The demonisation of Iran by the US and its allies has shown us a window of opportunity — the beleaguered nation is prepared to do business with India for rupee payments.

The US did this forcibly to Iraq more than a decade ago in the oil for wheat agreement under the UN supervised programme, when the war-ravaged nation did not have even basic necessities of life to offer to its citizens.

In both cases, however, the anxiety of the US was these nations, perceived to be rogue and in whose whimsical hands nuclear bombs will not be safe, should not be empowered with the US dollar and other hard currencies, lest they go shopping for arms of ‘mass destruction’.

What does the US-led demonisation of Iraq, Iran and, may be Libya, portend for India?

Rupee and rouble

Well, Iran is willing to sell oil to India against the Indian rupee, which admittedly is not a hard currency, freely tradable in the forex markets across the globe. Iran knows this, but is willing to do business with India on the understanding that it will buy goods it needs from India using the rupees it has earned through oil sales. This should be fine with India, given that payment would be made in the domestic currency.

Long ago India had entered into a similar deal with Russia but with a vital difference — the Russians insisted on being paid in their own currency, rouble. Now, they couldn’t obviously purchase goods in the Indian markets with rouble.

As a result, the Indian government had to intervene and sell export quotas for the goods chosen by the Russians for which the Indian government made rupee payments to the Indian exporters.

This led to confusion, that in addition gave rise to charges of favouritism. Be that as it may, the issue is we can enter into Iran-type arrangements with Iraq, Libya and even Russia, which might oblige if only to spite its bête noire , the US.

India would break away considerably from its dollar dependence, much to everyone’s relief in the country.

Of course, the US political establishment might not take kindly to India cosying up to its bête noires, but then India must learn to work in its own enlightened self-interest and not worry about falling foul of the US.

Barter system

Iran is in the dog-house and, hence, finds the arrangement satisfactory. Would Russia shop from India in rupees unless the prices are competitive?

We must, therefore, ensure that we are competitive and quality-conscious. In the short run, the Government may have to offer some bait to such buyers to overcome the price disadvantage, that could take the form of reimbursement of taxes built into the prices on the lines of duty drawback.

The rupee payment route has the trappings of a barter deal, except that the goods are not exchanged for each other. It must be admitted that while payment would not be made in the US dollar, valuation of the oil imported would factor in the prevailing quotations in dollar terms.

Nevertheless, the relief to the economy would not be small, as the reduced demand for the greenback would bring down the exchange rate in India’s favour. We must also explore more and more the possibilities of entering into counter-trade arrangements which is a more direct form of barter.

Forex measure

The government deserves to be congratulated for reducing the dollar thirst by tightening the norms for outbound foreign investments — only 100 per cent of the net worth of a company can be invested abroad, whereas the norms till recently permitted up to 400 per cent.

But it is barking up the wrong tree when it cuts down the permitted forex expenditure per individual from $2,00,000 to 75,000, given that, in any case, hardly $1.5 billion was used up on this account, a mere scratch on our total forex outgo.

Instead, we should have come down heavily on the external commercial borrowings route.

As much as $700 million per annum can be raised by pretty much any company that wants to lay its hands on easy money, only to realise that, after the binge, there is the bill — the deteriorating exchange rate exacts a heavy toll on such cavalier borrowers when it is time for repayment and interest.

(The author is a New Delhi-based chartered accountant.)

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