By Kartike Garg
India’s push for De-Dollarization might bring short-term benefits but it will harm India’s interest in the long run making the Chinese Yuan the alternative of the US dollar.
The US dollar has enjoyed the status of global reserved currency for a long time. The US federal reserve estimates that 79% of international trade and transactions around the world were done in US dollars during the 1999-2019 period. This dominance of the US currency is challenged by many developing and developed countries from time to time to reduce their dependence on the dollar. As the US has used its influence over international trade through dollars as a foreign policy tool, many countries are looking to insulate their central banks from geopolitical risks by supporting de-dollarization.
India along with many developing countries is trying to decrease its dependence on the dollar as the currency of international trade. The Russia-Ukraine crisis has pushed for the de-dollarization as it faced problems in buying Russian oil due to sanctions imposed by most of the Western countries. Earlier India was paying in rupees under its Rupee-Rouble trade pact to buy Russian oil. But recent reports indicate that India has started payment in Chinese yuan. Some reports suggest that at least two of the three private refiners of India are paying in yuan for Russian oil.
India’s efforts to reduce reliance on the US dollar and bypass Russian sanctions have brought some benefits in terms of oil trade. However, these measures are unlikely to lead to the Indian rupee becoming the world’s reserve currency in the long term. Instead, they could potentially contribute to the Chinese yuan replacing the dollar. While India’s pursuit of alternatives to the dollar is praiseworthy, it must carefully consider its alignment and support for Chinese and Russian initiatives aimed at establishing a new global payment system with the yuan as the reserve currency. Undermining the US’s global position may ultimately be detrimental to India’s own interests considering the greater cooperation the two countries have shown in the last two decades in various sectors.
A caveat need to be issued here, the process of de-dollarization is not as easy as it is considered. As long as China maintains its extreme capital controls on the use of the yuan, it cannot be adopted by other countries as a reserve currency. Dollar’s hegemony is something we are going to see for the foreseeable future. But this trend will impact the pace at which this change will take place.
Though some form of de-dollarization appears to be inevitable. The ban of Russia from the SWIFT payment system and its seizure of $630 billion fund by the US sounded alarm in many countries on how much leverage the US has through its currency. Though the effectiveness of sanctions depends on a country’s level of dominance in the global economy. During the post-Cold War era, when the US held a unipolar position, sanctions proved to be a powerful tool. However, the present international system reflects a more balanced power dynamic, and China, in particular, is challenging US sanctions by engaging in trade with countries under sanctions, including Iran and Russia.
The US dollar has maintained a monopoly as an international currency due to various reasons including the size of the economy, the unparalleled market for the US debt, etc. but the 2007-08 financial crisis showed the cracks in the liberal international financial system pushing China to seek yuan as an alternative for the US dollar. This is evident with the narrowing gap between the US and Chinese economies.
India is already negotiating for local currency trade with many countries along the lines of rupee-Rouble. This might be helpful with countries that import more from India than export making the use of Indian rupee in trade. This is not feasible with every country as India faces a trade deficit with almost every major trade partner.
Russia stopped taking payments in rupees as they have billions of dollars worth of rupees in Indian banks with no demand for Indian goods. This creates demand for alternative currencies such as the yuan. Though Indian foreign minister Mr. Jaishankar has indicated that India is not considering creating any BRICS currency for international trade, India should reconsider its decision to use the Chinese yuan as it will internationalize the currency making it more strong. It is not favorable for India to provide China with this much influence in international trade and financial transactions.
The global trend towards de-dollarization presents substantial challenges to the coercive power of the United States and the overall international economic system. As China’s influence continues to grow, the power dynamics are undergoing a significant shift, thereby making it increasingly arduous for the US to exert its desired influence on other countries through the imposition of sanctions. Although India’s commendable efforts to explore alternatives to the US dollar are understandable, it is crucial for India to thoroughly assess the long-term implications of its actions and critically evaluate whose interests it ultimately serves. In doing so, India should consider the evolving global landscape and the potential consequences of aligning with Chinese initiatives, as well as the impact on its own national interests in the long run.
(The author is an independent geopolitics analyst, he holds masters in International Relations and Area Studies from School of International Studies, Jawaharlal Nehru University, New Delhi.)
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