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New FTP Pivots On Export Growth: Can Soaring Yuan Increase Export Competitiveness Of India? – Analysis

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New Foreign Trade Policy (FTP) for India for 5  years has become overdue, since the previous policy expired in 2020. Given the global trade undergoing several  twists and turmoil, Indian policy makers dithered to frame a  new  long term FTP to suit to global trade and new look to India’s trade perspective. According to Economic Survey, India pitches for global hub for supply chain after China lost its significance in the post Trump’s  America First policy and Covid 19 pandemic.  Additionally, Ukraine invasion by Russia triggers  division in world trade, with trade likely to lean to east wards, given the Yuan gaining significance and US dollar losing pre-eminence. 

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The Ukraine war did not drive the normal behavior of emerging nation’s currency. Whenever a conflict flares up, traders dump emerging nation’s currency and shift to safer currencies like US dollar, Euro, Swiss franc. According to a forex dealer, Iris Pang, ING Bank Chief of Economics for greater China “the current Ukraine situation shows that Yuan is increasingly seen as a heaven currency in Asia”. David Chao, global market strategist for Asia Pacific region at Invesco believed the sanctions against Russia will favor the Yuan.  Mr Ruchir Sharms, global investor and Managing Director of Morgan Stanley said, “Spooked by the impact of US financial sanctions on Russia, many nations are looking  for ways to reduce dependence on dollar “.        

India’s export witnessed an erratic trend during the unbridle world trade over past three to four years. After pinning a  hope on soaring growth in export for two years in 2017-18 and 2018-19 ( 8 to 10 percent growth) , India’s  export slipped to negative for the following  2 years, before it sparked to nearly 45 percent growth in 2021-22. Nevertheless, the hike in export growth in 2021- 22  cannot be indicative for    future growth since  it was  pent up of unmet demand. Even  the Rupee depreciation to US dollar failed to swell India’s export during these periods. 

Against these backdrops, where  global trade is in tattering, the main issue of new FTP is how to increase India’s export competitiveness. Fiscal incentives become obsolete and vulnerable to USA ‘s hammering India’s policy  as  WTO non-compliant .  Ukraine war unveiled a new dimension in trade  with Yuan gaining  pre-eminence , vis-à-vis,  US dollar losing significance.   Yuan has appreciated , not seen in last 4 years, notwithstanding the global trade plunged into turmoil with more than 5000 sanctions against Russia.  According to Nikkei Asia, Yuan was traded at 6.30 per US dollar on March 3, 2022 – an hike never seen since April 2018. According to a forex dealer , it was a reverse  gear uptick  in Yuan against the global speculation of US dollar hike in the wake of Ukraine invasion.   

India’s export could not reap benefits from the Rupee sliding  against US dollar since past four years. Indian Rupee depreciated nearly 8 percent  since 2018-19 . But export fell  by  5 to 7 percent during the following  three years  before it surged to 45 percent in 2021-22. The main reason was that given the US dollar most  traded  currency in the world, any change in dollar rate,   due to Federal rate changes   or unprecedented global issues,  has similar impact on the currencies of other countries who are  major competitors to India’s exports.  Eventually, appreciation of US dollar during last four years has similar reactions to the currencies of these  countries.   In other words, exports of these countries became cheaper and posed  challenge to Indian export competitiveness.

Since  Yuan is not susceptible to US dollar frequent changes, it is less risk currency than US dollar. As said before, Yuan soared  after four years in March 2022. Saudi Arab’s   pondering  for  Yuan payment can be  a case in point. Saudi Arab has been negotiating with China for accepting Yuan for oil export to China for 6 years.  Saudi Riyal is pegged to US dollar. As a result, any rate fall in US dollar  incur losses for Saudi oil. Given the price fixed on Yuan base, it will shield the nation from price volatility. This demonstrates that sanctions against Russia brought the urgency for trading in Yuan. 

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Share of US dollar in  world coffer of foreign exchange reserves is declining.  According to IMF’s Composition of Official of Foreign exchange Reserves ( COFER) ,  share of US dollar  declined  to 59.2  percent in Q3 in  2020-21.  Big Four, viz. US dollar , Pound sterling, Japanese yen and Euro, hold dominant shares in world foreign exchange reserves . Their combined shares fell to 92 percent in 2021, from  98 percent  per cent in 1999. The noteworthy feature of  the changes in composition of reserves  is that  global holding of non-traditional currencies , viz. Chinese Yuan, Australian dollar,  Canadian dollar and Swiss Franc,  increased. It increased  from  0.2 percent  in 1999 to  9.1 percent in 2021.  Yuan  was dominant  among  the   four non-traditional currencies reserves. It accounted for  25 percent in non-traditional reserves in  the central banks globally

China is the biggest trade partner of India.  India has wide trade deficit with  China.  Nearly , one-sixth of India’s global import is generated from China, against 5-7 per of India’s export to it. Given these, it is imperative for India to  export more to China to counter-balance its wide trade deficit. Indian products can be  export competitive and find wider space in Chinese market, had India been engaged in Yuan payment mechanism. Not only in Chinese market alone, but also in other countries who are considering for settlement in Yuan, such as Saudi Arabia, Russia and the like minded countries, after the global trade is likely be skewed to east ward due to the Ukraine conflict. 

Given the Yuan soaring in global reserves and   dimensional change in global  trade structures, the Yuan can be potential currency to increase India’s export competitiveness. RBI Governor exhorted the urgency  for increasing non-dollar reserves in India’s foreign exchange reserves.

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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