360° UPSC Mains Analysis

Jaipur, Rajasthan, India

The member nations span diverse climatic zones, from the tropical wet-and-dry climates of Chennai and Rio de Janeiro to the humid continental climate of Kazan and the semi-arid conditions of Jaipur. Geologically, these regions vary from stable ancient cratons to active tectonic zones, influencing their infrastructure development and trade resilience.

The geographical scope of the BRICS bloc spans multiple continents, bridging major emerging economies across South America, Europe, Asia, and Africa. This vast spatial distribution encompasses critical maritime choke points and oceanic trade routes that are vital for the cross-border trade discussed in the article.

These geographies are rich in critical mineral reserves, agricultural outputs, and energy resources. The trade routes connecting these hubs, particularly maritime corridors across the Indian and Atlantic Oceans, underpin the economic necessity for the cross-border payment mechanisms and local currency settlements discussed.

The regulation of currency, foreign exchange, and international relations falls exclusively under the Union List (List I) of the Seventh Schedule of the Constitution of India. Specifically, Entry 36 (Currency, coinage and legal tender; foreign exchange) and Entry 10 (Foreign affairs) vest the legislative and executive competence entirely in the Central Government. Consequently, state governments have no jurisdiction over cross-border payment systems, CBDC issuance, or multilateral financial treaties like those discussed under the BRICS framework.

Direct payment linkages will boost India's bilateral trade with BRICS nations by bypassing the traditional SWIFT-based correspondent banking network, which is prone to geopolitical disruptions. It eliminates double-conversion costs (e.g., converting INR to USD and then to the partner currency), making Indian exports more price-competitive.

Facilitating direct cross-border payments and CBDC integration can significantly reduce India's Current Account Deficit (CAD) by lowering transaction costs on trade and remittances, which currently average 2-5%. It also helps stabilize the Indian Rupee (INR) and optimize foreign exchange reserves by reducing reliance on the US Dollar for bilateral trade settlements.

The Tertiary sector, particularly Banking, Financial Services, and Fintech, will experience technological upgrading through CBDC and UPI-linkages. The Secondary sector, especially MSME exporters, will benefit from improved profit margins and faster liquidity cycles due to the elimination of multi-layered correspondent banking fees.

Lowering cross-border transaction costs directly benefits migrant workers by reducing remittance fees towards the UN SDG target of under 3%, thereby increasing household disposable income. Additionally, reduced transaction friction for MSMEs supports job retention and wage growth in export-oriented manufacturing sectors.

Historically, India's integration into the global financial architecture was shaped by its colonial status under the British Empire, where it was a key member of the 'Sterling Area' established formally in 1939 to conserve foreign exchange. At the 1944 Bretton Woods Conference, the Indian delegation—including future Finance Minister Shanmukham Chetty and RBI Governor C.D. Deshmukh—vigorously negotiated the release of India's massive sterling balances (accumulated during WWII) and pushed for development-focused multilateralism. Post-independence, India inherited a highly regulated foreign exchange regime, leading to the enactment of the Foreign Exchange Regulation Act (FERA) in 1973 (which replaced the temporary 1947 Act) to conserve scarce foreign reserves.

Following independence, India maintained strict control over foreign exchange to manage its balance of payments, culminating in the highly restrictive Foreign Exchange Regulation Act (FERA) of 1973, which criminalized exchange violations. The economic crisis of 1991 prompted a paradigm shift from 'regulation' to 'management', leading to the enactment of the Foreign Exchange Management Act (FEMA) in 1999 (effective June 1, 2000), which liberalized trade payments and made violations civil offenses. In the 21st century, India's policy evolved to promote digital financial sovereignty, leading to the launch of the Unified Payments Interface (UPI) in 2016 and the pilot of the Central Bank Digital Currency (e-Rupee) in 2022 to facilitate low-cost, direct cross-border settlements.

The current BRICS push to bypass the US dollar-dominated SWIFT system parallels the post-WWII efforts of the Sterling Area to maintain a separate currency bloc to protect member reserves from dollar shortages. It also mirrors the bilateral clearing agreements and rupee-ruble trade arrangements established between India and the Soviet Union during the Cold War to bypass hard currency constraints.

During the freedom struggle, Indian nationalist leaders and business elites (such as the authors of the 1944 Bombay Plan) strongly protested the colonial drain of wealth and demanded that India's sterling balances be released to fund national industrialization rather than being locked in London to support British war debt.

High transaction costs directly reduce the disposable income of families dependent on remittances, impacting their access to basic needs like healthcare, nutrition, and quality education. Direct, low-cost payment systems restore dignity to migrant workers by ensuring their hard-earned money reaches their families intact, rather than being drained by financial intermediaries.

The high cost of remittances impacts the realization of Directive Principles of State Policy (DPSP), specifically Article 38 (promoting welfare by securing a social order with minimized inequalities in income) and Article 39(a) (ensuring citizens have the right to an adequate means of livelihood). Under international human rights standards, reducing transaction barriers supports the Right to Development and the right to an adequate standard of living.

As a policymaker, the primary ethical conflict lies in balancing national economic sovereignty and the welfare of citizens (reducing remittance costs for poor families) against the geopolitical risks of secondary sanctions or trade retaliation from dominant global powers. There is also a tension between promoting rapid digital financial integration (efficiency) and ensuring robust consumer protection and data privacy for financially illiterate populations (equity).

Low-income migrant workers, particularly those under the Emigration Check Required (ECR) category, and their families are highly vulnerable to exorbitant cross-border transaction fees (up to 20% in some regions). Small-scale exporters, artisans, and MSMEs also face severe margin erosion due to double currency conversion and correspondent banking fees, limiting their global competitiveness.