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TCA Ranganathan.
The Biden-Trump election contest and the recent expiry of the petro-dollar deal have combined to give new life to speculation about the possible arrival of a multi-currency international environment. While it is extremely unlikely that the US dollar will get displaced anytime soon, we should be cognisant of the possible repercussions to our economic wellbeing if it happens.
It is undoubtedly true that the current dollar dominance is often weaponised by the US for political ends. Iran and North Korea have been prohibited from using US dollars to settle trade commitments since long. Russia joined this club for having started the Ukraine invasion. The US has sequestered their central bank dollar holdings. These countries are settling their trade obligations outside the dollar mechanism. In all likelihood, other countries could also run afoul of US redlines and be pushed into the club. China has been taking several measures over a long period of time to insulate itself from such a threat. Should we, as the fifth largest economy (soon to be third) follow suit? A review of the Chinese experience will assist thought on this.
China is the world’s largest exporter, with 14.2 per cent share of global trade, and the second-largest economy, with 19 per cent share of global GDP. It is the largest trading partner of 120 countries, enjoying a trade surplus in excess of $800 billion. It has continuously sought to reduce its dollar dependence.
Cross-border trade settlement in renminbi (RMB, aka yuan) was started in Shanghai and Guangdong in 2009. Later, Hong Kong, Singapore and London were designated as offshore RMB centres. Offshore RMB deposits were also encouraged.
Alongside, it made the effort to create a market for offshore RMB assets. These were the so-called Dimsum/Panda bond markets. They allowed foreign companies/sovereigns to issue RMB-denominated bonds in offshore/onshore markets.
Further, bilateral swap lines/arrangements exceeding the equivalent of $1 trillion are in place with about 40 countries. China also launched the BRI (Belt and Road Initiative) in 2013 and has investment commitments running into trillions of dollars.
These hugely expensive efforts have borne fruit. The IMF introduced RMB in the Special Drawing Rights (SDR) basket in 2015. Currently, 30 per cent of Chinese services imports and 23 per cent of goods exports are denominated in RMB.
However, on a global basis, the RMB’s share of trade settlements have stagnated, post-2015, at about 3 per cent. A similarly low share exists for RMB-denominated bonds/investments. The primary constraints are apparently the lack of an open capital account and insufficient play for the ‘rule of law’.
On the other hand, the US dollar’s share of trade settlements has climbed to 46 per cent, at the cost of euro/yen/sterling settlements. It is above 70 per cent outside the Euro Zone. The euro is next with 24 per cent aggregate share but dominates intra-EU trade settlements. So, the US dollar is unlikely to lose sheen any time soon. However, suppose it does, where would we stand? Where do our trade dependencies lie?
India currently exports about $450 billion and imports $675 billion worth of merchandise, and does services exports of $323 billion and imports of $180 billion, implying a net trade deficit. The US is our largest trading partner. It accounts for over 60 per cent of our services exports and is the fourth-largest importer of our merchandise. The EU is our next largest partner. It is the largest importer of our merchandise and the third-largest importer (after US, UK) of our services exports. We have substantial trade surpluses with both under these categories.
But we have a negative trade balance with all other important trade partners. These are the ASEAN (deficit above 30 per cent), China (deficit above 75 per cent), UAE and other Middle East countries (deficits range from 15 per cent to over 50 per cent) and Russia (deficit about 90 per cent).
This implies that we could be one of the primary losers if the US dollar loses importance, as we would then be forced to convert dollars/euros earned in our trade surplus zones into currencies preferred by the exporters in a new regime. A currency exchange always carries a cost incurred by the purchaser. We need to overcome this weakness by becoming a significant exporter.
There could be two, but not necessarily alternative, paths. One could be to strengthen our services sector exports. We dominate in the IT and other technical services but have very low presence in financial services and logistics and goods transport services, which account for almost half the global services trade. This low presence can be viewed as a low-hanging fruit. De-regulation/de-control over capital flows and port/airport usage rules could pay dividends. Kutch, for example, could be converted into a SEZ entrepôt similar to Hong Kong, Singapore and Dubai.
The other could be to further strengthen manufacturing, which has undoubtedly grown over time and ranks sixth globally in size but only 17th as an exporter. The gap is uniquely large. It is possible that our entrepreneurs are being discouraged by conflicting policy signals. We need to do things differently to improve our export ranking.
The real sector, the playing fields where manufacturing happens, could do with substantial upgradation. Over time, we have created a very large policy management system, larger in size than most countries. Illustratively, the US, UK, Russia and China all have fewer than 30 ministries. It is often said that too many ‘cooks’ result in greater policy uncertainty. We could de-regulate/de-centralise easily by reducing/merging roles and redeploying governance talent. China benefited by imitating the US and UK in allowing extensive economic de-centralisation. So could we!
(TCA Ranganathan is the former chairman of the Export Import Bank of India is a banker with a theory of everything. X: @tcartca)