Dedollarisation and internationalisation of rupee: Why it remains a distant dream

Circa 1992. In February 1992, the then president of Russia, Boris Yeltsin visited India. He went back to Moscow with an extremely attractive deal that definitely benefited Russia, who was then struggling on economic front. India then owed Russia 9.87 billion, which then translated into Rs 31,377 crore. This balance was created due to the rupee–rouble swap entered into between India and erstwhile Soviet Union in 1955 and the India–Soviet Trade Protocol of 1978. According to these bilateral pacts, India and the erstwhile Soviet Union traded with each other in rupee and rouble. However, the trade between India and Soviet Union was lopsided in favour or Soviet Union. India imported defence hardware and supplies, machinery, etc. Against that India exported tea, coffee, tobacco, spices, pharmaceuticals, sugar, textiles, etc. It is pertinent to note that the rupee–rouble exchange rate was pegged in favor of Soviet Union. In that era, Soviet Union imported many things like tea, textiles, etc which it could re-export to the West and earn US dollars. The favorable exchange rate benefited Soviet Union in this. The Indian economy was in an abysmal state. Thanks to License Permit Quota (LPQ) Raj the manufacturing sector was extremely uncompetitive in quality and cost terms. There was no way that Indian manufacturing sector could sustain itself in the global market. India’s share in global trade was at rock bottom levels of around 0.53 per cent. Here, it is pertinent to note that Nehruvian economic idea of license, permits, and quota killed India’s competitiveness and India’s share crashed from around 1.78 per cent in 1950 to 0.53 per cent in 1991. It was quite natural that no country was really interested in buying Indian goods and naturally Indian rupees had no demand. In such a situation, India owed Russia Rouble 9.87 billion or Rs31,377 crore. Russia was in severe need for US dollars. In this scenario, the 1992 Rupee Rouble Agreement offered the elbow room to both India and Russia to settle their accounts. According to the deal, India had to repay Rs 19,643 crore over a period of 12 years in annual installments and balance Rs 11,734 crore in 45 years in interest free annual instalments. Here, Yeltsin also provided a levy to India to export Indian goods to settle the outstanding due. Then, India’s exports to Russia stood at around Rs 2,500 crore and were declining due to host of reasons including economic problems in Russia. Finally, it took more than a decade for India to settle Moscow’s dues. Fast forward to 2022–23. Russia has become the second largest exporter of crude oil to India. Russia–Ukraine war and resultant sanctions by the United States of America forced Russia to sell crude oil to India at discounted prices. In FY 2022–23, India’s crude oil imports from Russia stood at around $31 billion and total imports from Russia is at $46 billion. Total crude oil imports of India stood at $161 billion and Russia’s share is around 20 per cent. Against that India’s exports to Russia is at a meager $9.9 billion. This translates in a trade deficit of $36 billion. Add to this India’s imports of defence equipment and military hardware and spares etc., from Russia. India remains the biggest importer of Russian military hardware and defence equipment and in the period from 2017–22 India’s imports from Russia stood at $13 billion. In 2019, Russia was open to billing in Indian Rupees. However, with widening trade deficit and pile up of Indian rupees, Russia doesn’t sound to be as enthusiastic as it was earlier. The biggest reason for this is the fact that Indian rupee is not a fully convertible and freely tradable currency. India still remains an insignificant player in the global trade. Its share in global exports was less than 2 per cent and less than 3 per cent in global imports. In such a situation, transacting in Indian rupee in international currency markets is challenging. Major concerns of those holding Indian rupees in their forex reserves are twofold:

• What to import from India to settle the account and dispose of rupees earned by exporting goods (and in case of Russia – military hardware) to India?
• Which countries would be ready to accept payments in Indian Rupees while exporting goods to other countries holding Indian Rupee balances in it forex reserves? This is a challenge because those countries need to have an equivalent trade with India to settle its import bills in Indian Rupees. With a miniscule share in global exports, India is not in a position to make Indian Rupees attractive for other countries.

No doubts that countries like UAE have allowed UPI and transfer of funds from UAE to India in Indian rupees using India’s digital payment infrastructure. This is solely on the back of huge Indian diaspora working in UAE and repatriating rupees back to India. In this case, a significant part of the amount received from India in INR would be used for remitting money back to India. Along with this, UAE also imports many food and other merchandise products from India. Hence, it is relatively easy for UAE to opt for Rupee – Dirham Swap. It is pertinent to note that UAE Central Bank is discussing a $100 billion Rupee–Dirham Swap deal. However, the deal is still in the pipeline and we have to wait to see it becoming a reality. It is also important for India to note that despite a having a 14 per cent share in global trade, the EU has not been as successful in replacing the US dollars and making the euro a reserve currency. Even today, the US dollar accounts for around 80 per cent of the global trade and 60 per cent of the total forex reserves. To conclude, the exuberance of a large section of Indians on internationalisation of Indian rupee and dedollarisation appears to be a distant dream. India shall find the dream achievable only when its share in global trade rises significantly and India becomes competitive in international markets on cost and quality terms to compete with Chinese and Japanese merchandise products. As of now, India needs to focus on increasing its investments in export-oriented units and capturing a significant share in global market. Thereafter India can expect Indian Rupee to become a global reserve currency and global trade being transacted in Indian rupee. The author is a chartered accountant and tweets from @sumeetnmehta. Views expressed are personal. Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.