Shebonti Ray Dadwal replies: According to reports, Iran is willing to accept payments in rupee for the crude it sells to India but the Reserve Bank of India (RBI) is opposing the idea. Iran's central bank had expressed their vote of confidence in the rupee during their meeting with RBI executives, where they said that they were ready to operate through a State Bank of India (SBI) branch in Mumbai where state oil firms can make rupee payments. But RBI is against this arrangement on the ground of high trade imbalance between the two countries. Iran imports goods from India worth only $1 billion against the huge amount New Delhi pays for its oil. Also, many Indian banks do business with the US and are wary of coming under the US sanctions.

However, recently it appears that some smaller Indian national banks are being used to make payments to Iran, such as the UCO, Union Bank, etc. In mid-January 2012, a finance ministry team from India will be in Tehran for talks to resolve the payment issue, where some innovative ideas on how barter trade can be conducted on the lines of China-Iran and Iran-South Korea trade may be discussed.

Smita Purushottam replies: While it is not always possible to establish a direct relationship or causality between domestic labour unrest/ firm bankruptcy - and bilateral trade relations, hugely competitive Chinese exports can and have hurt importing countries’ economies by contributing to medium/long term redundancy among the latter’s firms. Paul Krugman, a Noble prize winning economist, has called for revaluing the Chinese currency in order to redress some of the imbalance.

Recent waves of labour unrest in China, including strikes in foreign invested enterprises such as the Japanese Honda company and the Taiwanese Hon Hai enterprise (which also witnessed multiple suicides due to poor labour conditions), have contributed to a revision in wages in many parts of China, particularly in the coastal, more developed regions.

However it may be premature to jump to conclusions regarding the impact of rising wages on China’s export juggernaut. In fact China’s exports and trade surplus have continued to rise at a very fast clip in July this year. The trade surplus dipped in August as imports rose by 35.2% over the year before, indicating improvement in domestic demand (domestic demand being generally expected to strengthen when the currency appreciates and domestic wages rise, and there has been marginal appreciation in both in China), but exports also rose, though at 34.4% - at a marginally lower rate than imports.

Also, Michael Porter’s theory of competitive advantage should be kept in mind. He says that higher wages may simply reflect higher productivity, which translates into rising exports. This explains Germany’s success as an exporting country, despite its labour force being paid some of the highest wages on the planet. German products, which embody high technology, and which require an educated and well paid workforce to produce them, continue to command a high premium in export markets. If China is following a high-technology path leading to rising Chinese exports in this segment - trade frictions resulting from bankruptcies in importing countries need not be a phenomenon of the past. Today’s headlines in the Wall Street Journal - http://online.wsj.com/article/SB1000142405274870484710457553213155091774... - clearly indicate that China is competing with western firms in the high tech sector.

Economist Intelligence Unit annual trade figures for China:

                                           2009 (Actual)      2010 (EIU estimate)
Exports of goods fob (US$ bn)      1,203.8     1,506.1

Imports of goods fob (US$ bn)       954.3     1,306.6

Current-account balance (US$ bn)       297.1     272.5

TOTAL                                    2158.1     2812.7

Shebonti Rad Dadwal replies: There are several factors contributing to the decision to stop subsidies:

1. Oil marketing firms were losing a lot of money as they had to market products at subsidized rates but had to buy crude at international rates.
2. The decision to dismantle the administered pricing mechanism was taken a long time back -- 2001-02, but was only partially implemented at the time and then held in abeyance after international crude prices began escalating till 2007 since it was believed that the fallout would have adverse political implications for the government at the time, since elections were round the corner. Also opposition parties were opposed to a price hike.
3. If India wants to implement reforms and attract investments in the oil sector, a subsidy regime is not conducive to the same.
4. If market forces are to be allowed to play in the Indian oil sector, then it is necessary to provide the private sector a level playing field. Some private companies which had entered the retail sector had closed down their operations due to difficulty in making profits because of the subsidy regime. With the lowering/removal of subsidies, they can now start their operations again.
5. In the short term, higher prices will affect the common man. However, in the long run, it will, or should, lead to more efficient functioning of the oil sector, it will prevent black marketeering, and it will force people to use energy more efficiently.
6. To alleviate the burden on the common man caused by higher oil prices, government could restructure the tax regime on fuels. Taxes comprise some 51% of motor fuels price.