Possibly for the first time for an American administration, President Biden’s much-delayed National Security Strategy recently named ‘inflation’ as a ‘global threat’ alongside China and Russia. One can blame it on Covid and the Ukraine War or cite other causes and reasons but together, they have only bolstered inflation and price rise, the inseparable twins.
‘People all over the world are struggling to cope with,’ the US Strategy paper said, making it a cross-border issue, along with China, Russia—but not giving the same hope as taming of the other two. The US central bank, Federal Reserve, has been increasing interest rates periodically, to try and keep domestic inflation on the leash, but it has not helped slow down, leave alone reverse price rise nearer home. All these have consequences for third nations even if they are not trading with the US.
Still living in the fear of the otherwise forgotten Great Depression of the Thirties, the Fed Reserve has been using the interest rate mechanism to check inflation. Yet, the continuing price rise can impact Biden’s Democratic Party in the biennial elections across the US in the coming month. The irony is that higher Fed Reserve rates also impact the economy, politics and hence elections, in third countries, including India.
Also, the Great Depression that held American and other western economies under its spell for a decade had commenced with the ‘Wall Street crash’ in 1929. Conservative economists in India, too, are hence watching the inexplicable surge in BSE-Nifty indices with concern.
What does it all mean for India and Indians? The continuing downslide in the rupee value against the American dollar flows also from the periodic rise in the US bank rates. It is a cause for national concern. Other indicators may have worked well to show a big GDP growth for India. Comparison with other economies may also be a good statistic, but price rise and inflation too have been travelling in the same direction as the GDP.
The constant increase in dollar rates affects the common man the most. India imports large quantities of dals and grams, which reach the common man’s dining table as much as that of the rich. Cooking mediums like palm olein are also mostly imported.
It is a double whammy for the ubiquitous, upwardly mobile middle class whose children are enrolled in overseas universities. They have to cut down on their family budgets to send dollars to their wards, for whom, too, prices of food and other goods have increased, locally.
Official figures show that the RBI has spent over $100 billion in forex reserves to control the dollar price but without success. Reversing an earlier advice, it recently asked Indian banks to stop building additional positions in ‘non-deliverable forward markets’.
In politico-electoral terms, the burgeoning numbers of the middle class have traditionally been opinion-makers during elections across the democratic world. It is no different in India. This means that the dollar rate can influence elections in third nations, including India, though that may not be the intention or motive of the US administration or the Fed Reserve.
The US dollar became the ‘international reserve currency’ after the Second World War. The Bretton Woods institutions like the IMF and the World Bank were also products of that process. At the end of the Second World War, from European colonial nations, the real power went into the hands of the US after it had fought and won the war for them.
Today, the global economic conditions have changed vastly from that distant past and have also become more complex—not only because of the collapse of the Soviet Union decades ago or because of communist China embracing the West’s idea of a market economy, even if with a ‘Chinese characteristic’. Again, there is more to it than meets the eye.
For instance, many nations see trading in and through the American dollar as an economic burden. The US too is seen as using it as a geopolitical and geostrategic weapon, though not necessarily targeting all the affected nations. The Bretton Woods scheme did not foresee it, and hence did not provide for distinguishing the multiple use of the dollar. Hence, third nations affected by the US’ economic sanctions, say against Russia or Iran, are helpless and hapless as it affects them.
The world has neither the collective will, nor the mechanism, to tell Uncle Sam that he is wrong, and unless the US changes its ways, they would be forced to consider an alternative to the Greenback. Instead, they have tried out alternatives of their own without being able to influence the global system to move away from the dollar.
Post-Cold War Europe dabbled with the euro, which has failed to offer competition to the dollar. A rising China’s ambition to make renminbi a parallel global currency has failed to take off. The unilateral US-led West’s sanctions on nations like Iran and Russia has also made India think and talk about trading in the rupee. India had done rupee-rouble trade with the erstwhile Soviet Union. It did rupee trade with Iran after American sanctions in the relatively recent past. At present, there are reports of India considering rupee-based trade with Russia, Iran, Saudi Arabia and the UAE.
India’s neighbours like Maldives and Sri Lanka, too, have for long been asking for bilateral trade with India. They either want a ‘South Asian currency’ or the use of the Indian rupee for their trade with third nations. Governments apart, individuals and small businesses in India and the neighbourhood (not to leave out others) end up losing big time while converting their native currency first into dollars before emplaning, and those dollars into the local currency after deplaning. Even without it, the US has to only print dollars but every other nation has to earn it.
In these multiple backgrounds, trading in the Indian rupee may become an economic compulsion for India, going beyond the recent political posturing viz the US, especially following western pressure against New Delhi for purchasing ‘cheap’ Russian oil. Whether or not India and its partners, other than Russia and Iran, have the stomach to take on the US remains to be seen!
N Sathiya Moorthy
Policy analyst and commentator
(sathiyiam54@nsathiyamoorthy.com)