India’s wheat stock could exceed 75 tonnes by July, and we have no place to store it. We should  exchange our wheat for Iran’s surplus rupees

The Foreign Trade Policy for next year will be announced in a few weeks. In the past this used to be called the Export Import (EXIM) policy. In those earlier days the main focus was on conservation of foreign exchange. Ever since our foreign exchange became adequate, that focus changed to trade promotion.

About a decade ago, there was even talk of excess of foreign exchange. Today, the stock of about $300 billion is not considered excessive, nor is it scanty. But export promotion still remains a priority. That is not for generating dollars, but for generating jobs. More than forty per cent of India’s exports come from small and medium enterprises. Exports generate jobs in labour intensive sectors like textiles, leather goods, brassware and of course IT.

So in providing export subsidy (if any), we are actually providing job creation subsidy. During last year, when the world economy was in near recession, India’s exports grew by 21 per cent in dollar terms. That’s not a mean feat, but cannot be taken for granted next year.

Exporters will need whatever help that they can get from the FTP. Exporters are currently happy about the decline in the rupee. In the context of FTP, there are two specific actions that policy makers need to push. The first has some urgency, and the second is strategic. The first is promoting wheat exports to Iran. Thanks to highest ever agricultural production, and aggressive procurement, the government’s granaries are overflowing. By July the buffer stock could exceed 75 million tonnes.

The country’s storage capacity, even counting private sector help is about 55 million tonnes. The rest has to be in open railway yards or uncovered warehouse grounds. With the onset of monsoon, that could lead to rotting and wastage. In the meantime, Iran needs wheat. It has a surplus of rupees, which can be used only to buy Indian goods. Iran sends about $12 billion of oil to India, but imports only 2 billion worth goods. There is thus a huge trade gap in its favour.

Unfortunately, India can no longer pay in dollars for Iranian oil, thanks to US pressure. Hence Iran is accepting 40 per cent payment in rupee terms, which will be kept in an Indian bank account. These surplus rupees will also “rot” unless used for importing Indian goods. Hence, swap rotting wheat for rotting rupees! This is actually a win-win proposition. India reduces its cost of storage by getting rid of the stock of wheat, exporters get paid in rupees, Iran gets food which it badly needs, and it uses up the surplus rupees that have been paid for its oil. (The large issue of Iran’s nuclear programme will drag on.

The US has been forcing its friends to “unfriend” Iran. India is in a unique position globally, where it counts both US and Iran as friends. It could be more proactive in finding a diplomatic solution, rather than allowing ever- escalating sabre rattling around the Gulf of Hormuz. But that’s way beyond FTP.) The second action which is a win-win proposition is related to FTP but goes beyond. China is India’s biggest trading partner. But imports from China exceed exports to China by $20 billion. This gap may widen in the future.

One way to bridge this gap is by asking China to invest a fraction of their dollars reserves in India’s infrastructure. So effectively, the bilateral trade deficit is bridged by India selling IOUs, promising China a return on their investment. The IOUs are payable in 20 years, in Chinese currency with a guaranteed return (of say 8 per cent). No dollars involved (just as in Iran trade). This annual sale of IOUs will cause future obligations to mount, but will benefit infrastructure growth. Let’s hope the FTP blesses this three way dollar-less tango involving India, Iran and China.

  Readers’ Feedback 

The weak rupee is a concern

Your article ‘Why the Rupee fall fails to alarm’ (PM, May 12) was so one- sided and biased, that I asked myself whether you were on the payroll of the RBI. Firstly, it was irresponsible journalism not to look at the cons of a weakening rupee. Using your warped logic, one should not care if the rupee reaches Rs 100 against the US dollar.

Secondly, your so called “third mitigating factor” is the kind of argument that a 15-year-old might make on an Economics exam while making a guess on the multiple choice section, but shows an outrageous lack of judgement and common sense. If an American NRI is holding $1,000 and remits money back to India to take advantage of higher interest rates, when this money is converted back after a year then s/he would have lost money in real terms.

Let me walk you through a mathematical exercise, in baby steps so you can keep up. If I transfer $1,000 from America to India at a rate of Rs 45 to earn 10% over one year, at the end of one year I will have Rs 49,500. I’ll leave out the effects of taxes on interest in case it gets too messy for you. In the meantime, if the rupee weakens to Rs 50 then I will only have $990 if I decided to repatriate the money or use it for overseas expenses, not counting bank fees for currency conversions or fees.
 
I am sure you can see one is left in a worse position than one started and had the money remained in the at US at 1% one would be better off. Please don’t write this sort of drivel, it’s irresponsible and reflects badly on your profession and newspaper.

-  Mark C. Trayling