Rupee-renminbi trade on cards to reduce deficit and strengthen rupee

An agreement with China to trade through native currencies of both nations, doing away with the US dollar, a barter mechanism to buy crude oil from Iran and Russia, as well as further monetisation of domestic gold assets are among ways the Centre hopes to reduce the trade deficit and strengthen the rupee.

An inter-ministerial meeting, chaired by Commerce and Industry Minister Suresh Prabhu on Thursday, saw these suggestions from a host of ministries including finance, coal, petroleum, electronics, and mines and power, among others. They will now draw up short-term measures — within the next three months — to reduce dependence on imports and ramp up domestic production capacity. 

Prabhu has also asked them to also create long-term plans to cut down on the widening current account deficit, mostly fueled by a lopsided trade balance.

The trade deficit has widened to more than $80 billion in the first five months of FY19 as the value of the rupee has nosedived and global crude prices continue to rise. In FY18, a disproportionate share of the $162-billion trade deficit was due to India racking up almost $76 billion in deficit with China.
 

To address this, a Rupee-Renminbi trade has been suggested with India's largest import source, allowing both nations to bypass the dollar. However, with barriers to trade still high, especially those that are non-tariff in nature, exports have a steep curve to climb, a senior Commerce Department official said. This has been true for the pharmaceutical sector, considered to be one of the most ambitious by New Delhi and shortlisted by Beijing for reducing import duties, he added.

In March, Chinese Commerce Minister Zhong Shan had visited New Delhi and recognised pharma as one of the areas where the trade disparity could be reduced. Both nations had signed an agreement in September 2014 to achieve bilateral trade balance by 2019. The five-year programme is a joint medium-term road map for promoting trade and investment.

According to people in the know, Commerce Minister Suresh Prabhu also suggested creating a barter mechanism with oil producers Russia, Iran and Venezuela, to reduce the outflow of dollars. However, the plan will be difficult to implement given the governments of all these countries face economic sanctions by the US, which has actively been trying to stop India from sourcing its crude from Iran and elsewhere.

Last month, a potential mechanism, allowing Indian importers to pay for imports from Russia — mostly diamonds and petroleum — in Indian currency, had been proposed by the commerce department. 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 country by the West, which 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. The same holds true for other nations whose names have been discussed as well, he added.

We are the only country to spend hard dollars to buy Venezuelan oil. Even then, the bulk is picked up by Reliance. The Centre can't get it because refineries are not up to the mark.

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