Countertrade can Work in Crisis Situations : Daily Current Affairs

Relevance: GS-2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Key Phrases: India’s Receipts and Payments, Sustaining Bilateral Trade, International Transactions, Countertrade Arrangement, Purchase Agreement, Debt-for-goods Arrangement, Development Financing, Umbrella Arrangement, Developmental Partnership Programmes, Financial Settlement.

Why in News?

A form of barter, it has worked for India with Iran, Vietnam, Soviet Union and Malaysia. Thirty countries can be covered this way.

Background:

In view of the mounting pressure created by the sanctions on Russia, which disrupted both India’s receipts and payments in dollar for its trade with Russia, the RBI is working together with its Russian counterpart for creating a framework for sustaining bilateral trade and banking operations, likely through greater use of rupee in international transactions.
The idea of creating a trade settlement mechanism in rupee to facilitate and augment bilateral trade ties between India and trade partners is not a new one. India has, in the past, accepted and made payments in rupee for its trade with several countries including Russia, Nepal, Iran, Bangladesh, and a few east European countries.
Given the vulnerabilities of the existing trade and financial settlement mechanisms to the sanctions imposed by the US, and the difficulties in trading with countries facing foreign exchange crisis or balance of payments difficulties, there is a need to outline an alternative framework for facilitating transactions with such countries.

Advantages of Countertrade Arrangement:

Countertrade presents an effective way of,
- Mitigating risks posed by protective trade policies like sanctions, currency restrictions, non-tariff barriers etc.
- Challenges associated with outward remittances of foreign exchange, where conventional means of payment is non-existent or complex for a variety of reasons
- Challenges in securing supply of strategic mineral resources where India has significant import dependence.
- Countertrade is basically a barter or a quasi-barter arrangement that explicitly links import and export transactions. Countertrade has emerged as an important mode of international transactions for countries facing currency or cross-border payment challenges.

Is India has such arrangement in past?

India has entered into several types of countertrade arrangements in the past, including,
- A barter trade agreement with Iraq under the ‘oil-for-food’ programme wherein Iraq agreed to facilitate daily delivery of a fixed quantum of oil to India at a fixed price in exchange for exports of rice and wheat from India
- A counter purchase agreement with Malaysia wherein a rail construction project was undertaken by IRCON International Ltd. in Malaysia, for which the Malaysian government made payments to IRCON through the supply of palm oil of equivalent value to India
- A buyback arrangement with the erstwhile Soviet Union wherein the National Textiles Corporation Ltd. (NTC) of India bought 200 sophisticated looms, in return for a buyback commitment by the Soviet Union to purchase 75 per cent of the textile produced from the looms;
- Debt-for-goods arrangement with Vietnam wherein India Exim Bank extended a Commercial Line of Credit to Vietnam and in return, the Food Corporation of India imported rice from Vietnam and paid to IDBI/India Exim Bank for the imports
- A clearing arrangement with Iran wherein a Rupee payment mechanism was established between India and Iran in 2012 under which the Rupee accumulated from payments for imports by India was utilised for payment for exports of products, projects and services to Iran.

Is India has Definitive Policy for Countertrade?

In spite of several countertrade transactions over the years, there is no definitive policy for countertrade in India. Several countries like the Philippines, Indonesia and China have comprehensive countertrade policies that have helped secure imports of critical items even in the wake of growing uncertainties.
A type of countertrade, debt-for-goods, has especially been used by China for securing important raw materials and promoting value-added exports. A debt-for-goods model is a countertrade transaction wherein a country avails itself of funding for a development project, and full or partial repayment of the debt is through exchange of goods or services to the lender country.

Why India should Countertrade Arrangements?

For the lender country, such a model can provide avenues for exports of high value-added goods and services tied to the development financing, while also helping secure the supply of key raw materials through imports from the borrower country. For the borrower country, such a model helps in financing critical infrastructure development, without depletion of scarce forex resources.
In light of the heightened uncertainty and pronounced need for an alternative mechanism for trade, a framework for countertrade could be developed for India, with provisions for a debt-for-goods model. India Exim Bank’s recent study has identified 30 countries to start with, where a countertrade mechanism under the debt-for-goods model would be prudent.
These are resource rich countries that face restrictions on outward remittances of foreign currency, or are under debt distress or facing high risk of debt distress. These primarily include those engaged in the exports of mineral fuels like Nigeria, Libya, Venezuela, Iran, Republic of Congo, Sudan, Yemen, among others, as also key exporters of non-fuel primary commodities such as agricultural products and mineral resources, like Zambia, Tanzania, Mozambique, Belarus, Fiji, Nicaragua, Cuba, Syria, and Lebanon, among others.

Is countertrade policy an Umbrella arrangement?

The countertrade policy for India could be an umbrella arrangement, including a mechanism for local currency trade, but not limited to it. The policy could have a multipronged vision ranging from mitigating currency related risks related to international trade, to extending development finance assistance to the needy developing countries without depleting their scarce forex reserves; and augmenting exports to lesser explored geographies having potential to trade with India but facing forex challenges.
Countertrade mechanism would also be worth contemplating from the perspective of securing repayments in the developmental partnership programmes of the government of India, typically in resource abundant countries.
There should also be provision for a switch trade model in India’s countertrade policy, as one of the main challenges with countertrade is that the goods identified for countertrade by partner countries may not have sufficient demand in India. In a simplistic explanation, under a switch trading model, an international trading house can be engaged to serve as an intermediary for offtake of the product and concomitant payment for settling the exports leg of the transaction.

Way Forward:

The international trading regime with dollar at the pivot has made trade settlements susceptible to actions by the US. India has taken a strong stand of safeguarding its economic interests, even amid the growing clout for suspending trade relations with certain countries. It must bolster its stand through a comprehensive mechanism for circumventing the challenges to trade settlements.
Given the vulnerabilities of the existing trade and financial settlement mechanisms to the sanctions imposed by the US, and the difficulties in trading with countries facing foreign exchange crisis or balance of payments difficulties, India can adobt an alternative framework for facilitating transactions with such countries.

Source: The Hindu BL

Mains Question:

Q. What do you understand by countertrade arrangements? In the scenario of sanctions imposed by the US on various countries how it help India to trade with such countries? Critically Examine.