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.
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.
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.