Modi’s ‘Rouble Wise Rupee Foolish’ Policy

Context:

The article examines the recent shift in India’s trade settlement practices, as it moves away from the U. S dollar and begins to pay its foreign trade in Chinese yuan.

Several Countries are adopting the yuan for trade transaction:

• Brazil: Recently, Brazil’s new government announced that Brazilian companies can settle their foreign trade using Chinese yuan. 
• Russia: The yuan is now the most actively traded currency in Russia. 
• Bangladesh: Bangladesh has been coerced into paying for Russian nuclear power using the yuan. 

U.S. Dollar-Chinese Yuan Conflict:

• A significant global outcome of the Russia-Ukraine conflict is the U.S. dollar-Chinese yuan conflict. 
• Trust on US Dollars:
  • Reserve Currency: The U.S. dollar has long enjoyed an “exorbitant privilege” because of its pre-eminence as the world’s reserve currency. 
  • Global Trust: The global trust in the dollar plays a vital role in establishing the U.S.’s status as a superpower. 
• China’s Yuan to Reshape The World Order:
  • Break Dollars’ Hegemony: Evidently, the Chinese are no longer willing to accept American hegemony. 
  • Strategy: Destabilizing and dethroning the U.S. dollar is a key strategy for China to challenge the U.S. 
    • Its overtures and coercions to invoke other nations to switch to the yuan for trade settlements to reshape the world order. 

Against India’s Interests:

• India and China have various border issues. 
• China oftenly makes attempts to threaten India’s sovereignty.
• China came close to waging a war against India during the pandemic. 

India’s Dilemma in Trade Settlements:

• It is not in India’s interests to help China’s ascendancy, but the recent Indian steps are shocking, it is — paying for its own foreign trade in yuan.
• Trade for Russian Oil: After economic sanctions imposed by the West against Russia for the Ukraine war, the yuan has emerged as the currency to settle India’s purchase of Russian oil.
• High Trade with China: India-China trade has grown four times in the last decade and is one-sided, with India importing seven times more from China than it exports. 
  • China is India’s second largest trading partner while India is only China’s 13th largest partner. 
• After India-Russia trade settlement in yuan, China surely forced India-China trade in yuan.
• Hence, it would be hard for India to refuse or resist a potential Chinese demand for trade settlement in yuan.

Way Forward:

• Avoiding Future Deals like Russia: India need not to make such a deal again in future like with Russia. If India starts to use yuan for a sizable proportion of its trade, it would provide a big fillip to China’s ambitions to dominate the new world order.
• Exploring Alternative Payments System: India needs to maintain its trade relations and currency settlement as a bilateral agreement.
  • And if bilateral negotiations would not be successful, then negotiations would be on alternative payment systems.

News Source: The Hindu