For years, India had been maintaining the largest trade deficit with China, followed by the Middle East. But the geopolitical shifts in 2022 changed everything. Russia was not even in the top 10 countries with which India had a trade deficit. But since 2022, India has witnessed a historic and asymmetric expansion of its trade deficit with Russia, making Russia one of its most important trading partners. Before 2022, India’s trade deficit with Russia was under $5 billion, but it has now skyrocketed to a staggering $50.9 billion.
India’s rising trade deficit with Russia is widening despite the rupee-ruble payment mechanisms between the two countries with the purpose of broadening the bilateral trade relationship. But the rupee-ruble payment mechanism is not working. The reasons behind this are India’s massive trade deficit with Russia, volatile exchange rate and inconvertibility of the rupee, as well as fear of sanctions from the US. These make the rupee-ruble payment mechanisms almost ineffective, and often the two countries opt for alternate currencies like UAE Dirham (AED) for bilateral trade.
India’s rising trade deficit with Russia is widening despite the rupee-ruble payment mechanisms between the two countries with the purpose of broadening the bilateral trade relationship. But the rupee-ruble payment mechanism is not working. The reasons behind this are India’s massive trade deficit with Russia, volatile exchange rate and inconvertibility of the rupee, as well as fear of sanctions from the US. These make the rupee-ruble payment mechanisms almost ineffective, and often the two countries opt for alternate currencies like UAE Dirham (AED) for bilateral trade.
This extreme trade imbalance is predominantly energy-driven. Discounted Russian crude petroleum imports surged massively, now comprising over 80% of India's total import bill from Russia. Not only this, but India is importing about its 50% petroleum from Russia. Apart from petroleum, India imports a substantial portion of its coal and mineral fertilisers from Russia, which further widens this gap. Conversely, India’s export base remains severely fragmented and stagnant at around $4 billion to $5 billion, restricted by stringent non-tariff barriers, shipping bottlenecks, and ongoing rupee-ruble payment frictions.
Russia has a huge reserve of Indian rupees lying in the Vostro accounts, with no use in the near future. So, for Russia, accepting rupees is not a profitable business. Until and unless India changes the direction of trade, this gap will not narrow down. For this, India has to reduce the trade deficit while intensifying overall trade with Russia. Indian firms find it very difficult to comply with strict Russian certification, quality standards and labelling criteria. If India wants to change the direction of trade, it has to get over the above-mentioned bottlenecks.
Russia has a huge reserve of Indian rupees lying in the Vostro accounts, with no use in the near future. So, for Russia, accepting rupees is not a profitable business. Until and unless India changes the direction of trade, this gap will not narrow down. For this, India has to reduce the trade deficit while intensifying overall trade with Russia. Indian firms find it very difficult to comply with strict Russian certification, quality standards and labelling criteria. If India wants to change the direction of trade, it has to get over the above-mentioned bottlenecks.
Rajeev Upadhyay
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