getting paid in rupee for exports to the main trading partner, say China or Saudi Arabia. India pays the partner in rupee for all the oil or other commodities it buys from it. Working out such a three-way trading arrangement will, however, be extremely difficult.

The experience from the rupee-rouble protocol that lasted two years after the breakdown of the USSR is important to understand here. By the time Boris Yelstin’s Russia put an end to the protocol, India owed around 10 billion rouble to that country. Some sort of auction arrangement was put in place for Indian exporters so that those dues could be paid off. Both debt and trading markets maybe much more developed now than what they were in 1978 when Dr Singh signed the protocol, but currency arrangements need to be thought through carefully, lest the country is left holding dues it did not pay to other countries.