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De-dollarisation and India

‘Multipolarity’ and ‘de-dollarisation’ became part of the international lexicon even before Russia’s war against Ukraine deepened political divisions between countries. Political rifts easily translate into economic divisions. Multipolarity implies rising powers don’t wish to be ordered around by the world’s sole superpower. They include Russia, India, China, Iran, Saudi Arabia, and even American allies like France and Germany.

Two problems arise. First, as G20 president this year—and also staking claim to leadership of the Global South—India must face the fact that developing countries have different interests and speak in different voices. Second, the main proponent of multipolarity and de-dollarisation has been an expansionist China, which challenges the US’s primacy and the territorial sovereignty of most of its neighbours. To complicate the situation for India, China has an “unlimited strategic partnership” with an aggressive Russia.

Part of the “China problem” is that its yuan is the main challenger to the dollar which has been the leading reserve currency for some 80 years. China and Russia seek to reduce US influence, enhance their global economic standing, and mitigate the impact of US sanctions on Russia.

More generally, a mix of geopolitical, economic, and strategic considerations has led several countries, from Brazil to Indonesia, to take the path of de-dollarisation with the intent of reducing the risks associated with an over-reliance on the dollar. However, internationalisation of currencies, signifying falling global dependence on the dollar, necessitates the emergence of viable alternatives. Russia’s weak rouble has no chance. Because of China’s economic clout, the yuan does. Since the Ukraine war, India’s moves sometimes appeared to strengthen both rival currencies of the dollar.

Wittingly or unwittingly, India has been pleasing both Russia and China by defying Western sanctions on Russia and buying its oil. In April 2022, Russia thanked India for using the rupee-rouble mechanism to facilitate trade and get around Western sanctions on Russian banks. At a time when Beijing is challenging US dominance, in June 2022, India’s top cement producer, UltraTech Cement, paid for Russian coal in yuan. It was not until March this year that the Reserve Bank of India asked banks and traders to avoid using Chinese yuan to pay for Russian imports, because of the longstanding Sino-Indian border conflict, and asked them to pay in the UAE’s dirham instead.

Meanwhile, India has tried to develop the rupee as a global currency as it tries to boost exports. This is a key part of its 2023 foreign trade policy. India and Bangladesh have in principle agreed to use their national currencies for trade. India and Malaysia are also trading in local currencies. And India is ready to trade in rupees with countries that are facing a shortage of dollars. There has even been talk of a ‘BRICS currency’, representing the currencies of Brazil, Russia, India, China, and South Africa. But the BRICS countries have diverse problems. South Africa is getting weak prices for its exports; India is the BRICS country with the lowest GDP per capita. China, the strongest economic power in the group, is the political and economic gainer. In this context of ‘multipolar currencies’, the talk about multipolarity gathers a strategic momentum, which does not necessarily favour India.

China is challenging India’s hopes of utilising trade and investment to serve geopolitical ambitions. For example, China has increased strategic ties, military exchanges and drills with Kazakhstan and Turkmenistan, as well as Iran and Oman. By gaining strategic leverage, Beijing has positioned itself as a major defence and trading partner for these countries and could limit the extent of New Delhi’s regional economic influence and reach.

Meanwhile, India could antagonise the US by mulling a free-trade deal with Russia, which has frequently criticised the Quad and Indo-Pacific Economic Framework for Prosperity (IPEF), both of which India is part of, as ‘anti-China’. In contrast, India has had protracted difficulties in signing an FTA with any Western country.

Last year, New Delhi joined Washington’s IPEF. The IPEF includes Southeast Asian countries, Australia, New Zealand, South Korea, and Japan. It aims to strengthen economic ties in the Indo-Pacific without a formal trade treaty. India was the only one of the 14 members that refused to join the trade pillar, expressing concerns over possible discrimination against developing economies.

India’s claim to Asian or Global South leadership could be a non-starter because of its absence from any regional economic organization, even as China lowers tariffs for member-states of the Regional Comprehensive Economic Partnership, which was created in 2019. India’s economic no-show is at odds with its claim that Asian unity is central to its future worldview. All the more so, as both China and Japan have stronger trading ties with Asia’s fast-growing economies other than India.

Currently, 80% of global oil sales are done in the dollar, which is used in 60% of global trade. China holds 3%, America 60%, of international currency reserves. So, if India wants a stable economy, it should bear in mind the unlikelihood of even the yuan replacing the dollar, and cultivate robust economic relations with the US and friendly Asian countries.


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