India and Russia Need to Deepen Economic Relations

The recent meeting of the Indo-Russian Business Co-operation Council and the Trade and Investment Forum in New Delhi was significant, in that it took place after the recent summit-level talks between the two countries. This symbolises the fact that both countries assign considerable value to increasing bilateral trade and economic co-operation.

Fresh impetus was provided to the strategic partnership between India and Russia during President Putin’s recent visit to India. His visit reinforced the interests of both states in maintaining their traditionally close and friendly relationship. But the question that still remains is, whether a similar impetus was provided to boost trade and economic co-operation between the two countries.

Bilateral trade between Russia and India was severely affected due to the disintegration of the Soviet Union. The break-up of the USSR in 1991 and India’s economic liberalisation about the same time resulted in a drastic reduction in bilateral trade and economic co-operation. At present, the two economies display certain interesting similarities. Both economies are resurging and at the same time diversifying. They have achieved significant rates of economic growth over the last few years – seven per cent in the case of India and about 6.9 per cent in the case of Russia. This robust growth provides a strong base for expanding business contacts and promoting new projects.

An analysis of bilateral trade shows that India’s main exports to Russia are not growing at a consistent rate over the past few years, while Indian imports from Russia have remained almost static over the last decade and a half. There is a need to address specific areas to ensure greater trade flows and to reach the target set by the two governments of US $10 billion in total trade by 2010.

The greatest hindrance to trade between India and Russia is the lack of trade routes. There is need to optimise the shipping route because, until a viable and shorter route for trade is worked out, higher growth rates in trade of goods will continue to be hampered. The agreement on the new India-Russia Transport corridor may help in reducing transport costs. The present route, which passes through the Suez Canal and enters the Russian port of St. Petersburg via Kotka (Finland) and Rotterdam (Netherlands), is long and time consuming. The new route – Mumbai-Bandar Abbas-Astrakhan – would comprise of sea and land links across India, Iran and Russia and will shorten travel time by as much as ten days. The North-South Corridor thus needs greater attention from both countries.

Despite the interest shown by both sides to increase bilateral flow of goods and services, there are still some trade barriers, non-tariff barriers for instance, that continue to plague bilateral trade. These too need to be identified and addressed, since they hinder market access.

Another issue that needs to be addressed seriously pertains to the remaining funds under the Rupee-Rouble debt agreement. Between 1953 and the collapse of the Soviet Union, bilateral trade was conducted through a specific system of trade and payment called the Rupee trade system based on annual plans. However, after the collapse of the Soviet Union, the Indian and Russian governments renegotiated the entire trading arrangement. After several rounds of discussions, an agreement was reached in 1993, under which rouble credit was denominated in Rupees and a repayment schedule was drawn up. The agreement provided for an annual repayment of about US $1 billion equivalent in Rupee to Russia over a period of 12 years starting from 1994, with smaller amounts for a further period of 33 years. The Rupee debt funds were to be used by the Russian side to import goods and trade related services from India. Since then, bilateral trade has been based on payments in freely convertible currencies. All Russian exports to India follow the new system. But in the last decade, about two-thirds of Indian exports were financed through the renegotiated rupee-debt repayment mechanism.

India and Russia also need to look at other relevant issues including the expansion of inter-banking co-operation and easing of visa regulations for Indian professionals for short as well as longer periods, including business travel. For investment purposes, at present the greatest promise lies in joint collaboration in the area of energy. Russia has the energy potential to satisfy India’s growing energy needs. While public sector energy companies from India have already made large investments in Russia, private sector companies too now need to look at investments in downstream petroleum units in Russia in return for a stake in petroleum refineries there.

Despite economic policy changes in both countries, the Indo-Russian economic relationship is still dominated by defence/public sector transactions. The military industrial complex (MIC) still stands at the core of strong Indo-Russian economic linkages. India is further expected to continue importing defence equipment from Russia in the coming years.

Macro-economic stability and growth in the two economies continued mainly because of their intensive expansion of internal consumer and investment demand. Overall, the economic policies of both countries aimed at supporting macroeconomic equilibrium and stimulating growth. Today, Russia’s ambition seems to be not just limited to becoming a prime supplier of energy to the world market but to eventually re-emerge as a great economic power using petrodollars. Similarly, today’s India has a lot to offer to Russia. Sectors in which India has shown high export growth over the last few years are information and communication technology, professional services such as medical health (specifically dental), engineering, travel and tourism, as well as certain financial services. Russia, on the other hand, has demonstrated expertise in, apart from the energy sector, research and development in scientific and technological sectors, transport services, etc. The two countries could also consider building a strong platform for sharing views on innovation and research and development in the above mentioned areas so as to learn and benefit from each other’s competence. Both countries could also roll out new initiatives to boost bilateral economic co-operation.

Russia’s Economic Report of December 2006 states that it has been experiencing severe shortages of skilled labour due to demographic decline. This has had an adverse effect on its economic growth. In this context, it could be of mutual interest if professionals from India were to be hired to meet Russian requirements. This idea was discussed during Putin’s January 2007 visit as well as during the recent visit of Russia’s Minister of Economic Development & Trade. Now Russia is looking for alternatives in the form of expatriate labour from Central Asia and the Caucasus, mainly because of the latter’s familiarity with and knowledge of the Russian language. If Indian job seekers were to learn the Russian language, it would boost employment opportunities for them in Russia. Chinese labourers have already started finding a foothold in Russia’s Far East, and they might very soon spread to other parts of Russia as well. There is no doubt that Russia will prefer Indians rather than Chinese in this regard.

India and Russia have to exploit their comparative advantages in a globalising world if they wish to expand bilateral trade and deepen economic co-operation. This is imperative to add greater ballast to their strategic partnership in the 21st century.