Is selective Re convertibility the answer to boost trade?

Pratim Ranjan Bose Kolkata | Updated on January 09, 2018 Published on December 06, 2017

Informal trade between India and Nepal is $7 billion – 75% more than the official trade of $4 billion

Huge potential lies in the east, where because of convertibility issue, trade goes underground, raising costs

Former RBI governor Raghuram Rajan was keen on it. “My hope is that we will get to full capital account convertibility in a short number of years,” Rajan had said in April 2015. The hope was belied, probably for a reason.

But even if policymakers are not comfortable with the idea of full convertibility, at this juncture, they may consider making rupee convertible to the eastern regional neighbours, with whom India is eager to push trade and commerce to build a strong regional framework.

Trade in rupee

The issue keeps coming back in almost every Track-II dialogue in the region, with researchers and business, from India and the neighbouring countries, backing the proposal. The prime argument in favour is that as a dominant currency the border trade is done in Indian rupee. However, since it is illegal, the money is routed through hundi, leading to higher transaction costs.

There are two specific pitfalls to this. First, high transaction costs put hurdles before the border trade to grow to its full potential. Most importantly, the entire transaction of goods and services (which particularly dominate the border trade) remains unaccounted.

The potential is not small. Indian officials estimate that the informal trade between India and Nepal is as high as $7 billion – 75 per cent more than the official trade of $4 billion.

Sachin Chaturvedi, Director General of India’s Ministry of External Affairs-sponsored think-tank, Research and Information System for Developing countries (RIS), backs the convertibility of rupee for regional trade.

“Our calculations show that transaction costs for payment in dollar raises cost from 18 per cent to 32 per cent, based on quantum and choice of modality of payment,” said Chaturvedi at an Indo-Nepal conference at Birgunj in Nepal earlier this year.

The Nepalese Ambassador to India, senior officials of Indian mission in Nepal, and other officials and researchers from both countries, were present at the meeting.

What is true for India and Nepal is true for every country in the region. India’s official trade with Bangladesh stands at $6 billion. However, a 2010 estimate of ADB quoted the informal trade at somewhere near $6 billion.

The scene is even more complex with regard to India-Myanmar trade. Since US banks are yet to set up shop in Myanmar and India trades in dollar, transactions are routed through Singapore incurring high transaction costs.

Traders in China, Japan and Thailand do not face this problem as their currencies are convertible.

The net result is that their trade is booming and our trade is stagnant at $2 billion for years.

But that is merely the tip of the iceberg.

According to official statistics, India-Myanmar land border trade is limited to $50-70 million, and takes place only through Moreh-Tamu border. The trade is in Myanmar’s favour. However, local businesses think the informal trade is a few hundred times higher than the official border trade.

A July 2015 BusinessLine report quoted K Lalminthanga, the then president of the Mizoram Chamber of Industries, who had said that 30 per cent of the goods trade was routed through Mizoram and the balance in India’s favour.

Lalminthanga’s assumptions may not be incorrect. Earlier this year, China stopped the import of agri-commodities, including sugar, from Myanmar, through the Muse land border. The reason: many of them were from India.

Ajitava Raychaudhuri, a trade economist from Jadavpur University and expert on the regional trade issues, thinks currency convertibility may work in India’s favour. Border trade, in particular, may get the maximum boost by attracting large-scale players and the resulting reduction in trade costs.

Economic corridors

Raychaudhuri, however, adds that parallel initiative to build economic corridors will bring greater value addition to Manipur and Mizoram as they share the border with Myanmar.

Ken Tun, Chairman and CEO of Parami Energy of Yangon, thinks currency convertibility will unlock India’s potential to export pharmaceutical products and medical services to Myanmar. Parami recently started importing diesel and paraffin from Numaligarh Refinery in Assam through the land border.

“Let Indian rupee be a listed foreign exchange in the neighbourhood,” Tun said at a recent Indo-Myanmar conference in Yangon, in the presence of Indian ambassador Vikram Misri, and a galaxy of senior Myanmarese officials.

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Published on December 06, 2017
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