India-Russia ties: India must have a tab on trade deficit

India imports way more commodities and way more in value terms than it exports to Russia
The trade deficit is a cause of concern since future economic ties with Russia are promising
The trade deficit should be narrowed as it weakens the long-term trade prospects of a country

In his Arthashastra, Acharya Chanakya had told policymakers to not tilt Foreign trade in one direction. To avoid a trade deficit, he advocated for a balance of imports with an equivalent number of exports. India failed to walk on that track in India-China trade, but strengthening India-Russia ties give us one more opportunity to use this gem of wisdom.

India’s imports from Russia tripled

Crude is not the only commodity finding its way into India in the wake of western sanctions. According to a report by The Economic Times, India’s imports of refined products from Russia have tripled in the past few months. Russians exported more than 1 lakh barrels per day (bpd) of refined products over recent months.

Fuel oil comprises 70 per cent of this basket, while the remaining 30 per cent is dominated by biofuels and secondary refinery feedstocks. It is a remarkable shift, considering the fact that over the last 3 years, we imported only 30,000 bpd on average from the Putin-led country.

Bilateral trade is heavily tilted towards Russia

The increasing trade between both strategic partners is indeed a good sign, but there is also a worrying trend in our economic ties with Russia. If you look closely at the numbers, we are more dependent on Russian products than Russians are on made-in-India products. In other words, bilateral trade is heavily tilted in favour of Russia.

In 2021-2022, our bilateral trade with Russia was worth more than $13.12 billion. Remarkably, we exported items worth only $3.25 billion to Russia, while Russia’s exports to India rose to the tune of $9.87 billion. This led to a humongous trade deficit of $6.62 billion. Our trade ties with Russia poke a hole as big as nearly 3.5 per cent in our overall bilateral trade deficit worth $192.41 billion.

Import basket is more diversified than exports

That kind of deficit certainly can’t be termed as balanced. But, the more worrying aspect is that in only 2 months of this fiscal year, we had imported products worth $5 billion from Russia. Apart from crude oil, India’s import cart from Russia includes Pearls, precious stones, metals, coins, fertilisers, ships, boats, vegetable fats and oil, inorganic and organic chemicals, iron, steel, aluminium, aircrafts, spacecrafts, cosmetics, edible meat among others.

On the export front, it is saddening that our exports to Russia are not as diversified as our imports. Our main exports include pharmaceutical products, coffee, tea, fish, crustaceans, cereal, organic chemicals, nuclear reactors, boilers among others.

Trade ties will only increase

By all indications, trade ties will touch more than $20 billion by the end of this fiscal year. It is pertinent to note that the number is a conservative estimate. The reason is that the INSTC corridor has started its operations, shortening the trade route. Additionally, India has developed huge clout in present as well as future economic centres of Russia. Recently, Nikolay Lyubimov, Governor of Ryazan regions, which controls nearly 30 per cent of Russian GDP invited Indian entrepreneurs to increase Indo-Russian trade ties.

Both countries have embarked on a remarkable journey with bilateral currency transactions. Virtually, every bottleneck such as connectivity, tariff and non-tariff barriers, lack of business interest and excessive regulations in the markets of both countries is being sorted out. Thanks to western sanctions, Indian Companies are slated to get privileged entry into Russian markets. Additionally, Rupee is getting internationalised, paving the way for Rupee-Rouble bilateral trade.

Rupee-Rouble should be profitable for both

However, problems of trade deficit will remain. For instance, Indian companies opening their shops in Russia will not send money back to India. In fact, they will earn in Rouble and reinvest a significant portion of that profit for increasing their capital capacity. It will only benefit Rouble. Even Rupee-Rouble trade is highly tilted towards increasing the value of Rouble.

The Rouble cross-section of Rupee-Rouble has already been going on for years. After the US passed CAATSA legislation and later withdrew from JCOPA in 2018, India’s trade settlement with Russia got majorly tilted towards the Rouble. Before 2019, we used to settle more than 50 per cent of India-Russia trade in Dollars, but in 2021, 53.4 per cent of Indian payments to Russia was made in Rouble while Dollar’s share came down to 38.3 per cent.

Time to follow Chanakya

In the future, our trade with Russia will skyrocket. We have invested heavily in the Russian Far East and modalities of reaping dividends have already been chalked out. Since Rupee-Rouble will dominate the rooster, one currency (Rouble) should not be allowed to hog all the limelights of bilateral trade.

Indian companies investing in Russia should start focusing on exporting made-in-India products to the Soviet nation rather than establishing a manufacturing base in Russia itself. That would be a good start towards a noble goal. In the long term, Chanakyan wisdom works rather than barely 2 centuries old Economic theories.