Internationalization of Rupee, Yuan, and Implications for India
Though the challenges to dollar hegemony are not new in the international arena, former attempts were extinguished after the tragic death of the proponents. Both Saddam Hussein and Gaddafi made proposals of replacing the dollar in trade and transactions. Coincidently, both these people are no more. After a short interval of history, the de-dollarization has returned to the global landscape. The articles examine the current trends designed by China and their impacts on India and the world.
The aftermath events of Russia – Ukraine reopened an arena of anti-dollar initiatives in global politics. De-dollarization pushed by China and Russia turns into a chain reaction where numerous countries are slowly undergoing a paradigm shift in replacing the dollar with the yuan, ruble, and rupee. The power consolidation of Lula da Silva in Brazil rejuvenated BRICS banks which further accelerated the process. In the most recent development, Bangladesh has decided to trade in the Indian rupee as a part of reducing its dependency on the dollar. There are indications that more state-controlled banks in Bangladesh will join the due process. Russia has been trading oil to India in rupees since the sanctions imposed by the West. Similarly, France deals oil and gas with China in yuan to tackle the deals with American banks for dollars.
Slow But Solid Start
The idea of weakening dollar dependency is not an infant child in realpolitik. The IMF had made a similar proposal in which the dollar could be substituted with SDR (special drawing rights). Renowned economist Joseph Stiglitz authored a paper “Towards A New Global Reserve System,” producing an economic analysis on replacing the dollar. The long-forgotten Chiang Mai initiative and the proclamation of Gaddafi to replace the dollar with gold reserves at the African Union conference were all minuscule footnotes in the history of de-dollarization initiatives.
The culmination reached its zenith with China expanding its geo-political influence and Russia pledging a complete offensive on Ukraine and NATO. The 2022-23 timeline in international politics witnessed some weeks where decades happened. Russia and China enhanced their diplomatic proximity to the greatest in their history ever. The Saudi- Iran deal brokered by Beijing; the re-integration of Syria to the Arab League; the entry of Iran to the SCO, and the appointment of Dilma Rousseff at the apex of the BRICS bank fertilized the de-dollarization program.
What China aims for?
In the after-math timeline of globalization, global economy witnessed certain economic failures and crises. In the early days of globalization, several economists stated that this restructuring of economies according to the IMF’s plan sheet was unjust towards countries of the Global South. Many predicted that the unequal development at the cost of African and Asian countries could trigger a reverse effect on the Global North. In due course, the call for protectionism and the ceasing of globalization became the important political receipt of Western countries. Liberal democracies fell and anti-immigrant, pro-protectionist governments and parties sprung up. This has coincided with the next major wave of migration from developing/underdeveloped countries to developed countries.
In the meantime, the Global South countries started to face the ill effects of unequal development. They were unable to garner the fruits of prosperity that were promised to be delivered after the structural adjustments to the program. The increasing economic failures and dependency on the West created distress among the countries. China was cautious in the process of its integration into the global economy. Sound public sector and government interventions helped China in fertilizing its economy.
In the wake of the global recession and trend against the USA-led economic order, China has positioned itself as a beacon of salvation. China could consolidate its position over continents through its economic assistance, and win the approvals of African, Asian, and Latin American countries.
The economic plan of de-dollarization by China is presented as an opportunity for the country to thrift its economies through diversification and reduce dependency on a single foreign reserve i.e., the dollar. In Africa, European countries still post standing armies and indulge in monetary decisions. This initiative of China is considered a masterplan to pull themselves from traps. China has accurately placed the plan as they never ask for a complete switch to yuan.
With the reduction of dependency on the dollar, China is aiming to expand and strengthen its trade relations with other countries and concretize its geo-political position. But this is also a win-win situation for India.
The Internationalization of Rupee
The report published on the internationalization of the rupee by the Inter Development Group (IDB) of RBI recommended certain changes and the introduction of new frameworks in pallets of the financial and banking sector. Despite anxiety about the monetary and economic drawbacks at the initial stage, different sectors and experts share their optimism on the internationalization of the Indian rupee. In this due process, India must adopt certain economic and geo-political measures to contain the shocks. New Delhi must strive for a sound ecosystem with concrete banking and aptly regulated financial markets. Within the banking system, there are fissures in fully utilizing technology that should be dealt with immediately. The government should develop a robust policy on cryptocurrencies and be keen on alternative non-dollar financial structures and markets.
Recently, the discount on Russian crude oil to Indian oil buyers has slightly slipped. News agencies report that this happened as every public sector oil company and private entities negotiated separately. This is a reminder to the government to twine its fingers towards oil-based PSUs.
The growing rate of inflation and other economic volatility will not only hinder the internationalization of the rupee (a sound economy and measures are needed to contain the shocks) but also prevent the people from enjoying the benefits of possible internationalization.
In the wake of anti-globalization rhetoric pushed by the advocates of liberalizing economies, de-dollarization can help in realigning globalization in a just manner. The internationalization of the rupee, yuan, and ruble means a diversification of Indian markets and opportunities, and a new economic world order is possible. Indian start-up chains can be expanded to numerous countries and new opportunities will be opened for the labour force. The integration of markets made possible by the internationalization of the rupee can open new horizons of prosperity for the economy. The drawback of dependency on the dollar is that the collapse of the US economy becomes the collapse of the global economy. Diversified use of currencies as a medium of exchange can create more stable economies.
The current government has failed in catering to the benefit of discounted crude oil to the common people. The centralization of benefits and the process of internationalization of the rupee cannot go hand in hand. In the long run, lack of diversification of benefits will ultimately “trickle down” India’s growth and development prospectus. The topmost agenda should be delivering for the benefit to people.
Challenges to India
The Indian-oil companies have been settling in yuan instead of rupee in their procurement of discounted Russian crude oil. Most analyst opines that this was due to the lack of acceptance of the Indian rupee. Russia cited that the amount of INR reserve was beneath the roof and due to the sanction, rupee cannot be used with other countries. Thus, Russia demanded that the payments should be settled either in yuan or dinar.
Why did Russia prefer yuan over INR even though India is the traditional and strategic partner in USSR and post-USSR period? This can be correlated with certain paradigm shifts taken by the Indian government in the recent period. Bharath Karnad, a prominent national security expert describes current Indian policy as “bowing to the powerful and bullying the weak.” While India tried to closely work as an ally to the USA, the UK, and developed countries, China focused on developing and under-developed countries where there are scopes for market expansion and alliances. Thus, the outreach of INR in comparison with yuan remained transient.
Recently Russia has assented to sell oil to Pakistan in yuan. This is an alarming indicator for India as the intentions of Moscow and New Delhi are diverging in separate directions. This can cause peril to New Delhi’s geo-political power. A serious set of reconciliations in both economic and geopolitical policies is essential.
Reforms to be Taken
According to the official release of the Russian Federation, Prime Minister Modi in his briefing to Putin discussed his recent visit to the USA and India’s international contracts. This indicates the realignment of India’s geo-political positions. The foreign ministry has been struggling to counter the cascading effects caused by “Howdy Modi.” With the bolstering of Russia-China ties, India must be delicate to not slip into a deadlock.
Another reason for the piling up of INR is that there are seldom things to be brought using the rupee by Russia while yuan can be used to buy Chinese goods. Another problem is that the rupee needs to be converted into other currencies to be used by Russia. But INR faces sluggish responses when it comes to conversion. Though this deadlock was temporarily resolved through the export of Apple phones to Russia from India, the problem of reluctance for conversion of INR is rooted in the diplomatic and economic programs of India.
Thus, India needs a comprehensive two-fold approach to further collocate India to utilize de-dollarization. Macro and micro-adjustments to strengthen the rupee and diversify its circulation should be adopted. China’s economic success lies in the sound economic foundations in which the state played a major role. The free market aspirations of China were thoroughly regulated. India should enhance its manufacturing and service sector. The markets for both these sectors should primely concentrate on the tri continents. The export of services and goods to the West brings remittances but Africa and Asia have more resources that can be imperative for the growth of business. This could be made possible by increased participation and initiatives in regional corporations like the Shanghai Co-operation Organization (SCO), BRICS, ASEAN, NAM, etc.
The Indian government should have flexible and strict control over the economy and the central bank along with share markets should be profound. Serious observations must be performed on the India-China relationship.
More than the binary question of non-alignment and multi-alignment, India needs to bridle the influence of ideological literature which is morbid in pursuing geo-political prominence. The internationalization of the rupee can be fluid with structural changes made in the country’s prospectus of both economic policies and international relations.
Alan Paul Varghese is a student of M.A. Political Science from the School of Open Learning at the University of Delhi. (DU) He was a recipient of Smithu Kothari Fellowship For Young Researchers by the Centre For Financial Accountability (CFA) for his research article on Public Sector and the Pandemic. His writings focus on political economy, theories, and international relations. He has authored several articles on international relations, economic and social issues in prominent online news platforms and web portals in Kerala. He can be contacted through email id; firstname.lastname@example.org and email@example.com
Get a daily dose of local and national news from China, top trends in Chinese social media and what it means for India and the region at large.