Reviving economic interests

Published : Oct 14, 2000 00:00 IST

Vladimir Putin's visit provided the opportunity for India to create effective bilateral and trade relations even under the transformed market environment in Russia.

THE centrepiece of President Vladimir Putin's visit was the signing of a 'strategic partnership' agreement with India. Broadly this agreement means enhanced cooperation in the political, economic, defence and cultural fields. In the political field, Puti n made positive statements on issues such as Kashmir and international terrorism immediately after signing the agreement. In the area of defence, India signed pacts to purchase, among other things, T-90 tanks, Su-30 MKI jet fighters and the aircraft carr ier Admiral Groshkov.

A whole section of the agreement deals with trade and economic issues. Both countries have agreed to strengthen cooperation with a view to expanding trade and economic relations. Several sectors, including metallurgy, fuel and energy, information technol ogy (IT), banking and finance and communications, have been identified. A few other things, such as simplifying procedures and removing non-tariff barriers, have also been mentioned. However, unlike in the political and defence fields, no immediate resul ts are in prospect on the economic front, although it can be argued that under the new circumstances, business in both countries is no more the business of the governments. Therefore, it is up to the private sector to take advantage of the conditions cre ated by these agreements, in the near future.

Despite this, Putin's visit could have been used more effectively to promote India's economic interests in Russia. Compared to India, the Russians have done good business during the Putin visit. As Russia has a comparative advantage in the arms industry, India has purchased arms worth billions of dollars from Moscow.

One important aspect of the old Indo-Soviet friendship was a special bilateral trade and economic relationship. After the disintegration of the Soviet Union, this relationship was badly damaged. Putin's visit had held out an opportunity to create a speci al bilateral economic relationship, even under entirely different circumstances. Despite having had solid economic and trade relations in the past, a large part of the 1990s constituted a period of difficult adjustments, for Indian as well as Russian bus inesses. Economic transformation in Russia from a centrally planned economy to a market economy in 1991 coincided with the ushering in of policies of economic liberalisation in India. These developments changed the nature and character of foreign economi c relations in both countries.

Moreover, the last one decade has been a very difficult period for Russian business. It is not only that Russia is transforming its economic system, but this transformation is also taking place under a period of "a permanent crisis". As a result, the Rus sian economy was already reduced to half of what it was in 1990, when another financial and economic crisis hit the economy in August 1998. Its gross domestic product (GDP) now ranks only 16th in the world, with social indicators close to those of medium income developing countries. In contrast, in the last one decade the Indian economy has grown rapidly, compared to any other time in the recent past. Indo-Russian economic relations have to be seen in this context.

Since 1953, when the first long-term trade agreement was put in place between India and the Union of Soviet Socialist Republics (USSR), seven such agreements have been signed. This bilateral trade was conducted through a specific system of trade and paym ent called the Rupee Trade System based on annual plans. An important feature of the system was payments in non-convertible currency. The two countries' trade turnover increased from less than Rs.2 crores in 1953 to about Rs.8,000 crores in 1990-91. In 1 990-91, more than 16 per cent of India's exports went to the USSR and about 6 per cent of the imports came from it.

After the collapse of the Soviet Union, India and Russia renegotiated the entire trade regime. An agreement signed in 1993 terminated the rupee trade arrangement and mandated all bilateral trade transactions to be conducted on hard currency basis. The is sue of repayment of civilian and military loans taken by India also came up. After prolonged negotiations, the rouble credit was denominated in rupees and repayment schedule was drawn up. It was agreed that India will pay about Rs.3,000 crores annually t o Russia for 12 years from 1994, and that Russia would use the rupees to buy Indian goods. Later, it was also agreed that this amount could be put to auction to Russian and third party enterprises at discount to make Indian goods more economically viable . Today, Indo-Russian bilateral trade is based on payments in freely convertible currencies. All Russian exports to India follow the new system. But only about 20 per cent of Indian exports follow the new route. The rest are financed through the renegoti ated rupee-debt repayment mechanism.

As a result of these economic policy changes, traditional actors in Indo-Russian trade and other economic relations, such as the public sector units and state trading corporations, are no longer as relevant as they used to be in the Soviet era. Sections of the Indian private sector, which used to get away with selling many products of questionable quality under the bilateral trading system, are finding it difficult to adjust to the radically changed economic and commercial environment in Russia today, d riven by market forces.

The main items of traditional export from India are tea, readymade garments, drugs and pharmaceuticals, coffee, tobacco, rice and leather goods. Recently, some non-traditional items like electronic goods have also shown strong growth. But there has been some negative growth in respect of tea and coffee.

Traditional imports from Russia include fertilizer, iron and steel, non-ferrous metals, newsprint, synthetic rubber and chemicals. Last year, India imported coal, coke and briquettes, worth $40 million, from Russia. There has also been strong growth in r aw cotton, electronic goods and printed books. Negative growth is noticed in iron and steel, organic and inorganic chemicals and gold and silver.

These statistics do not reveal the full story. Many imports from Russia, particularly of metal, metal scrap, fertilizers, paper and paper products, are sourced through international suppliers. Hence they do not reflect in the figures. Similarly, many Ind ian goods enter Russia via "shuttle trade'', or through third countries.

At the governmental level, an Indo-Russian Inter Governmental Commission on Trade, Economic, Scientific, Technological and Cultural Cooperation has been engaged in certain activities through 11 joint working groups. Some infrasturctural projects are bein g implemented with Russian participation. India and Russia have also cooperated in the oil and gas sector. But most of these initiatives are cooperations at the public sector level. Since the future of most of these units are uncertain in both countries, the presence of some big Indian business houses in the Russian market is important. Indian industry has already identified areas of mutual interest - IT, pharmaceuticals, telecommunications, financial services, hydro-carbons, energy and power, oil and g as, food processing, financial consultancy, management services, textiles and diamond processing.

The recent agreement on an India-Russia transport corridor may help in reducing transport costs. The present shipping route, which passes through the Suez Canal and enters the Russian port of St. Petersburg via Kotka (Finland) and Rotterdam (the Netherla nds), is long and time-consuming. The proposed route comprises sea and land links across India, Iran and Russia, and will shorten travel time by as much as 10 days. The new route will be Mumbai- Bandar Abbas (Iran) Astrakhan (Russia).

The joint declaration also says that both countries would enhance cooperation and coordination at international trade, economic and financial bodies. This may be useful in formulating common positions and responses to emerging global economic issues. In fact, there is also great scope for learning from each other in the area of economic policy making. The experiences of both countries concerning privatisation and liberalisation of trade could be understood better through regular consultations. Overall, future bilateral economic relations will depend on the importance Russia gives to India's developmental needs. The USSR had played an important role in India's industrialisation process. It had a comparative advantage in sectors like steel, which was cen tral to India's industrial needs. India has to assess Russia's current comparative advantage. Similarly, India can help Russia in the process of restructuring and modernisation through its expertise in IT, management and financial services. While address ing a gathering of captains of Indian industry in Mumbai, Putin invited Indian investment in these areas.

Two factors will determine the immediate future of Indo-Russian economic relations. First, sustained growth of the Russian economy and second, competitiveness of Indian industry, commerce and services. Further, things would have been much more transparen t if the majority of Indian exports to Russia were not financed through the rupee-debt repayment mechanism. The strong political will in both countries to improve bilateral economic relations could have been converted into real economic gains if some bol d policy initiatives have been taken. The present level of Indo-Russian trade is certainly not commensurate with the existing potential. In order to improve these relations, some bold policy initiatives were needed. The joint declaration says that both c ountries will explore the possibilities of regional trading arrangements with third countries. If policy-makers were serious and imaginative, they could have proposed a bilateral free trade agreement, although there would have been reservations from some industries in both countries. The free-trade agreement had the potential to give a new direction to bilateral relations. It could have created a feeling of special economic relationship. There are strong signs that the Russian economy is picking up. Thi s year it is expected to grow by 5 to 6 per cent. This was the right time to give a boost to Indo-Russian economic relations.

Dr. Gulshan Sachdeva teaches at the School of International Studies, Jawaharlal Nehru University, New Delhi.

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