India should expand bilateral Re trade within Asia

INDIA has been at the receiving end of China’s transgressions since the 1950s. The trend is continuing with ferocity, high frequency and increased penetration into the Indian system. Virtually every Indian sector — economics, defence, commerce, trade, industry — has received body blows, and there’s little to hope for better things anytime soon.

A new ‘currency front’ appears to be opening as the rupee faces critical times. The Reserve Bank of India (RBI) needs to act adroitly to help make the rupee stable and not let it be seen as a piece of paper flying all over in a storm.

Indeed, a consistently weak and unstable (depreciating) rupee has been one of the main reasons debilitating the development of the Indian economy for more than six decades. India certainly can do better.

In contrast, China has managed its currency smoothly in turbulent times. Thus, a close look at the two currencies’ exchange rate fluctuations vis-a-vis the dollar during the past 15 years would be instructive.

Between 2008 and 2023, the Chinese yuan’s or renminbi’s average closing price per dollar fluctuated between 6.95 (maximum) in 2008 and 6.15 (minimum) in 2013, thereby showing that Beijing had a steady currency even in unfavourable times. It proves that no country can progress/prosper without a stable currency, as earlier shown by post-World War II Japan.

Occupied Japan was rehabilitated by American banker Joseph Dodge on the basis of three simple principles: sound currency, balanced budget and fiscal stability. As the Japanese yen had suffered during the war, with misery heaped on people through inflation, in one stroke, the Japanese currency’s exchange rate was fixed at 360 yen to a dollar. The yen became unitary, leading to enormous economic benefits through a stable currency. From 1949 to 1971, 360 yen equalled a dollar, which singularly ‘led to an extraordinary export-led economic growth of Japan.’ Dodge ruthlessly reversed the policy of deficit spending, which was the bane of the Japanese economics since the 1930s’ advent of militant polity. A balanced budget, fiscal prudence and stable currency made the miracle of the Land of the Rising Sun in all its splendour.

In view of the Japanese and Chinese examples, the performance of the rupee in the international market during the past 15 years would make one suggest that due diligence by the RBI is overdue.

True, the first major devaluation of the rupee took place on June 6, 1966, wherein it fell from Rs 5 to a dollar to Rs 7.5. Overnight, the balance of payments went haywire as the Indian currency plunged into a chronic depreciation and deficit. Successive governments have not been able to stabilise the rupee.

In 2008, one dollar was worth Rs 43.51. On May 29, 2023, the rupee touched 82-plus, underscoring the volatility of the Indian currency. Topping it all, the RBI issued an order for the withdrawal of notes of Rs 2,000 denomination. It has had an avoidable and undesirable ripple effect on India’s currency-friendly market of Dubai and adjacent territories where currency exchange units attract customers.

Simply put, the rupee today faces problems on both internal and external fronts. Demonetisation, depreciation, devaluation and the withdrawal of the Rs 2,000 note are constantly keeping it in a state of turbulence and instability; and that’s not a good omen.

No doubt, despite the hurdles, India’s foreign exchange reserves are nearing $600 billion, thereby giving its economy the much-needed confidence for foreign trade transactions. Nevertheless, it must be borne in mind that in contrast to India’s foreign currency comfort, China has accumulated $3.2 trillion to take on foreign aid, trade and investment. With the ever-expanding one-way bilateral trade profit across continents, backed by favourable balance of payments, Beijing is determinedly challenging the dollar’s omnipresence in the global market.

It has launched a two-pronged attack to attain supremacy of the currency. First, reduce dollar payments in imports and exports, and follow it up by coercing weaker, smaller and handicapped trading partners to transact in yuan/renminbi. The aim is two-fold. Save the dollar-filled foreign exchange kitty and make its own currency a force in the financial world.

In a way, wider acceptance of the yuan/renminbi is testimony to the Chinese Communist Party’s sovereignty. Doesn’t the currency, like the national flag, denote national identity too?

Thus, there once was the globe-trotting British pound. The dollar eclipsed the pound post World War II. But the US is today challenged by China. True, China has a long way to go, but its aggressive machinery is working overtime. From Russia to Bangladesh, Bolivia to Brazil, Argentina to Iran, Mongolia to Kazakhstan, the process is yielding fruit. The renminbi is rising and the yuan is transacting with aplomb.

What can India do? It must make a determined start with a rupee push to pluck at least the low-hanging fruit. Russia and India once had a healthy rupee trade. Unfortunately, the dire situation arising out of the Ukraine conflict has made Moscow turn away from bilateral rupee transactions. The yuan seems to have stormed the Russian economy. Hope this is a fleeting trend.

Bangladesh appears keen on the Indian rupee trade because of its depleting dollar kitty, which stands at $30.18 billion. Dhaka owes $41.1 million to India’s public sector oil company Numaligarh Refinery Limited and $147.2 million to Indian Oil Corporation.

It could be a win-win situation if India expanded bilateral rupee trade within Asia. For that, of course, the RBI has to ensure the rupee’s stability, which will enhance consumer confidence and lead to wider acceptability.