Subject: External Sector

India’s rupee trade settlement mechanism, a means of using rupees instead of dollars and other big currencies for international transactions, is attracting interest from more countries.

More countries are interested

• Tajikistan, Cuba, Luxembourg and Sudan have begun talking to India about using the mechanism.
• They have shown interest in opening special rupee accounts, called vostro accounts.
• Opening of these accounts needs approval from the Reserve Bank of India.
• It has already been used by Russia following the imposition of sanctions on Moscow over the Ukraine war.

Rupee Settlement System for International Trade

• Banks acting as authorized dealers for such transactions would have to take prior approval from the regulator to facilitate this.
• All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
• The exchange rate between the currencies of the two trading partner countries may be market determined.
• Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
• These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
• Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

Benefits of such a mechanism

• Trade facilitation: This will also facilitate trade with countries like Russia which are facing sanctions.
• FOREX savings: India imports more than it exports so the country will also save foreign currency under the new arrangement.
• Rupee appreciation: The rupee is at a historic low against the dollar. It will also help stabilize rupee.
• Mitigating war impact: Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
• Convertibility easing: We see this as a first step towards 100% convertibility of rupee.
• Energy security: It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.
• Export promotion: As such, the new mechanism will help India promote its exports.

Which countries would prefer this system?

• War mongering Russia: For now, it looks like trade settlements in rupee will be limited to countries like Russia and Iran who are facing sanctions from the West
• Bankrupt Sri Lanka: SL is going through economic turmoil and India has been consistently extending lines of credit to SL.
• Immediate neighbors: Other countries may include immediate neighbors of India.

Rupees over Dollars: Why countries would prefer Rupees?

• At a very simplistic level, this is like two Indians deciding to use an alternative mode of exchange that they have come up with, instead of using rupees.
• In other terms, this is similar to the barter system.
• The main reason for countries to want to trade with India in rupees is this:

1. USD has been going through a phase of strength against most currencies in the world
2. Strong USD performance has essentially made imports expensive for most countries
3. Sri Lanka, which is going through one of its worst economic crises in decades, is a glaring example of a country in which the economy has come to a halt due to a drastic fall in forex reserves

• While the Sri Lankan Rupee has declined over 83 percent against the US Dollar, its fall against the Indian Rupee has been lower at 70 percent.
• So instead of paying 83 percent more to make purchases in USD, Sri Lanka can pay in Indian Rupees and save some money.

Challenges

• Trade surplus countries’ preference: The question that RBI and the Indian government will have to answer is this – why would countries with a trade surplus with India want to trade in rupees?
• Negative trade balance: China had a $73-billion trade surplus with India in 2021-22 – that is, Indian imports from China exceeded its exports to China by $73 billion.
• Idle money lying useless: If China were to trade with India in rupees, it would have Indian rupees worth $73 billion (about ₹5.77 lakh crore) sitting idle in its Rupee Vostro accounts in an Indian bank.
• Few countries interested: Countries whose exports to India are more than imports, will not be too enthusiastic to trade in rupees, especially if the difference is huge as in the case of China.

 

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The trade deficit, difference between import and exports, between India and China has touched $51.5 billion during April-October this fiscal.

Widening deficit

• The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.
• According to the data, imports during April-October this fiscal stood at $60.27 billion, while exports aggregated at $8.77 billion.
• The merchandise exports from India to China had increased from $11.93 billion in 2014-15 to $21.26 billion in 2021-22.

India-China bilateral trade

• In 2021, annual two-way trade crossed $100 billion for the first time, reaching $125.6 billion, with India’s imports accounting for $97.5 billion, pegging the imbalance at close to $70 billion.
• This is certainly a healthy deficit compared to the industrial development in both nations.

A quick backgrounder

• Trade ties began to boom since the early 2000s.
• This was driven largely by India’s imports of Chinese machinery and other equipment.
• It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

The Hindi-Chini buy buy

• A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
• Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
• Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
• For instance India sources close to 90 per cent of certain mobile phone parts from China.

India’s export to China

• Even as an export market, China is a major partner for India.
• China is the third-largest destination for Indian shipments.
• At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

Should we worry about this?

• Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
• In this light, India’s trade imbalance with China should not be viewed in isolation.
• For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
• Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

So, having a trade deficit is good?

• Of course NOT. Running persistent trade deficits across all countries raises two main issues.

1. Availability of foreign exchange reserves to “buy” the imports.
2. Lack of domestic capacity to produce most efficiently.

Can we ban trade with China?

Ans. Certainly NOT!

• It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
• It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
• Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
• Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
• Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
• India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

China is our Frenemy. Here is why.

• The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
• Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
• Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

Way forward

• In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
• But no country is completely self-sufficient and that is why trade is such a fantastic idea.
• For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

 

 

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India’s imports from China reached a record $57.51 billion in the first half of the year, according to China’s trade figures.

India-China Bilateral Trade

• China is India’s largest trading partner.
• Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, and technical equipment.
• Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulfur, stone, cement; machines, engines, and pumps.

Recent measures to curb imports from China

• Blame it on the pandemic and the border dispute, but the result is the same: some Indian businesses are boycotting China.
• The government is now asking Indian e-commerce companies like Flipkart and Amazon India to label country of origin for all products sold on its websites.
• The govt banned many Chinese mobile applications, including top social media platforms such as TikTok, Helo and WeChat and games such as PUBG.

Can we completely boycott Chinese products?

• Trade deficits are not necessarily bad: Both Indian consumers and Chinese producers are gainers through trading.
• Will hurt the Indian poor the most: This is because the poor are more price-sensitive.
• Will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market.
• Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 per cent.
• Will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
• Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years.
• India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China.

Way forward

• In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
• The government’s “Atmanirbhar” focus is expected to help ministries handhold industries where self-reliance needs to be built.
• For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

 

We would love to see you attempting these questions. Post your answer snaps in the comment box.

 

Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

 

Q.“Curbing Chinese imports to India will do more harm than any good”. Analyse.

 

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Iran started the first transfer of Russian goods to India via a new trade corridor which transits the West Asian nation, people on the Iranian side familiar with the developments told news outlets.

The cargo will travel through the International North-South Transport Corridor (INSTC).

What is the news?

• The cargo ship departed St. Petersburg for the Caspian Sea port city of Astrakhan.
• It will reach the northern Iranian port of Anzali and then will be transferred by road to the southern port of Bandar Abbas on the Persian Gulf.
• From Bandar Abbas it will reach via ship to India at Jawaharlal Nehru Port Trust (JNPT).

International North–South Transport Corridor (INSTC)

• The INSTC is a 7,200 km-long multimodal transportation network encompassing sea, road, and rail routes to offer the shortest route of connectivity.
• It was established on 12th September 2000 in St. Petersburg, by Iran, Russia and India for the purpose of promoting transportation cooperation among the Member States.
• It links the Indian Ocean to the Caspian Sea via the Persian Gulf onwards into Russia and Northern Europe.
• It will move freight between India, Iran, Afghanistan, Armenia, Azerbaijan, Russia, Central Asia and Europe.

Significance of INSTC

• Trade facilitation: INSTC is aimed at reducing the carriage cost between India and Russia by about 30 per cent and bringing down the transit time by more than half.
• New corridor in making: It has the potential to transform the economies of countries along the corridor into specialized manufacturing, logistics, and transit hubs by facilitating access to newer markets.
• Multimodal transit: The recent Suez Canal blockade, which cost the global economy hefty damage amounting to US$9 billion, has amplified the optimistic outlook towards the INSTC as a cheaper and faster alternative multimodal transit corridor.

Benefits offered to India

• Export promotion: The INSTC connects India with Central Asia, and Russia, and has the potential to expand up to the Baltic, Nordic, and Arctic regions, increasing the scope of trade multifold.
• Ease of trade: For India, it provides a shorter trade route with Iran, Russia, and beyond to Europe, creating scope for increased economic engagement.
• Alternative Route to Central Asia: It opens up a permanent alternative route for India to trade with Afghanistan and Central Asia, given the hurdles in the direct route through Pakistan.

 

 

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CEOs of AMD, Nvidia and Intel have said at different forums last year that the chip situation will remain tight for the rest of 2022.

Genesis of shortage

• After reaching its peak in 2011, the laptop market growth slowed down with the rise of alternatives such as smartphones and tablets.
• Then, the pandemic hit.
• People switched to work from home, children connected to schools through laptops, and get-togethers happened over video calls.
• This shift led to a surge in demand for laptops and tablets.
• The stay-at-home rules also made several people pick up console-based learning and gaming.
• Each of these devices were in high demand and are run on thumbnail-sized semiconductors, performing various functions on a single device.

Also read:

[Sansad TV] Perspective: Semiconductor Industry & India

What led to the production anomaly?

• Manufacturers produce them as 200mm or 300mm wafers. These are further split into lots of tiny chips.
• While the larger wafers are expensive and mostly used for advanced equipment, the devices that were in high demand needed smaller diameter wafers.
• But the manufacturing equipment needed to make them were in short supply even before the pandemic began.
• Industry is moving in the direction of 5G and advanced communication, which requires expensive wafers.
• High consumer demand for low-end products, coupled with large orders from tech firms chocked chip makers whose factories were also closed during lockdowns.
• As the industry gradually tried to pull itself out of the supply crunch, and logistical complexities have exacerbated the problem.

Impact of Ukrainian War

• Separately, Russia’s invasion of Ukraine has strained exports of essential commodities used to make chip sets.
• Moscow supplies rare materials like palladium, and Kyiv sells rare gases to make semiconductor fab lasers.
• This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.

Global supply chain

• About a decade and half back, semiconductors barely drew attention from large companies that have now come to rely on the thumbnail-sized semiconductor piece.
• During this period, firms developed a system to make chip sets.
• The system was made by interconnecting several parts of the world to make a single device.
• It is what we now call as the global supply chain.

How intricate is this network?

• Semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions, according to a joint study by Global Semiconductor Alliance and Accenture.
• The report estimates a semiconductor-based product could cross international borders about 70 times before finally making it to the end customer.
• Wafer fabrication is the most globally dispersed, with 39 countries directly involved in the supply chain and 34 involved in allied activity.
• They provide services like photolithography, etching and cleaning.
• Designing happens across 12 countries; product testing and manufacturing each are done across 25 countries.

COVID is the only raison d’être

• Supply chain dynamics back fired due to the pandemic, and the recent geopolitical events.
• When the pandemic began, carmakers stopped requesting chips from suppliers due to low demand for new vehicles.
• And now, as they ramp up production to meet consumer demand, chip makers are down on supply because they have cut deals with other industries.
• As the geopolitical events in Central Europe and production shutdowns in China continue to add pressure to the already complicated semiconductor supply chain.

 

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The Union commerce ministry was preparing to send delegations abroad to boost the country’s wheat exports, when the government abruptly banned its exports on 14 May.

Why did India ban the export of wheat?

• Record retail inflation has punctured India’s export hopes.
• While wheat prices are up nearly 20%, prices of essential food items such as flour have risen nearly 15% last year.
• Prices of other food items that use wheat, like bread and biscuits, have surged, too.
• Heatwaves in the latter part of March, especially in northwest India, impacted the production of foodgrains.

Is India staring at a food shortage?

• India’s grain stocks are well above the buffer levels and the decision to regulate wheat exports was taken largely to check prices and curb hoarding.
• The public distribution system in the country would be run smoothly.
• However, the government has replaced wheat with rice in the Pradhan Mantri Garib Kalyan Yojana scheme for 2022-23.
• The effort clearly is a response to the reduced availability of wheat.

What has been the global reaction to the ban?

• Agriculture ministers from G7 condemned India’s decision to withhold wheat exports amid a global grain shortage.
• India is the world’s second-largest wheat producer and was expected to fill the gap created because of the Ukraine war.
• However, wheat exports will be allowed in cases where an irrevocable letter of credit has already been issued.

How will the ban affect India’s neighbors?

• The export control will help India guide wheat trade in a certain direction.
• Even with the ban, there is a window open for neighbouring countries.
• The export will be allowed to other countries “based on the request of their governments”.
• This window is crucial for Sri Lanka because the country is facing an economic crisis.
• Also, Bangladesh and Nepal have traditionally relied on Indian wheat.

What is the impact on farmers and traders?

• The ban has deprived Indian wheat traders the opportunity to gain from the global grain shortage.
• It may have an unfavorable impact on wheat farmers too.
• Market prices of wheat had soared past the minimum support price (MSP) in recent months.

Issues with the ban

• This ban has impacted the credibility of India as a reliable supplier of anything in global markets.
• It conveys that we don’t have any credible export policy as it can turn its back at the drop of a hat.
• More interestingly, it also reflects a deep-rooted consumer bias in India’s trade policies.
• It is this consumer bias that indirectly becomes anti-farmer. This ban deprives farmers from profit-making.
• It only shows the hollowness of agri-trade policies and dreams of doubling agri-exports.
• The export ban also reflects poorly on India’s image in playing its shared global responsibility amid the Russia-Ukraine war.

Way forward

• It may be recognised that inflation is a global phenomenon today caused by excessive liquidity injected by central banks and loose fiscal policies around the world.
• India’s wheat export ban will not help tame inflation at home.
• The Government could have announced a bonus of Rs 200-250/quintal on top of MSP to augment its wheat procurement.
• The govt could have calibrated exports by putting some minimum export price (MEP).

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Back2Basics:

How the Central and State governments procure Wheat?

 

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