As a Delhi resident and economic journalist in the 1990s, I got to know first-hand what I call the Dollar Paradox.
On the one hand, India was recovering from a severe balance of payments crisis in 1990/91. This eroded foreign exchange levels to a new low and ushered in an IMF-supervised macroeconomic adjustment programme that led eventually to the Indian rupee being floated on the current account; the US dollar was admittedly king as India struggled to boost exports.
On the other hand, a visit to Palika Bazaar at the heart of Connaught Place in New Delhi showed me the power of the rupee.
India was slowly ending a decades-old rupee trade with the now-collapsed Soviet Union but Russians loved leather jackets, Assamese tea and other goods at the glorified flea market that looks more like a refurbished underground parking. They mostly paid in rupees, which they had their own way of finding. Many shopkeepers at Palika Bazaar could speak Russian, as did their signboards. Pssssst. With some common sense or imagination, you could link all that up with sex trade involving women from the former USSR.
The global domination of the US dollar is now seriously and furiously debated but its dominance is a statistical fact. About 60 per cent of the world’s foreign exchange reserves are still in US treasury bonds or dollar-denominated instruments, though the share is steadily falling.
We need to ask why the dollar has been king and also why it has been steadily falling but also some hard questions on the new attempts for a BRICS (Brazil, Russia, India, China, South Africa) plan for the group to have its own currency.
Speaking at the St. Petersburg International Economic Forum event in New Delhi last week, Russian parliamentary official Alexander Babakov said domestic currencies being used in transactions could be a good transition arrangement pending a digital or alternative currency though it is acknowledged that India and China do not see eye to eye on many issues (unless you count soldiers staring at each other on their unresolved international boundary).
I think it is too early to predict the dollar’s demise, and here are my reasons.
- The US is still the world’s technology leader. With everything from microchips to Artificial Intelligence and biotechnology in the hands of US-led or American companies, the strength of intellectual property will keep the US economy strong enough. By extension, the dollar will have its advantages.
- China has an opaque state-controlled system in which the Yuan has been artificially controlled by Beijing for decades. Its data is often unreliable and its foreign trade is substantially closed. So, it is difficult for those who deal in trade matters to easily bridge the trust deficit with China.
- Russia is talking about an alternative currency because it suits Moscow and President Putin but its economy as well as military conduct following the Ukraine war make it more of a potential pariah than a consensus builder.
- Brazil and South Africa are not big enough as economic forces except as add-ons
- The US has a strong culture of institutional arrangements such as rule of law, transparency in statistics and a vibrant open society. This will indirectly help the dollar hold its fort.
My personal memories of Palika Bazaar tell me that some kind of domestic-currency-denominated trade between BRICS economies can be somewhere between a barter and a real hard currency in the foreseeable future. But there is a long haul for a new currency to emerge.
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India is in a unique position which it shares with the European Union and American economies respectively. It is democratic and its statistical system and fiscal practices are quite transparent even when there are troubles. Just as US bank failures need not mean a big blow to the US dollar, India’s fiscal problems need not hurt the rupee beyond a point. The rupee on its own stands stronger in such a context.
The US dollar is still a big brand, though its product is questionable as days go by. Just as iPhones have affordable Asian brand clones, the US dollar is heading for similar currency clones. It is easier for India to boost its own rupee than play ball with difficult China and a truant Moscow.
Demand and supply are what increasingly power up India and China as economic powers. But the currency as a product has political, economic, ethical and historical attributes. This is where we need to understand that the dollar is not a pushover.
Russia’s oil, China’s forex reserves and India’s productive population will increasingly influence global currency movements but don’t write the dollar’s obituary just yet.
(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)
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