Dollar hegemony needs serious fact-checks by countries which should promote other currencies
Afailed experiment with UK Prime Minister Liz Truss, who quit office in 44 days, has shaken the once-mighty kingdom and the globalised market, which breathes a sigh of relief, hoping credibility to return as London still controls major world trading of bullion to metals. No less a shock it was for India as it has been talking to Truss since she was foreign and trade minister for free trade agreement (FTA) hoping to export more and earn hard currency.
A super 13.3 per cent inflation and uncertain British economy was a bit too much for Truss to manage through populism of tax cuts and other sops. Perhaps more than that Truss does not know how to manage her own MPs, after she defeated Rishi Sunak. She had purged all Sunak friends from the government. The fissure and her fast-shifting stance played the worst. Neither populism worked in an economy having galloping inflation nor was she able to remain firm on her decisions.
The fifth biggest economy India is in a shock whether it has surpassed the UK or something left to be done. Rarely before a
premier of six weeks has shaken not only its economy but also major world
currencies. One wonders whether her persona was so weak or the Russian President Vladimir Putin and US President Joe Biden tangle in NATO supported Ukraine war took its toll. The European crisis is not easy as the EU does neither know whether to jump into the
war or face an unprecedented energy crisis. The
Biden-Putin duo’s animosity triggered sanctions to
ensure that the continent instead of renewable energy goes back to coal and other fossil fuels.
The plunging currencies amid 8.2 per cent inflation are the other shocks. The sterling pound is crashing against a continuously rising dollar. So is the Euro. Have they become lackeys of the US? The US despite its economy not in the pink of health faces an uncertain market and the NATO countries stare at an unknown future. True, the US dollar holds the sway but countries like India are taking baby steps to look beyond. Amid rising purchases of Russian crude oil, a Russian bank opened an account in India’s Yes Bank in September. Saudi Arabia and India discussed rupee-riyal trade. The State Bank of India advised Indian exporters to avoid trade in dollars with countries like Bangladesh.
The International Monetary Fund says despite the dominance the dollar is losing share in global foreign exchange reserves from about 72 per cent in 2000 to about 60 per cent in 2022. Major currencies gaining share are Euro, pound and Chinese renminbi. Recently, India’s chief economic advisor V Anantha Nageswaran said that while weaponization of currencies or forex was the current trigger for countries to explore alternate arrangements, internationalising the rupee was a “logical evolution”.
In a limited way rupee is accepted in Vietnam, Indonesia, Paraguay, Chile, Costa Rica and Hungary. Indian rupee is considered equivalent to 305 Vietnamese dong and 192.11 to Indonesian Rupiah. India is majorly using rubles to buy crude oil from Russia. It offers discounts, bears the transportation and insurance costs. Oil purchases from Russia almost trebled from $5.3 billion in 2021-22 to $14.5 billion in just five months. The Russian share of total imports by India rose from 2.5 per cent to 11.4 per cent, according to the Commerce Ministry. Till 2019, 50 per cent of Indian payments to Russia was in dollars. From 2021, with the S-400 air defence deal, 53.4 per cent of Indian transactions are in rubles and 38.3 per cent in dollars.
The Britain remaining the politically most unstable with low growth if not corrected sooner may lose even Indian interest for having the FTA. Indian perception is that the UK still has command over the world economy. If that is lost the FTA would add little for India. Still except for the juggled up total figures, the UK economy is stronger than many economies.
Similarly, India still has about 86 per cent of the foreign trade in dollars – 86.6 per cent of exports and 86.3 per cent of imports. In other currencies it has trade in Euro, exports 7.4 per cent and imports 8.8 per cent; other currencies (yen, renminbi, Canadian dollar, Swiss franc and Australian dollar) 3.8 per cent exports and 3.3 per cent imports; British Pound 2.4 per cent exports and 0.5 per cent imports; and Japanese yen 0.1 per cent exports and 1.1 per cent imports.
The currency management and rupee trade in larger areas being planned is likely to be a panacea for a long-term solution to the forex crisis and ensure a better future for the country.
(The author is a policy analyst)
