India needs to bridge huge trade deficit with Russia

THE enduring relationship between India and Russia has come under increasing pressure from the United States in recent months. New Delhi's consistent, though low-key, support for its long-time friend since the onset of the Ukraine conflict has been a matter of concern for western countries but did not raise any major red flags.

Even when India persisted in abstaining from the UN resolutions condemning Russia's aggression in Ukraine, there were only muted diplomatic exchanges expressing disappointment.

The situation has now changed dramatically, with the US taking an offensive posture against India's purchases of Russian oil, terming it an act of support for Russia's war. It has gone further to levy a punitive 25 per cent tariff on exports for this reason on top of the 25 per cent tariff imposed earlier.

These measures have to be viewed in the backdrop of the fact that no such tariffs have been imposed on China, which imports far larger quantities of oil from Russia. The convoluted logic given by US officials for the imbalance is that China was already buying considerable oil from its neighbour while India's purchases shot up only after the conflict began.

India's reaction to US pressure has been to continue steadily buying Russian oil, though there has been some diversification of sourcing. Even so, it continues to account for around 34 per cent of the total purchases by India in September, according to a trade analytics agency, Kpler.

The other outcome of the Trump administration's tirade on the oil issue has been a strengthening and deepening of the relationship with Russia. Reports flow in of increased defence imports even as economic ties are expanding rapidly. Defence purchases, which include the S-400 air defence systems, may not be linked to the volatility in Indo-US ties and are likely a consequence of the performance of Russian equipment during Operation Sindoor.

But the widening economic engagement is a direct outcome of Trump's tariff adventures. India is continuing to buy Russian oil despite the US demand to stop such purchases. It has not backed down despite the prospect of a 50 per cent levy hurting a big chunk of exports to the world's biggest market. On the contrary, it looks as if India-Russia bilateral trade is set to increase substantially from the current level of $68 billion.

The process began at the recent Shanghai Cooperation Organisation summit in Tianjin, where Prime Minister Narendra Modi's bonhomie with Chinese Premier Xi Jinping and Russian President Vladimir Putin was flashed around the world. More important, however, were the visuals of Putin being accompanied by Modi in his vehicle at the summit. The message of renewed friendship between the two countries was unmistakably conveyed to the US.

The symbolism is now being translated into action with Putin offering to buy a wide range of goods from India to offset the loss of the US market.

Recognising the huge imbalance in trade with India's purchases of crude rising steeply, he has declared that Russia would be prepared to import agricultural and pharmaceutical products to bridge the trade gap. These comments came shortly after the announcement of the Russian President's visit to India in December.

The mention of agricultural goods is significant since this is an area in which the US is seeking to enter the Indian market. Even though trade negotiators have declared that agriculture and dairy are among the red lines for any trade deal, US officials have continued to seek market access in these areas. In fact, there has been criticism over the failure of India to buy from the US soya bean or corn — commodities bought earlier in large volumes by China. Trump's tariff hikes have prompted China to seek other suppliers like Brazil, leaving US farmers in the lurch.

In sharp contrast, Russia has found easier access for farm goods in this country. Agricultural imports, especially pulses and edible oils, have risen in recent years. It has become the fifth largest supplier of farm products to this country. As for exports, these mainly comprise rice, tea, coffee, spices and marine products. Most areas have potential for growth as supplies from western sources to Russia have reduced after the war began in 2022.

Prospects are bright for the supply of pharmaceutical goods as well, given the sanctions imposed by European nations. This is an opportunity for Indian pharma producers who are facing a threat of higher tariffs in the US market. Though tariff hikes have been announced, they have not been implemented, probably due to a recognition that higher prices would hurt consumers.

Yet the reality is that it may not be so easy to bridge the huge trade deficit with Russia. Of the total $68 billion of bilateral trade, India only accounts for about $5 billion of exports. It will need a tremendous effort to make up this gap.

The process could be accelerated if Putin's government follows his directive to find ways to rectify this imbalance. He also highlighted the need to resolve challenges like financing, logistics and payment systems. This includes hurdles linked to rupee payment systems, which have arisen in the last few years.

These are complicated by the existence of western sanctions on Russian financial transactions and the resulting caution of Indian banks. Such issues need to be resolved speedily, else bridging the trade deficit speedily will be a difficult task.

Russian investments in this country may also be on the anvil, especially in the heavy engineering, defence and infrastructure sectors.

A joint venture is already underway for manufacturing railway wagons both for the domestic market and for supply to Russia. This could be the template for future investments involving collaboration with both public and private sector companies.

In other words, economic relations with Russia are set to expand more quickly than ever in the past. India is now looking at Russia as an alternative market.

It may not replace the US but there is no doubt that Vladimir Putin's visit in December will mark the launch of a new era of economic engagement between the two countries.

Sushma Ramachandran is a senior financial journalist.