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Barter System - A Comeback

Posted in Finance Articles, Total Reads: 4731 , Published on August 19, 2012

Barter”: hearing this word we fill like we are entering in to our pre-age history book. We might have deleted the this term from our international trade matters since a long period of time. Today India is in the verge ofbalance of trade crisis. Imports are growing over exports over the years for India. Indian Rupee getting depreciated on daily basis. The foreign exchange reserve getting diminished in parallel with the payment deficits.

Skimming through the details of the import figure of the country, one of the major parts goes to Imports of crude Oil and petroleum. Analyzing the figures of the last April to September, 2011: the total import for India was 233.5 b$ out of which the crude oil imports constitute 70.4 b$ .i.e. around 30% of the total import figure. Day by day this figure is increasing and no way can’t we reduce this lion’s share of crude oil looking at the growing demands of the Indian society .So better to tackle it in an alternative way.

Looking at the current global scenarios happening around us such as Iran’s offer to trade crude oil with basic commodities such as Rice and wheat, we can deduct the best logic to tackle this crisis with reintroduction of barter system to our international trade. The best part of the barter system is the replacement of the money by commodities. In long run this will act as India’s foreign exchange reserves survivor. The definition of barter says that, “Barter usually replaces money as the method of exchange in times of monetary crisis, such as when the currency may be either unstable”. India at this point of time satisfying this definition of barter system to a great extent.

The eye opener in the whole global event is that, we can reemerge as the agricultural giant in the world. In the past agriculture acted as the strength of India. Before the industrial revolution, this was the prime sector in contributing to India’s GDP growth. Years passed, and we forgot our real strength. Hope this is the time to rethink on our strategy; re-plan to counter attack the impact of balance of payments crisis. Once again let’s analyze the figures for Indian exports. The figure for Indian export is 174.66 b$, out of which agricultural products export constitutes 14b$ .That means we are exporting just 10% of the total exportsas the agricultural outputs. But if we compare the figures of the employment in agriculture, it constitutes 52% of the total employment in India.

Let’s discuss the pros of the barter system in trade. Barter eradicates the exchange of money from the whole trade. That clearly states that we can exchange our home grown agricultural products in place of money without depending upon the foreign exchange reserves. It other way around we can save our currency not to be depreciated in future and also reducing the debt on our country. We can save India from being the future victim of “Dollarization of US Dollars”. The balance of payments crisis will disappear in few years after the reintroduction of the barter trade for the crude oil imports.

The main part of the government tax reserve goes to subsidy for the fertilizers for the agriculture. As the country dependent on the monsoon, the output varies year to year too. So the loss because of varying demand occurs year to year with over production or less production etc. With introduction of the barter the whole demand system will be converted to supply driven. This means the extra output will serve as for the international trade. Farmers can get good return on their investment and they will not be dependent on the fixed base price set by the government.

Considering the supply driven supply chain of the agro products, there will be no uncertainty in demand and the wastage will be very less. As the farmers will be extending their business to whole global market, the profit margin will be greater than usual trend. Indirectly this will also reduce the unemployment figure for India attracting the youths of India towards this sector.

If we go in to the depths of the oil exporting countries, especially Iran; the scarcity is in the field of agro products, FMCG derivable(s). This gives a clear cut message for the Indian major in FMCG sector such as Reliance,  Aditya Birla, ITC etc. to extend their business helping this barter too. They can process these agricultural products as per the international needs and also help Indian farmers to increase their quality of the materials.

This will be a win-win condition for these companies and Indian farmers. Farmers will be getting their appropriate demand against the agricultural products and Indian farms can also increase their profit margin being globalized. Indian government will be paying these farms in Indian rupees in exchange of the crude oil they received against the barter for their products. No longer India will be in a state of balance of payments crisis or foreign exchange reserve crisis anymore.

The Barter system has its share of disadvantages as well. A coordination and understanding to the highest possible extent is the need where the two nations depend on each other’s surplus goods to meet their own demands. The feeling is mutual and so is the need.

The main drawbacks of Barter system can be summarized as below-:

Barter system relies on the understanding between countries and the needs of each other. The needs of countries should be complementary. If India requires Oil from Iran, it should possess something that Iran needs. Luckily in actual, Iran requires agricultural goods, which India has in plenty. This may not be the case everywhere putting a constraint into the trade plans. However, the multilateral barter system is a solution to the above stated problem. This increases the prospect of being able to find your exact needs. And also works well in improving the relations amongst nations. What better than being the Nation who stands by in the need of the hour!!

A major problem with the barter system was the issue of common measure of value i.e. there was no reference value to which goods could have been mapped. Some goods had to be devalued so that a barter exchange can be brought into the picture. This may not augur well for some of the small countries as their economy depends on the production. However to tackle this countries can bilaterally or multilaterally agree to a certain reference value so as to bring uniformity. This would be a mutually agreed treaty amongst the participating countries and would work in the interests of the states.

Barter system deals with the exchange of goods amongst the countries. Goods are kept in a physical form and this requires a storage cost which includes rent for the space taken, property taxes, security costs and utilities such as electricity and water. Also warehousing has repair and maintenance costs and all the above are part of warehousing costs. Transportation of goods forms a major chunk and includes freight charges, insurance amongst others.

Storage of goods in physical form brings into perspective the perishability and overhead loss of some goods. Also there may be deterioration in the value of good over a period of time due to external and internal factors. For ex: Crude oil imported at the rate of 100$ per barrel, can deteriorate to a value of 95$ in a span of a week due to the world economy changes. This results in value deterioration and loss to the organization. To counter this, the companies might follow an increased sale value thereby valuing the good more than the actual just to balance the loss that might arise out of such a scenario.

Considering the pros and cons of the barter, introduction of the barter will be the partial barter in these initial days acting only for crude oil with some specified countries. The result can be analyzed in the coming days with measuring the contribution to GDP, reduction in the cost of the petroleum products, inflation rise percentage and transportation cost of the materials inside India. Going forward Indian government can also remove the subsidy against these fertilizers saving the tax payers money and investing in other required sectors.

Money is otherwise known as fiduciary money. So let’s take this jargon in a globalized manner and establish the trust with other countries as well as internal trust between different Indian companies, farmers and government.

Our last words….”Let’sReenergize Barter”!!!!

This article has been authored by Biswajit Mishra & Sidharth Jena from Greatlakes Institute of Management.

Image: FreeDigitalPhotos.net

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