In April 2023, while facing criminal charges, former US President Donald Trump had warned that US Dollar is crashing and will soon no longer be the world standard. His warning came amid rising interest in countries to go towards de-dollarisation.

What is De-dollarisation?

Ø  De-dollarisation refers to the process wherein countries tend to reduce their reliance on the US dollar as a reserve currency, medium of exchange, and also a unit of account.

Ø  Reserve currency is the foreign currency held by central banks to facilitate international transactions, stabilise exchange rates and bolster financial confidence.

Ø  The attempts to dethrone the dollar as the global reserve currency have picked up pace in the aftermath of Russia’s invasion of Ukraine last year.

What gives the US dollar the power in international trade?

Historical factors —

Ø  The US dollar began replacing pound sterling as international reserve currency in the 1920s since the country emerged from the First World War unscathed.

Ø  The Bretton Woods system cemented the dollar's position further after World War II.

Ø  Since the US emerged stronger after the Second World War, the 1944 agreement established a post-war international monetary system that allowed the US dollar to become the world's primary reserve currency globally.

Reserve currency status —

Ø  The central banks around the world hold US dollars as a reserve to support their own currencies and to conduct international transactions.

Ø  This gives the US dollar a strong global demand, making it a widely accepted currency in international trade.

Ø  Stability and Liquidity — The US dollar is considered a stable and liquid currency.

Size of the US economy —

Ø  The US economy is the largest in the world, with a GDP of over $22 trillion.

Ø  This means that the US dollar is widely used in international transactions and trade due to the large volume of US goods and services that are traded.

Network Effects —

Ø  The US dollar has a strong network effect, as it is widely used in global financial markets, and is the default currency for many commodity prices, such as oil.

Ø  This makes it convenient for businesses and individuals to use the US dollar in international transactions, creating a self-reinforcing cycle.

Why was the call for de-dollarisation renewed?

Geo-political events and search for alternatives —

Ø  Iran and Russia (for invading Ukraine) were disconnected from the international dollartrading systems like SWIFT.

Ø  The U.S. imposed several sanctions that restricted the use of the U.S. dollar to purchase oil and other goods from Russia.

Ø  This has been seen by many countries as an attempt to weaponise the dollar.

Over-reliance on the US dollar —

Ø  As the world becomes more and more interconnected, the need for a stable and equitable financial system became paramount.

Ø  Hence, the over-reliance on the US dollar as a reserve currency has to some extent led to vulnerabilities and imbalances in the global economy.

Ø  Growing economic power of emerging market — The growing economic power of emerging markets and their desire for a more diversified and resilient financial architecture has renewed the call for de-dollarisation.

Global efforts towards De-dollarisation -

Countries all over the world —

Ø  China, Russia and Brazil have been among the expanding list of nations that have embarked upon the path of de-dollarisation.

Ø  In January 2023, Iran and Russia announced that they will jointly issue a new cryptocurrency backed by gold, to serve as a payment method in foreign trade.

Ø  In March 2023, China and Brazil reached an agreement to settle trades in each other's currencies.

Ø  Similarly, Argentina said it will pay for Chinese imports in yuan instead of US dollars in order to preserve its dwindling foreign reserves.

India moves away from the dollar —

Ø  India has also started making efforts to reduce its dependence on the dollar.

Ø  It started moving towards paying in rupees for oil imports from Russia.

Ø  In July 2022, the RBI through a circular allowed international payment settlements for imports and exports to be made in rupees.

Ø  Due to the efforts of the Government of India, so far banks of 19 countries including the UK, New Zealand, Germany, Malaysia, Israel, Russia and the United Arab Emirates have been permitted to make settlements in rupees.

Challenges towards de-dollarisation -

Potential impact on global financial stability —

Ø  As countries reduce their reliance on the US dollar, adjustments in the composition of global reserve assets may lead to shifts in capital flows and changes in asset prices.

Ø  These fluctuations could create financial instability, particularly in emerging markets and countries with substantial dollar-denominated debt.

Creating a viable alternative to the US dollar —

Ø  Creating a viable alternative to the US dollar presents a formidable challenge to achieve the requisite degree of stability, liquidity, and acceptability.

Ø  Currently, no single currency fully meets these criteria, although the euro and the Chinese yuan have made strides in this regard.

Increased volatility in currency exchange rates —

Ø  It could result in increased volatility in currency exchange rates, particularly during the initial phases of transition.

Ø  Hence, de-dollarisation will have potential costs for developing countries.

Conclusion -

De-dollarisation presents opportunities for a more diversified and resilient global financial system.

However, it also poses significant challenges that must be carefully managed to ensure the preservation of global financial stability and sustained economic growth. Hence, developing countries like India should adopt a prudent and measured approach towards de-dollarisation.

Between 2020-2040, India will account for approximately 25% of global energy demand growth. Therefore, India must ensure energy access, availability, and affordability for its large population.

Comparing energy scenario in India with other countries -

Ø  Petrol and diesel prices went up by 35-40 per cent in the US, Canada, Spain and the UK.

Ø  Whereas, despite importing over 85 per cent of its crude oil requirements and 55 per cent of its natural gas requirements, prices of diesel in India have gone down in the last year.

Ø  Several countries in our neighbourhood have had dry-outs and power cuts to manage demand.

Ø  There has been no shortage of fuel anywhere in India.

How has India managed to stabilise energy prices?

Ø  Massive cuts in excise duty and VAT rates were announced twice by the centre and many states as well.

Ø  Oil PSUs absorbed huge losses to ensure that the massive hikes in the prices of crude oil and natural gas in the international market were not passed on to Indian consumers.

Ø  Subsidised administered pricing mechanism (APM) gas for the city gas distribution sector was drastically increased even at the cost of cutting down the captive use of domestic gas by PSUs.

Ø  Export cess on petrol, diesel and ATF and windfall tax on domestically produced petroleum products helped to prevent refiners and producers from profiteering at the cost of domestic consumers.

Ø  Expansion of the network of crude suppliers from 27 nations to 39 nations has been a significant step amidst global turmoil in the energy sector. Energy trade with the US has gone up 13 times in the last four years and at the same time India has balanced relations with Russia to ensure a reliable supply of crude oil.

Ø  By expanding petrochemical production: India is a global exporter of petroleum products and its refining capacity is the fourth largest in the world after the US, China, and Russia.

Ø  The refining capacity expansion was also one of the major factors in ensuring fuel price stability during the international oil price volatility seen last year.

Ø  India’s effort is to enhance this capacity to 450 MMT by 2040. 

Impact of steps taken by India -

Ø  Above policies not only ensured affordable energy for Indian consumers but also had a calming effect on global petroleum markets.

Ø  India’s purchase of petroleum products from certain nations has kept the global demand and supply of around 98-100 million barrels/day balanced, thereby keeping oil prices in check for the global value chain.

Ø  Had this not been done, global prices would have shot to $300/barrel.

India’s roadmap to ensure energy justice -

Ø  Traditional fuels exploration reforms — By 2025, India wants to boost its net geographic area under exploration from 8 per cent (0.25 million sq km) to 15 per cent (0.5 million sq km) and has reduced the prohibited/no-go areas in our Exclusive Economic Zone (EEZ) by 99 per cent.

Ø  Reforms in the direction of energy transition — India remains steadfast in climate change commitments; becoming net-zero in emissions by 2070 and cutting down emissions by one billion tonnes by the end of 2030.

Ø  Moving towards a gas-based economy — By increasing the share of gas from the current 6.3 per cent to 15 per cent by 2030.

Ø  India has connected more than 9.5 crore families with clean cooking fuel in the past nine years.

Ø  PNG connections have increased from 22.28 lakh in 2014 to over 1 crore in 2023.

Ø  The number of CNG stations in India has gone up from 938 in 2014 to 4,900 in 2023.

Ø  Since 2014, India has increased the length of its gas pipeline network from 14,700 kms to 22,000 kms in 2023.

Ø  Recently revised gas price guidelines are intended to ensure stable pricing regime for domestic gas consumers while at the same time providing adequate protection to producers from adverse market fluctuation with incentives for enhancing production.

Ø  Biofuel revolution — By launching E20 - 20 per cent ethanol blended gasoline will be rolled out in 15 cities and will expand across the country in the next two years.

Ø  India’s ethanol-blending gasoline has grown from just 1.53 per cent in 2013-14 to 10.17 per cent in 2023.

Ø  India is also setting up five second-generation ethanol plants, which can convert agricultural waste into biofuel, further reducing pollution due to stubble burning and generating income for farmers.

Ø  The National Green Hydrogen Mission — It has been launched with a budget of Rs 19,744 crore to develop the entire green hydrogen ecosystem in the country. It aims accelerate India’s efforts towards 4 MT of annual green hydrogen production which will lead to import savings worth of Rs 1 lakh crore of cumulative fossil fuel by 2030.

Ø  Transitioning India’s future mobility pathways — Along with green hydrogen and biofuels, India is also supporting electric vehicles through a production-linked incentive scheme to make advanced chemistry cells of 50 GW hours.

Ø  The government has announced viability gap funding and customs duty exemptions for the sector.

Ø  India is targeting the installation of alternative fuel stations (EV charging/CNG/ LPG/LNG/ CBG etc.) at 22,000 retail outlets by May 2024. 

Conclusion -

A pragmatic and balanced strategy has helped India to keep prices of petrol, diesel and gas under check. As India grows to become a $26 trillion economy by 2047, we are implementing a unique strategy for ensuring energy security and achieving energy independence.