The Aakhya Weekly #44 | The Death of the Dollar?

Apr 21, 2023

De-dollarisation, or reduced dependence on the US dollar in global exchange, speculation, and as a store of value, is the talk of the town. Feverish op-eds and articles speculating endlessly on the possibilities are appearing in every newspaper and magazine. While the idea itself is decades old, it hadn’t gained much traction until recently, following the Russia-Ukraine conflict. Economies around the world are shifting to alternative currencies for their trade settlement, following inflationary pressures arising out of the conflict in Ukraine.

Dismantling the hegemon(e)y

The US Dollar became the global reserve currency in the aftermath of WW-II at the Bretton Woods Conference, taking over from the pound sterling – the final nail in the coffin of the British Empire. The dollar was perfectly poised to meet the demand for a politically neutral, stable, and freely convertible currency for the facilitation of trade settlements. Even today, about 88% of world trade is settled in US dollars, according to an estimate by the Bank for International Settlements. The dollar’s status as reserve currency has led to a near-perfect elastic demand for it and has conferred immense power on the US Government and corporations.

The Soviet Union’s collapse and the emergence of a unipolar US-led order further expanded the dollar’s dominance, leading to weaponization of the dollar by the US Government through economic sanctions (such as those imposed on Russia and Iran) and an inflationary impact on other economies from US monetary policy (such as changes in interest rates). Investors in India are no doubt familiar with the US Federal Open Market Committee (FOMC), which meets several times a year to decide on whether to increase or decrease lending rates - which reflect inversely in market movements on Indian stock exchanges the following day.

The sanctions against Russia for the Ukraine conflict were the last straw for many worldwide, leading to India, Saudi Arabia, Brazil and several other countries who faced inflationary pressures at home moving to reduce dollar dependency, by resorting to settlement of trade in alternative currencies. India, in particular, is working on internationalisation of the Indian rupee as the preferred currency for trade settlements (see our piece from Nov 2022 for more). Over 18 countries so far have indicated their interest in rupee-based exchange with India and are in the process of creating special accounts with India for this purpose. Even so, there is little to indicate that the rupee will gain widespread acceptance as a currency where in trades where India is not involved, much less a global currency that could hope to rival the US dollar – partly because it is not fully convertible and is subject to stringent regulation in India. But this de-linking from the dollar by India and other growing economies is indicative of a growing trust deficit regarding the US greenbacks.

What, if not the dollar?

Reports suggest that the Chinese Renminbi (yuan) could emerge as the new reserve currency for settlement of trade payments. China has every incentive to use current developments as an opportunity to position itself as a dominant economic power by convincing others (particularly in the Middle East and Africa) to trade in the yuan. However, the yuan is also not fully convertible, with the Chinese Government maintaining strict regulatory control over its exchange rate. Experts believe that this is the primary reason why the yuan – or any other currency – cannot hope to match the free convertibility of the US dollar, whose value is determined by market forces and subject to minimal regulatory interference. Moreover, there is the ‘trust’ factor of a US-backed currency, which survived even the collapse of the gold standard under the Nixon administration in 1971. Despite some erosion of this trust, other sovereign-backed currencies simply do not inspire the same level of confidence, even today.

There’s also a fair bit of speculation around whether the BRICS nations (Brazil, Russia, India, China, and South Africa) will introduce their own global reserve currency to compete against the US dollar. While it is not impossible, geopolitical realities indicate that it is highly unlikely for any conditions to emerge that will necessitate a meeting of minds between BRICS nations – India and China in particular – on this issue in the foreseeable future.

Another alternative is issuance of central bank digital currencies (CBDCs), which CBDCs are becoming a new buzzword in the global financial sector, with several key projects underway, such as the mBridge project – a multi-jurisdictional CBDC project between the central banks of Hong Kong, China, Thailand and the UAE, which successfully completed its pilot run in October 2022.

Digital money transactions are seen to be the future and could very well eliminate the need for holding dollars in reserve currency – which forms the basis of the greenback’s dominance. India is on the verge of releasing its own CBDC (the digital rupee) as a cash alternative that could emulate the massive success of the Unified Payments Interface (UPI) system. Incidentally, the US is set to unveil FedNow - an instant payment service (similar to UPI) which will allow businesses and customiers to access funds and transact through all participating banks in real time, 24/7. It is already being speculated that FedNow is likely intended to supplant a Fed-issued CBDC in the US.

While a multipolar currency system is fairly popular as an idea today among developing economies who are contributing an ever-increasing share of the global GDP, the doomsday prediction for the dollar is still not within the realm of reality. For one thing, an end of the dollar hegemony is predicated on an alternative to replace it – on which there is little consensus. Furthermore, while Asia looks like it might have first mover’s advantage with CBDCs and projects like mBridge, Washington’s hawkish policymakers, aided by US’s technological advantages, are poised to catch up - with possible solutions to counter the threat.

The future is uncertain. But for now, the dollar remains king.

Top Stories of the Week

India’s quantum ambitions

In a move that promises to bring India to the technological forefront, the Union Cabinet has given the green light to the ‘National Quantum Mission’ (NQM) – an initiative that seeks to build a robust quantum computing ecosystem in the country.

Fundamentally, classical computers function in the realm of bits – the most basic unit of computing information. Bits may have one of two possible values – zero or one. Computer terminals work like a light switch: if it is on, the output is one, if off, the output is zero. With enough bits arranged together, one can store all the information available to us on our devices. The murky, counter-intuitive world of sub-atomic particles, however, allows for even more options. At these immensely tiny levels, instead of a binary of on/off, several possibilities may exist at the same time. By manipulating these – at least in theory – one may be able to perform computation at rate that is exponentially higher than anything classical computers can achieve.

This is what the NQM aims to work towards. With the launch of the mission, India joins an elite club of six countries working at this frontier. The cabinet has signed off on an outlay of INR 6,000 crore for the mission, for the seven years between 2023-24 and 2030-31. Six departments will be tasked with working on the mission – the Department of Space, the Department of Atomic Energy, MeitY, CDOT, and the Department of Science and Technology, overseen by a Mission Director that shall oversee a special Mission Secretariat. Over the period of the mission, the Government aims to create quantum computers of a capacity of 2,000 qubits (to quantum computing what a bit is to classical computing).

India has previously made limited forays in the space. In 2019, the Prime Minister’s Science, Technology and Innovation Advisory Council had identified quantum mechanics as one of its nine National Science Missions. The Department of Science and Technology, in the same year, had initiated the Quantum Enable Science and Technology (QuEST) program to research on quantum computing and other quantum mechanics-based technologies. Several private institutes, too, were working in the field. The NQM scales up our ambitions, streamlining these disparate projects into a coordinated effort.

India challenges WTO ruling on ICT import tariffs

India is planning to appeal a recent ruling by the World Trade Organization (WTO) panel, which declared its imposition of tariffs on mobile phones and electronic components as violating global trade rules. The Indian government believes that an appeal is necessary to safeguard its domestic manufacturing goals, particularly in the information and communications technology (ICT) sector, which has experienced significant capacity building in recent years. In 2019, the EU, Japan, and Taiwan filed complaints against India's import duty of 7.5% on various IT products, including mobile phones and components, as well as integrated circuits. Despite opposition from several trade organization members, India increased the tariff to 15% and later to 20% to curb imports and promote domestic production. The WTO panel ruled in favour of the complainants, prompting India to consider an appeal.

The Indian government plans to argue that some of the products mentioned in the ruling did not exist when India signed the Information Technology Agreement (ITA), which required the country to eliminate tariffs on certain products. If India were to alter its duty structure following the WTO ruling, it could impact local value addition and hinder some of its domestic manufacturing initiatives, such as the production-linked incentive (PLI) scheme for smartphones. The Manufacturers’ Association for Information Technology (MAIT) expressed confidence in the government's ability to make a reasoned decision on the matter and highlighted the significance of manufacturing growth in India. The chances of the appellate body ruling against India are slim since the WTO's appeals mechanism is not functioning, as the US has blocked appointments to the appellate body, resulting in disputes remaining unresolved. The appeal process offers an opportunity for India to make its case and ensure that its domestic manufacturing goals are not adversely impacted by the WTO ruling. However, even if the WTO appellate body starts working now, it would take over a year to take up India's appeal.

All eyes are on the outcome of the appeal, as it will be crucial in determining the future of India’s domestic manufacturing sector and its mission of achieving self-reliance, particularly in the ICT industry.

This Week in Policy

Economy and Taxation

India’s wholesale price inflation declines significantly to 1.34% year on year in March, from 3.85% in February. Month on month, the wholesale price index in March has been the same as that for February.
In a little nugget on the rumoured (and widely anticipated) Direct Tax Code, finance ministry officials reveal that the Government is considering reworking the capital gains tax structure, ramping up the tax rate for the wealthy.

Sustainability and Energy

Centre invites expression of interest bids for development of hydrogen valley innovation clusters (HVICs), which are defined as specific geographic regions where hydrogen serves more than one end sector or application in mobility, industry, and energy, including all steps in the hydrogen value chain, from production to distribution.
The National Green Tribunal has directed Rajasthan to pay an interim compensation of Rs. 100 crore for damage to the environment, including pollution of the Dravyavati river, caused allegedly by textile printing industries in the Jaipur district.

Emerging Technology and Media

MeitY has published rules to enable Aadhaar authentication by entities other than government ministries and departments, in a bid to promote ease of living.
The Delhi High Court has granted time to MeitY to furnish information about the steps taken to regulate content on OTT and social media platforms. The matter has been posted for hearing on 25 April 2023.
MeitY is considering a migration from the National Informatics Centre’s solution to a secure cloud-based service that offers a wide range of productivity tools for government officials.

International Trade and Foreign Affairs

France, India and Japan will soon announce the creation of a new platform for creditors to coordinate the structuring of Sri Lanka’s debt, according to an announcement made by Japan’s Finance Minister Shunichi Suzuki.
Russian deputy prime minister Denis Manturov is in India to discuss a possible free trade agreement involving the Eurasian Economic Union (EAEU).
In what is slated to be the highest-level visit by a Pakistani leader to India in many years, Pakistan Foreign Minister Bilawal Bhutto Zardari will attend the Shanghai Cooperation Organisation meet in India next month.

Healthcare

NITI Aayog recommended that Indian standards of drug regulation should be aligned with global standards, as part of the inter-ministerial consultation on the draft New Drugs, Medical Devices and Cosmetics Bill, 2023. This comes in light of significant quality issues in Indian-origin drugs that were exported to other countries.
The Government is closing in on launching its “Heal by India” platform, a program through which doctors and other healthcare professionals shall be dispatched to other countries to provide medical services.

Banking, Finance and Insurance

In a first, the RBI is inviting entire boards of directors of both public and private sector banks to a conference next month to address issues around governance and ethics. The in person meetings will be scheduled in two batches on 22nd and 29th May.
The Ministry of Electronics and Information Technology (MeitY) is likely to issue a separate order to fintech and payment firms to block payment gateways for non-permissible online games.

Logistics and Infrastructure

The Department of Promotion of Industry and Internal Trade has set up a task force to formulate a framework to determine the logistics cost in the country. It will also be identifying the supply chain sector’s opportunities, challenges and the root cause of these.
The National Highways Authority of India is working towards the development of around 10,000 km of Optic Fibre Cables (OFC) infrastructure across the country by 2024-25.

Labour

The Union Labour Ministry has directed Chief Secretaries and Administrators of all states / union territories to take measures to manage the adverse conditions workers may be subject to this summer, with record heat waves being anticipated.
The Delhi Government has come out with a significant package of 70 reforms, including a removal of the prohibition on women working at night, permission for establishments to be open 24x7, and a unified portal for labour related filings.

Tracking the G20

This week marked the midway milestone for India’s G20 presidency. Incidentally, it also celebrated a key milestone in its presidency this week, with the hosting of its 100th G20 meeting, the meeting of Agriculture Chief Scientists (MACS) in Varanasi.

On the east coast of the United States, 2nd meeting of G20 Finance Ministers and Central Bank Governors (FMCBG) took place along with the 2023 spring meetings of the International Monetary Fund and the World Bank Group. The meeting discussed debt sustainability and debt restructuring challenges and ways to address them, including the role of Multilateral Development Banks (MDBs) in these processes through the provision of net positive flows of concessional finance, which remains steady as a key push of India’s agenda.

Upcoming Events

Seminar Economic Growth in Middle-Income Countries

April 24 | Virtual

The Centre for Social and Economic Progress (CSEP) is hosting a seminar on April 24, 2023 on “Economic Growth in Middle-Income Countries” with Indermit Gill, Chief Economist of the World Bank Group and Senior Vice President for Development Economics, Somik Lall, Staff Director, World Bank’s 2024 World Development Report, Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister (EAC-PM), and Nitin Desai, Chairman – Governing Council, TERI and Former Under Secretary General for Economic and Social Affairs, UN. The discussion will be moderated by Rakesh Mohan, President and Distinguished Fellow, CSEP. More Information | Registration Link

A Few Good Reads

Recent events do not indicate that we are moving into a multi-polar world, but rather a bi-polar world with the United States and China shooting ahead as Europe and Russia fall by the wayside, writes C. Raja Mohan.
Andrew Korybko explains the geopolitical ramifications of Sudan’s civil war, which may ripple down to countries across the Nile.
Poor adherence to the rule of law, terrible human development indicators, fractious social divides - Ashoka Mody’s ‘glass half-empty’ version of India has recently garnered international attention. Milan Vaishnav writes an excellent review of his book “India is Broken”, acknowledging where the book goes right, and pointing out where it does not.
How do we ensure that we do not careen into an AI apocalypse? Twelve policy suggestions from Luke Muehlhauser.
Courtney Kennedy, Dana Popky and Scott Keeter trace how opinion polling (in the United States) has changed over the last decade to adjust for social and technological developments.

Tweets of the Week

Election interference by foreign powers is nothing new, as this story by David Zabinsky shows:

Wednesday marked the 48th anniversary of India’s first space foray:

Tim Cook comes to India:

Key Notifications and Reports

The International Financial Services Centres Authority has published regulations on the regulation of reinsurance.
The statutes of NID Andhra Pradesh have been notified.
The Economist Intelligence Unit has released its Business Environment Report for the year 2023, which notes massive gains in India’s business ecosystem.

The Aakhya Weekly