The Foreign Trade Policy announced on March 31 promised to take steps to support international trade in the Indian Rupee (INR). The Reserve Bank of India (RBI) made regulations permitting banking arrangements for invoicing, payment and settlement of exports and imports in INR. The Economic Survey 2023 asserted that international trade in INR would help in protecting it from volatility, and reduce the cost of doing business.
The Government of India and the RBI initiated serious negotiations with many countries, including Russia and West Asian countries, to convince them to accept the INR in payment of their exports.
The government and the RBI have also been trying to raise the stock of the INR by constantly messaging Indian businesses and the people that it would soon become an international currency.
Are these efforts succeeding? Is there a serious likelihood of the INR being accepted in international trade and payments? A more important question is whether international trade in the INR will yield better returns for the exporters?
Official efforts to talk up the INR did strike an emotional chord among many people. Many feel their pride swell when they hear stories of the Indian Rupee being accepted for payment at airports in the United Arab Emirates. Some people have started entertaining notions that the INR would soon acquire stature at par with US Dollar.
Exports-imports are ultimately made by businessmen. Indian businesses would be interested only if trading in the INR would get more value to them for their exports than doing it in US Dollars.
The slang — getting more bang (value of goods) for the buck (dollar by default) — describes the desirable phenomenon of getting more value for the money spent. In the context of international trade, the slang works both ways. Indian exporters would be happier to get more bang for their USD/INR when they import and more USD/INR for the bang they export.
For Indian traders, there is the question of exchange rate dynamics as well. For them, the ultimate test really is — will exporters get more INR when they export the same amount of goods by converting the US Dollars received or directly denominating the trade in INR and receiving the payment in INR?
INR trade = Lesser receipts
It is easier to trade in a currency the value of which both sides accept to be same. Gold and silver worked as the main work horse currency for centuries. US Dollars, convertible in gold, served the same purpose after the World War II until 1971 when it was de-pegged from gold. Even after the de-pegging, the US Dollar continues to be treated all over the world as the effective single global currency. That is the reason why more than 80 percent of international trade is still denominated in the USD.
About two-third of US Dollars are held and used outside the United States. The US runs large trade deficit, which supplies the world with US Dollars. The US also makes massive investments outside the country, which also supplies the world with USDs. This facilitates and strengthens the use of US Dollars. Its easy availability results in very low conversion costs, and faster payment settlement.
There are some other large economic blocs as well — the Euro zone and China in particular. The Euro and Chinese Yuan are still not used as major currencies for international trade and payments. The exchange value of most international currencies, including the INR, to these two currencies, are generally determined by two-step conversion reducing the final value received.
India is a relatively much smaller economy. The INR is used almost exclusively as domestic currency. Barring a few countries, the world does not even recognise and convert the INR in their respective currencies. There is very little appetite for denominating trade in the Indian Rupee or accepting INR payments for exports to India as this results in effective lower realisation to them.
In this scenario, Indian exports would end up getting lesser US Dollars for the same amount of goods exported than the US Dollars the exporter would have got if it was denominated in the US Dollars.
Trying to make the INR an international trade and settlement currency is nothing short of a wild goose chase at this juncture.
India needs to become a much larger economy in terms of its GDP and international trade integration. India also needs to move further on INR convertibility. The recent clumsy decisions to impose tax collection at source (TCS) on international remittances and credit card transactions move the clock backwards.
China has grown its economy massively. The Chinese Yuan was accepted as one of the five international currencies by the International Monetary Fund (IMF) in 2015 — and still it is struggling to be accepted as a currency for international trade.
India is far behind. Let us focus on the hard task of building the economy first, instead of squandering time and energy on this wild goose chase.
(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘Explanation and Commentary on Budget 2023-24’.)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.
(Published 23 May 2023, 07:53 IST)
