Govt eyes rupee payment mechanism with Russia to curb widening CAD

Move is part of efforts to curb widening current account deficit

India is mulling a rupee payment mechanism with Russia as part of a broad range of measures aimed at reducing the current account deficit (CAD). 

Trade deficit has widened to more than $80 billion in the first five months of the current financial year as the value of the rupee nosedived and global crude prices continue to shoot up.

The potential mechanism will allow Indian importers to pay for imports from Russia – mostly diamonds and petroleum – in Indian currency while Russia would be able to use those rupees to pay for its own imports. India had a similar mechanism with Iran earlier to work around the sanctions against the Islamic republic by Western powers, that were subsequently lifted in 2015. “Exporters will benefit from the move as Russia will be interested to use up its rupee reserves since the nation is facing a shortage of US dollars,” a senior external affairs ministry official said.

While both New Delhi and Tehran have been discussing ways to revive the mechanism from the beginning of this year, the United States insisted that India stop buying from Iran. On Tuesday, commerce secretary Anup Wadhawan said the finance ministry and the Reserve Bank of India will work out a mechanism to ensure that India-Iran trade does not get disrupted following the decision of the US to impose sanctions on import of Iranian crude.

“We hope the global political economy doesn’t hurt the petroleum economy because then, the prices of petrol go up. We are telling exporters that a mechanism will be in place so that trade is not disturbed. We are urging all departments to put in place arrangements which do not disrupt exports,” he added.

New Delhi had earlier said that the government only followed economic sanctions imposed by the United Nations and not those imposed by a single nation – in this case, the US.

Export growth to continue

As part of the efforts to curb the rising CAD, the government is also set to identify ‘non-essential imports’ that can be cut down.  “Under the norms of the World Trade Organization, we have a right to use tariffs as long as they are under the fixed bound rates,” Wadhawan said. 

However, he stressed that the government expects merchandise exports to grow by 16 per cent in 2018-19. India continued to take advantage of the rising global crude oil prices on the export side, leading to total exports growing by high double digit figures every month in the current financial year. “We are discussing ways to expand exports and meeting exporters every week,” Wadhawan added.