India entered into bilateral rupee based trade agreements with the USSR and East European countries in the 1950s. It was then felt that these agreements would liberate us from foreign exchange shortages. The agreements had a ‘‘gold clause”.

When the rupee was devalued in June 1966, the rupee balances to the credit of these countries had to be escalated by 57.5 per cent (the obverse of the 36.5 per cent devaluation of the rupee in terms of the US dollar which, in turn, then had a fixed link with gold).

Again, in the 1990s, we were scalded by the rupee-rouble agreement under which Indian goods bought by Russia could be sold at a lucrative profit in third countries.

The history of bilateral or pluri-lateral (a few countries) agreements is that they eventually breakdown.

The institutional memory of the Government and the Reserve Bank of India (RBI) should have warned us about the pitfalls of rupee-based trade. Again, how would such agreements bear up to India’s 1994 commitment to the IMF under current account convertibility?

Rupee-based trade is an accounting device and imports of goods and services by India have to be paid by exports from India of goods and services — in other words, there is no free lunch.

Of course, we would be told that this time round it is different. With war looming in West Asia, rupee-based trade would reduce pressure on the exchange rate.

Have we crossed the Rubicon and is the agreement a fait accompli ? At least some safeguards are necessary. There should be no long-term credits/debits. Technical credits, with a ceiling, could facilitate normal swings in trade-related payments/receipts.

Any credits/debits beyond the ceiling for technical credits/debits should be settled in convertible currencies or gold.

In this day and age, transparency is of utmost importance and such an agreement should be placed before Parliament and signed only after ratification by Parliament.

The rupee payments agreements of the 1950s were kept in the top secret vault of the Chief Accountant of the RBI. In the aftermath of the devaluation of the rupee in June 1966, these secret documents were taken out for the first time.

On a personal note, I may be permitted to say that, as a junior officer of the Bank, under strict oath of secrecy, I was commissioned to examine these documents. That’s when we found out that there was a “gold clause” and nothing could be done about it.

Those who do not learn from the mistakes of the past will be punished by the future —I’ve shed my tears.

(The author is a Mumbai-based economist.)

Also read: >Is Re-based trade settlement a good idea? - Yes

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