A Rupee agreement with Russia would be beneficial to Indo-Russian trade

Since the current crisis in Russia has arisen out of western sanctions, a bi-lateral currency agreement would benefit both countries in the long run.


In 2013-14, the Indo-Russian trade amounted to S6.01 billion with the balance of trade in favour of Russia, as Indian exports during the same period stood at $2.121 billion only.


Apart from major exports like pharmaceuticals ($535 million), other items such as electric machinery ($ 170 million) Iron and steel ($128 million) and agri-produce ($117 million) comprised our exports. Our bilateral trade with Russia is settled in US Dollars. It is projected that this may actually increase to over $30 billion by 2025, if our trade relations grow at current rates.


The recent happenings in Ukraine have been a damper. Because of Russia's annexation of Crimea and the resultant crisis in Ukraine, the Russian relationship with the West has deteriorated to the extent of attracting sanctions from the West, which is USA and Europe. Although Europe is heavily dependent upon Russian gas supplies, this intervention has not been taken kindly by them.


Russia has announced its plans to scrap the South Stream pipeline project to supply gas to Southern Europe without crossing Ukraine and has proposed an alternative gas pipeline via Turkey to whom it has offered gas at a discount. Gazprom is reported to have signed a Memorandum of Understanding with Turkey's Botas for the pipeline, proposed to run under the Black Sea. A lot of technical and commercial details will still have to be worked out on this project.


In the meantime, it is reported in the press that, Ajai Sahai, Director General and CEO of Federation of Indian Exporters Organisation has plans to meet the Commerce Ministry to seek their assistance if the Government can work out some sort of Rupee payment agreement with Russia, because of the fall in the Rouble-Dollar parity since the Rouble's free fall in the recent past.


It may be recalled that when the sanctions were imposed on Iran by Western Powers, led by USA, as both Iran and India were inter-dependent on oil supplies, to circumvent the impasse, a rupee account was set up in the UCO Bank, Kolkata, which was used as a conduit for settlement of trade between both the countries. Since the current crisis in Russia is similar, arising out of western sanctions, Ajai Sahai feels a similar proposal can be brought into use, by both Russia and India, as this will benefit both nations.


Also, during the recent visit of Russian President Putin, projects and other details worth much more than $20 billion were concluded as reported in the press, which includes, Essar's 10-year multibillion dollar oil deal; Alrosa's pact for direct sale of rough diamonds; NMDC-Acron of Russia's deal to acquire a potash mine in Russia among others. Recently, Russia also relaxed the rules to permit the importation buffalo meat from India.


An indepth study and initial limitation of Rupee-Rouble agreement stipulating the total value that can be made in this manner would be a good start. Because of the steep fall in Rouble realisation, Russia is bound to control or reduce its export of wheat and India may find it worthwhile to have an "understanding" of wheat export price, wihch would also help to stabilise the market.


However, all these may also depend upon how the proposed first visit of an American President, as Chief Guest on Indian Republic Day goes and the result of discussions during the visit that he may have with the Indian Government.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)




3 years ago

It will be good for India. But, will it suit Russia? Russia is reported to be moving to receiving payments in Gold or hard currencies that can be converted forth with to gold.Abd then there is the US Polyphemes with the Old Man of Islam athwart its shoulders like Sindbad of yore who will include India in the sanction block!

Get ready for massive government borrowings

Due to poor recent experiences with the private sector, the government is pushing for much higher public investment, especially in infrastructure – at the cost of fiscal prudence


In the Mid-Year Economic Analysis (MYEA) for 2014-15, the Indian government has called a major policy change -- more public investment, especially in infrastructure segment. Tucked away on page 18 and 21, it says, "To revive growth, public investment may have to play a greater role … Consideration should be given to pursuing counter-structural fiscal policy as a way of reviving growth, and to finding the fiscal space to finance such investment…"

However, the question, especially looking at past experience, is whether public investment will necessarily lead to efficient outcomes. In addition, what will be the implication on fiscal deficit and interest rates?  This concern is on the backburner for now.

The government is turning impatient about poor growth and wants to take the reins of investment-led growth in its hands. According to the Mid-Year Review, the case in India for public investment going forward is threefold. "First, there may well be projects like roads, public irrigation, and basic connectivity, that the private sector might be hesitant to embrace. Second, the lesson from the Public Private Partnership experience is that given India's weak institutions there are serious costs to requiring the private sector taking on project implementation risks: delays in land acquisition and environmental clearances, and variability of input supplies, all of which have led to stalled projects.


These are more effectively handled by the public sector. Third, the pressing constraint on manufacturing is infrastructure. Power supply and connectivity are key inputs that determine the competitiveness of manufacturing."

How will this ambitious intervention be financed? The report notes "India has a fiscal flow problem but not a stock problem because the ratio of Government debt to GDP has declined substantially over the last decade due to a combination of high growth and high inflation," the report said. The report also notes, “that the debt dynamics will continue to work in India's favour as long as growth remains around 6% and the primary deficit remains in the current range of 1% of GDP. A case not just for counter-cyclical but counter-structural fiscal policy, motivated by reviving medium-term investment and growth, may need to be actively considered.”

This means the government thinks it has a lot of room to borrow. In overall terms, what the government in effect in the report is saying that, India desperately needs investment in infrastructure. The government will step in to boost it and it does not care much about slippage in fiscal deficit target in the process.

The push by public sector comes in the wake of disappointment of the last few years following “over-exuberant investment, especially in the infrastructure and in the form of PPPs”. There are stalled projects to the tune of Rs18 lakh crore (or about 13% of GDP) of which an estimated 60% are in infrastructure. In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one, as borrowing is used to cover interest payments. Over-indebtedness in the corporate sector with median debt-equity ratios at 70% is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector, it added.

Laying the ground for public expenditure to get out of this quagmire, the report argues that attracting new private investment, especially in infrastructure, in this climate, will be tough. "The PPP model has been less than successful. The key underlying problem of allocating the burden from the past, the stock problem that afflicts corporate and banks' balance sheets needs to be resolved sooner rather than later. The uncertainty and appetite for repeating this experience is open to question," the report said.

The other reason to argue for public expenditure is that while “private corporate investment surged in the boom phase, public investment too grew by about 3 percentage points. In addition, just as corporate investment declined by 8 percentage points during 2007-08 to 2013-14, so too has public investment by about 1.5 percentage points.”

If the thought process contained in the report is implemented, the bottomline would be this- The government and various public sector arms will enter the debt market to borrow massively. This demand for money will keep actual interest rates high, even if the Reserve Bank of India (RBI) cuts interest rates. Even that would be acceptable but what about the quality and deadline of public projects? The report notes, "To be sure, a greater role for the public sector will risk foregoing the efficiency gains from private sector participation. A balance may need to be struck with targeted public investments, carefully identified and closely monitored, by public institutions with a modicum of proven capacity for efficiency, and confined to sectors with the greatest positive spill-overs for the rest of the economy. These may then be able to crowd in greater private investment".  

Given how poorly supervised public investments are, this is a pipedream. All we may get out of this adventure is fiscal slippage.



K M Rao

3 years ago

PPPs have miserably failed on account of various reasons. The infrastructure companies have completely lost the trust of investors. The best course according to me is that the Govt. should give tax free bonds say at 10% and borrow from the market. The public will be more than willing to invest in these bonds rather than the IPOs and Mutual funds. Remember in 1990s Konkan Railway issued tax free bonds and the scheme was fairly successful. Professionals shall be brought in for execution of all important projects not the generalists.

Ordinance to implement coal, insurance reforms approved

'The Ordinance demonstrates the firm commitment and determination of this government to reforms:' Finance Minister Arun Jaitley


The Union Cabinet today approved key insurance and coal sector reforms which were stuck due to the Parliament logjam and also opened medical devices sector to foreign investment.
After the conclusion of the Winter session of Parliament, the Union Cabinet approved promulgation of the Ordinance on Insurance Bill, re-promulgation of the Coal Ordinance and allowing 100% FDI in medical devices in the pharmaceutical sector.
Finance Minister Arun Jaitley expressed hope that hiking of the foreign investment cap in the insurance sector to 49%, which has been pending since 2008, will result in capital inflow of US$ 6-8 billion.
“The Ordinance demonstrates the firm commitment and determination of this government to reforms. It also announces to the rest of the world including investors that this country can no longer wait even if one of the houses of Parliament waits indefinitely to take up its agenda,” Jaitley said.
The Insurance Laws Amendment Bill, 2008 could not be taken up for discussion despite being approved by the Select Committee of the Upper House because of the uproar over the conversion and other issues.
The Coal Mines (Special Provisions) Bill, 2014 has already been approved by the Lok Sabha during the session but could make no progress in the upper House.
The government promulgated the Coal Mines (Special Provisions) Ordinance, 2014, in October to facilitate coal block auctions after the Supreme Court cancelled 204 coal blocks in September. 


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