Vijay Kumar Gaba

 On 29^th June 2022, Reuters reported a trade deal that could have material and far reaching implications for India’s external trade in particular and the global trade in general as well. As per the agency, it has accessed documents from the Indian Custom department showing that Ultratech, the largest cement manufacturer in India, has imported 1,57,000 tonnes of coal, worth USD25.81million (appx INR2000cr), from Russia. The consignment is invoiced in Chinese currency Yuan (CNY), implying that the payment will be made in CNY, without using the global payment network like SWIFT. The agency also reported that other companies have also placed orders for Russian coal using CNY payments. (see here)

This could be the first instance of an Indian company using CNY to make international payments. Apparently, this time the transaction could be to circumvent the international sanctions on Russia. Ultratech would be using USD to buy CNY in China or Hong Kong to pay the Russian coal producer SUEK. But the success of this transaction may encourage companies to explore INR-CNY and INR-JPY routes of payment in future. It is pertinent to note that Russia and China are successfully conducting CNY-RUB trade for many years.

In the fiscal year FY22, India had a trade deficit of USD79.55bn with China (including Hong Kong) and a trade surplus of USD32.8bn with the US. These two countries are India’s largest trade partners, accounting for 26% of India’s total foreign trade. Notwithstanding the persistence of geopolitical conflict and political rhetoric, China’s (including Hong Kong) share in our foreign trade has risen to 14.4% in FY22. China accounted for 18% of India’s total imports in FY22, against 7.6% for the USA. An INR-CNY payment system in bilateral trade could be extremely beneficial for India, as it may help in bridging the trade deficit with China by making our exports to China more competitive.

Besides, India runs a trade deficit of USD28bn (FY22) with Saudi Arabia, mostly on account of oil imports. Saudi Arabia in turn runs a trade deficit of similar magnitude with China. Successful INR-CNY trade with China and Russia could open doors for non USD settlements with other trade partners also. This could potentially reduce dependence on USD for payment settlement.

It may be argued, CNY could not be as reliable a currency as USD, given the reputation of the Chinese political system and authoritative government. The US has always accused China of manipulating its currency. However, so far not much irrefutable evidence is available to conclude that PoBC has unduly manipulated CNY or exploited its trade partners. On the other hand if we compare the strength in USD considering the amount of USD printed by the US Fed in the past one decade, reasonable doubts emerge over sustainability of USD’s present strength.

The Indian Express highlighted in its 17^th March editorial (see here), “The weaponization of trade, the imposition of sanctions and the exclusion from SWIFT (Society for Worldwide Interbank Financial Telecommunication) by the US could trigger a faster de-dollarisation as countries displaying diplomatic and economic autonomy will be wary of using US-dominated global banking systems.

The US dollar, which is the world’s reserve currency, can see a steady fall in the current context as leading central banks may look to diversify their reserves away from it to other assets or currencies like the Euro, Renminbi or gold.

The notion of de-dollarisation sits well in the thought experiment of a multipolar world where each country will look to enjoy economic autonomy in the sphere of monetary policy.”

V. Ganpathy, a global expert in international trade and technology transfer, also opined (see here) that “India operates a huge trade deficit in excess of $150billion. One of the best way to counter this trade deficit is by introducing Rupee trade for major imports.” Ganpathy believes that the benefits of Rupee trade substantially outweigh losses. He believes, “An aggressive international trade lobbying is required to actively promote Rupee trade with dominant economies.” If India wants to become a global trade player, “the local currency should be the preferred trading instrument.”

The Ultratech deal could just be a small beginning for a major change in India’s foreign trade paradigm.