Date: 10/09/2022

Relevance: GS-3: Indian Economy and Trade, mobilization of resources, growth, development; Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: Countertrade, Types of Countertrade, and Role of countertrade in developing economies, the resource-backed financing for infrastructure (RFI).

Context:

• In recent times heightened uncertainties and greater volatility have led various countries to resort to countertrade as a tool for meeting developmental needs, securing key resources, saving scarce foreign exchange reserves and circumventing sanctions.

How can the countertrade be rewarding for Developing countries?

• Countertrade could be a key for sustainable growth in developing countries vis-a-vis other financing mechanisms because
  • Access to affordable development finance is critical to make a faster recovery.
  • Sovereign borrowing in foreign currency has historically been expensive for developing countries and it is being further constrained due to rising debt sustainability concerns.
• According to the IMF, about 60 per cent of the low-income countries are under debt distress or at the risk of debt distress, necessitating countertrade arrangements.

The need for Countertrade amid the current financial distress

• In recent times Global debt reached a record high since World War II, increasing from $226 trillion in 2020 to $303 trillion in 2021, and over $305 trillion in Q1 of 2022.
• There is a spiralling debt looming large on the development plans of low-income economies because
  • There is a trend of rising interest rates and resultant higher loan repayments across the globe.
  • Low income countries are left with limited financial choices to bid for their developmental projects and these are accompanied by
    • Severe scarcity of forex reserves
    • High inflation rates
    • Rise in external debt burden
    • Uncertainty over repayment capacity
• Amid such constraints, countertrade models such as resource-for-infrastructure or debt-for-goods model would be important for addressing the unmet financing needs.

India should leverage the RFI for its own benefits

• An RFI model can help India secure supplies of critical raw materials for industrial processes.
  • Currently, precious stones, gold and fuel imports account for about 50% of total merchandise imports of which fuel import alone account is about 28% and expected to triple in the next decade.
  • Demand for non-fuel minerals such as Nickel, Cobalt, Molybdenum and rare earths will increase, required for switching over to a no-carbon economy.
  • Many minerals for renewables like copper and silver are not sufficiently available domestically.
  • The RFI model can help India secure these raw materials and in return support the borrower countries in infrastructure creation.
• This model can also help in expanding horizons of Indian companies executing the infrastructure projects in lesser explored geographies which will provide many opportunities.

Other Countertrading practices may yield good results

• Countries are entering into government to government (G2G) deals for alleviating concerns over supply of important commodities.
  • India may utilize its stockholding of wheat for countertrade with countries to secure supplies of essential commodities at mutually agreeable terms using G2G deals.
• For example, countertrade for exports of wheat from India to meet Indonesia’s food grain demand in exchange for uninterrupted supply of palm oil.
• The RBI’s recent circular on payment and settlement of trade in Indian rupee further paves way for establishing clearing arrangements with countries such as Russia and Sri Lanka.
• India has implemented several countertrade transactions successfully in the past such as the railway project in Malaysia which was supported by the Palm Oil Board.

What are the challenges to Countertrading?

• Absence of clear policy for countertrade in India, except in the case of defense imports.
• Complexities of the legal framework and regulations in countries involved in a countertrade transaction.
• Diplomatic issues as many overseas governments may be unwilling to accept countertrade for commodities of interest to India.
• Prevalence of resource-specific issues i.e. commodities that the overseas government may be willing to trade, which may not have sufficient domestic demand.
• The institutional issues, such as a G2G mechanism would depend critically on the strength and capability of public sector enterprises in borrower countries to engage in such transactions with seamless coordination with Indian institutions.

An environment conducive to countertrading is the way forward

• The first step should be designing a clear umbrella policy for countertrade that delineates the role of various ministries and clarifies the payment settlement mechanism.
  • For this purpose a task force for Countertrade with diverse representation from various ministries, RBI, Commercial banks, Exim bank, PSUs should be set up.
  • At the same time feedback of all the stakeholders needs to be taken into consideration.
• It should not be perceived as an aggressive measure to recover dues, but as a mechanism to boost trade and investment in lesser explored geographies.
• Countertrading practices should be used based on suitability of transactions i.e. if RFI is not possible opt for countertrade practices such as Switch Trading and so on.
• Thus there is an imminent need to address all the aforementioned challenges which would make countertrading as a win-win for both India and partner countries.

Source: The Hindu BL

Mains Question:

Q. Explain meaning and scope of Countertrading. How could countertrading be leveraged in creating resilient supply chains of critical goods and services in view of the prevailing geopolitical conflicts around the world? (250 words).