Dollar Hypocrisy

-By Kushal Garg & Kushagra Baranwal (SRCC)

Introduction

“When America sneezes, the World catches cold”, this exorbitant power is the outcome of the Dollar dominance. Today, central banks worldwide hold 59% of their foreign exchange reserves in dollars, about half of the international trade, global debt securities, and international loans are invoiced in dollars (1).Around 40% of the payments globally are transacted in dollars even when it's between two foreigners (2). As per the federal reserve, foreign countries hold $7.1 trillion worth of money in US treasury bonds (3)

Let’s delve into how this exorbitant power came into existence. US joined the World War II after the war paced up. It supplied weapons and arms to its allies during the world war. Most countries paid the US in gold, making the US the largest gold reservoir. After the end of the world war, it became impossible for economies to use the gold standard as they depleted their reserves in war. 44 allied countries in the Bretton wood agreement signed the charter in 1944 and pegged their currencies to the dollar to act as a standard medium of exchange. In turn, the US agreed to redeem the US dollar for gold as and when demanded.

Dollar Today

The US economy is the largest in the world with GDP crossing $23 trillion. The USAtreasury bonds are considered to be a safe haven investment. As Milken Institute quotes “The simplest test of a safe haven remains this: if you had to put all your moneyin a single currencyand leave it untouched for 25 years, can you think of a better choice than dollars? ”. One can guess the power of the dollar by this data statistics that since the Great Recession of 2008, the bonds issued in dollars by foreign firms have almost tripled (4). The strength of the US economy and the global institutions like World Bank and IMF working for the benefit of the US economy has resulted in dollar supremacy.

Various factors point to Dollar supremacy. First is the benefit of financial stability and a political system in the economy as seen and trusted by millions of investors all over the world. SecondisthecredibilityoftheUnitedStates.TheUShasneverdefaultedonitsdebtandalways has a good cash flow in the International Global Market. Finally the use of the dollar in International trade, as a medium of exchange and as a reserve currency by central banks all over the world. This dominance is now being challenged by other alternative major currencies emerging globally.

Who Can Out-Throne the US Dollar as the World's Dominant Currency?

Euro, Renminbi, and Yen are the biggest rivals of the USD challenging its dominance as the global currency. Euro is the official currency of 20 member countries in the Eurozone and is next to the only US in terms of foreign reserve currency. As per IMF, $2.4 trillion worth of foreign currency is held in euros compared to $7 trillion in US dollars. Chinese Renminbi also threatensthethroneand theno.1position oftheUS dollar.NotonlyChinais thesecond-largest economy in GDP with over $18 trillion next only to the US but also has the largest population in the world. With growing concerns over the Russia- Ukraine war, China is trying to replace the USD as the base currency in all the deals pertaining to the oil sector with the support of Russia. Even Indian Rupee is now being officially accepted as a legal tender in 18+ countries, Russiaand UKamongthem.Withits newerstrongerforeignpolicyandsupportofmajorstrong economies, the Indian rupee is in the run too.

The Impact of the US Dollar's Dominance on the Global Economy:

Dollar dominance has contributed to a much bigger issue known as ‘Dollar trap’. Under this countries are forced to hold a large amount of reserve in form of dollars to trade in the International market, and have bargaining power and liquidity in their operations. To hold a such large amount of dollars the countries are forced to take loans from global institutions like the World Bank and IMF again strengthening the US dollar's dominance over globally with high-interest rates.

US Federal Reserve monetary and fiscal policy employed to stabilize the inflation in the economy can also have ripple effects destabilizing the global economy. If Fed decides to increasetheinterest rates tocontrolrisinginflation,itwouldresultinlossof capitalin emerging global economies, devaluating their currency, making it difficult to repay their debt and overall leading to a recession as being witnessed in small economies like Pakistan, Shri Lanka and many more.

Conclusion:

In conclusion, the dollar's dominance has created a complex web of economic interdependence that has both benefits and drawbacks. While the dollar's strength has provided a level of financial stability and credibility to the US economy, it has also contributed to a "Dollar trap" that forces countries to hold large amounts of dollars and take loans from global institutions. Moreover, the monetary and fiscal policies of the US Federal Reserve can have ripple effects on the global economy, causing recessions in smaller economies. As alternative major currencies like the Euro, Renminbi, and Yen emerge, it remains to be seen whether the US dollar will maintain its dominant position in the global economy or be displaced by a new global currency.

It is suggested that rather than giving the reign of control to a single country it will advisable that a centralized currency model should be adopted and Global institutions should create a forum to introduce a centralized currency that holds an independent status worldwide. Adopting this kind of model will reduce the risk of economic crashes and ensure that the selected currency model must hold some intrinsic value and cannot be manipulated by a single power. Its should be regulated by the free flow of market forces of Demand and Supply.

References

Amadeo, K. (2022, March 16). Why the US Dollar Is the Global Currency. The Balance. https://www.thebalancemoney.com/world-currency-3305931 Best,R.(2022,September24). HowtheU.S.DollarBecametheWorld'sReserveCurrency.Investopedia. https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reservecurrency.asp

Bertaut, C. (2021b, October 6). The International Role of the U.S. Dollar https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar20211006.html

Dollar Dominion. (n.d.). Milken Institute Review. https://www.milkenreview.org/articles/dollardominion https://www.jstor.org/stable/24812748 https://www.youtube.com/watch?v=0M79m44Zq7A

How Countries Should Respond to the Strong Dollar. (2022, October 14). IMF. https://www.imf.org/en/Blogs/Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar Lu, M. (2021, August 6). How Dominant is the U.S. Dollar? Advisor Channel. https://advisor.visualcapitalist.com/how-dominant-is-the-us-dollar/ Neufeld,D.(2022,December15). Visualized:WhatFactorsDrivetheU.S.Dollar? AdvisorChannel. https://advisor.visualcapitalist.com/visualized-what-factors-drive-the-u-s-dollar/ OILPRICEANDTHEU.S.DOLLAR:ASURVEYOFTHEEMPIRICALRELATIONSHIPESTIMATES AND ALTERNATIVE OIL-PRICING CURRENCIES on JSTOR. (n.d.).

Recent Appreciation in the U.S. Dollar Unlikely to Have Large Effect on Domestic Inflation.(2022, August 17). https://www.kansascityfed.org/research/economic-bulletin/recent-appreciation-in-the-usdollar-unlikely-to-have-large-effect-on-domestic-inflation/ TRT World. (2021, April 3). Who Is Challenging the US Dollar’s Dominance? YouTube.

US Inflation Calculator. (2023, March 28). Historical Inflation Rates: 1914-2023 | US Inflation Calculator.USInflationCalculator|EasilyCalculateHowtheBuyingPoweroftheU.S.DollarHas Changed From 1913 to 2023. Get Inflation Rates and U.S. Inflation News. https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ When Did the U.S. Dollar Become a Worldwide Reserve Currency, and Why? (2023, February 1).

Worldcoin.https://worldcoin.org/articles/us-dollar-reserve-currency#toc-5

Will theAsian countries be able to shield their economies from the dominance of Dollar using Rupee as their weapon?

~Priyam Sur (IMT Nagpur)

This article discusses the possible reasons whythe Indian rupee may become a global currency in the future, and discusses how this could affect the USD. The world's strongest currencies are the USD, Euro and Japanese yen. These three currencies are used in a majority of the world's currencytrades and hold alot ofvalueon aninternational scale. However, recent developments in global hydrocarbon trades and other international currency transactions have made some experts believe that the INR could be the next global currency. The augmenting of India’s exports and therisingglobal acceptanceof INR as aninternational currencycould help position the INR as a contender to become the next global currency. However, this will need considerable efforts and it is not something that can be achieved in the short term. To build moretransparencyandtrust amongmajornations, Indianeeds to focus on increasingits exports which will lead to more acceptability for its monetary currency. USD is also known as the world's reserve currency, meaning that it's accepted in almost all transactions related to international trade. This has been due to its trustworthy reputation amongst the merchants and its recognizability as a known fiat currency around the world. Despite such superior status however, many experts believe that with time, another currency may replace the USD as the world's reserve currency and there are strong reasons why this could happen.

De-dollarization is on

With more nations trying to de-dollarize the global commerce to prevent their fiat currencies from falling any further, INR is getting closer to become a global currency. The formation of 60 special rupee vostro accounts in 18 countries, including Russia and Sri Lanka, has been approved by the RBI in order to facilitate the international commerce of INR, which has drawn attention from a number of countries. According to records, the RBI had given the go-ahead to "domestic and foreign authorised dealing banks in 60 cases for opening SRVAs of banks from these nations" for the purpose of settling payments in INR, according to a statement made to parliament by India's Minister of State for Finance Bhagwat Karad. The minister said that, out of the 18 nations, Russia has been vociferous in promoting local currency transactions as part of the larger "de-dollarization" movement. He continued by saying that India, on the contrary, has been promoting the notion of commerce in local currency primarily to increase exports. These 18 nations include Russia, Singapore, Sri Lanka, UK, Botswana, Germany, Uganda, Guyana, Israel, Kenya, New Zealand, Oman, Malaysia, Mauritius, Myanmar, Seychelles, Tanzania, and Fiji.

Wall Street figurehead Nouriel Roubini, dubbed "Dr Doom," stated in an interview with the ET Now, that the Indian Rupee has the potential to function as a unit of account, a method of exchange, and a store of wealth. It’s possible that the rupee may eventually feature among the world's reserve currencies. Two-thirds of global financial and commerce transactions are conducted using the US dollar, which defies logic. Geopolitics plays a part. Even while there isn't yet a currency that can topple the US dollar, according to Roubini, who has been known for his tendency for pessimistic forecasts, the dollar is beginning to lose its ground to the Chinese yuan in terms of global competitiveness. India's per capita income is so low that, with reform, not only 7%, but even greater than 8%, is feasible. To attain that growth rate, however, you must implement many more structural economic reforms. And if you do, you could keep it up for a few decades at the very least. Yet, a lot relies on policy, the economist noted.

India and Bangladesh introducing Rupee-Taka

Soon, it's anticipated that India and Bangladesh will stop using the dollar as their official currency and instead do business in rupees and taka. RBI Governor is reportedly in favour of a dual currency, and the central banks of both nations are working on the details. According to reports, a test version will be released soon. What are the benefits of trading in Rupee-Taka for Bangladesh and India? Trading via these monetary units will lower the settlement cost and the conversion rate, which is advantageous for dealers on both sides. Currently, USD exchange rate is used for all the financial transactions between these two nations before being translated to rupees or taka. Conversion losses persist for both parties as a result. The Bangladeshi government also released a report in which it revealed that, in accordance with their estimates, almost $2 billion is spent annually by their citizens on the educational expenses, healthcare, and travel. India is also one of Bangladesh's top 3 import markets. Bangladeshis travelling to India, will also have an option to carry a dual currency card. Before travelling, residents can fill the card with INR, and vice-versa, and the exchange rate would be obtained directly from the two currencies.

UAE and Indian to promote Fintech and Trade

As one of the largest retailers, currently UAE-based retail giant Lulu Group International imports close to ₹80 billion worth of food and non-food products from India for their 247 hypermarkets and supermarkets in the region. They partnered with FICCI by signing an MoU which will further push the trade volume as well as enhance the CEPA initiatives. Efficient and cost-effective cross-border monetary transactions is the main objective of both CBUAE and RBI. Both these parties signed an MoU to promote the enhancement of inter-operability between e-Rupee and e-Dirham. Such encouragement of Fintech products and services is necessary especially when trade worth ₹80 billion occurs between these two nations.

Conclusion

Such encouragement ofusingFintechproducts and services is vital especiallywhenhigh-worth trades happen among any two nations. In this innovation encouraging decade, these bilateral moves will help the countries to escape the dependence on any third fiat currency that is used as medium-of-exchange and terminates the possibility of any conversion loss due to the depreciating factor of a currency and saves the excess disbursement and avoids inflation. India is the pioneer to begin the bilateral monetary transactions. Established the first vostro account in Russia to meet the mutual interests, after US started campaigns to isolate Russia. Then other countries also started doing it to reduce the demand of US dollar as many local currencies were depreciating. Digital currency is the future of multilateral cross-border settlements. It’s currently in the pilot stage in most of the countries and establishing this will eradicate the requirement of any third currency from global transactions.

References

 https://thewire.in/economy/global-settlement-does-the-rupee-have-the-potential-to-dethrone-the-dollar

 https://timesofindia.indiatimes.com/business/india-business/can-the-indian-rupee-replace-the-dollar-as-an-internationalcurrency/articleshow.cms

 https://www.washingtonpost.com/business/energy/the-dollar-will-vanquish-pretenders-to-its-throne/2023/01/26.html

 https://www.cfr.org/backgrounder/dollar-worlds-currency

 https://www.globaltimes.cn/page/202210/1276580.shtml

 https://indianexpress.com/article/business/market/rupee-falls-below-80-against-dollar-raises-worries-over-imported-inflation8039926/

 https://www.reuters.com/markets/currencies/indian-govt-not-averse-weaker-rupee-vs-dollar-source-2022-09-22/

 https://theprint.in/campus-voice/fall-of-rupee-is-good-for-economy-more-jobs-can-be-created-through-foreign-investmentexports/1164341/

 https://timesofindia.indiatimes.com/business/india-business/explained-what-a-falling-rupee-means-for-indias-economy-andyour-finances.cms

 https://www.compareremit.com/money-transfer-tips/the-rise-and-fall-of-the-dollar-vs-rupee-since-1947/

 https://www.indiatoday.in/business/story/rupee-to-dollar-all-time-low-depreciation-inr-to-usd-1968498-2022-06-30

 https://www.firstpost.com/world/rupee-closer-to-replacing-dollar-as-18-nations-agree-to-trade-in-inr-12295932.html

 https://www.firstpost.com/world/india-bangladesh-chuck-the-dollar-to-settle-trade-in-rupee-taka-12248812.html

 https://www.firstpost.com/world/indian-rupee-could-be-the-new-dollar-says-doctor-doom-nouriel-roubini-12188032.html

 https://www.livemint.com/news/world/lulu-group-and-ficci-sign-mou-to-boost-exports-from-india-to-the-uae11676736995716.html

 https://newsonair.com/2023/03/17/india-uae-inked-an-mou-to-promote-collaboration-in-the-fintech-industry/

Green Hydrogen: The Renewable Energy Source That Could Supercharge India's Economy

~Neel Savla (NMIMS Mumbai)

On 22nd March 2021, Nitin Gadkari, the Minister of Road Transport and Highways of India, made a surprising entrance to the parliament in a Toyota Mirai, a hydrogen fuel cell vehicle, bringing attention to the growing interest in green hydrogen as a potential replacement for traditional fossil fuels in India. In this article, we will assess the financial and economic impact of green hydrogen on India’s economy and determine its long-term feasibility.

Source: Byjus

Grey, blue, and turquoise hydrogen rely on fossil fuels, while green hydrogen is produced through electrolysis of water using renewable energy sources such as wind, solar, or hydroelectricpower.This process produces hydrogenandoxygen,with noemissions otherthan water vapor. Therefore, the viability of green hydrogen production depends entirely on the availability and efficiency of these renewable energy sources.

Let's take a look at the viability of these renewable resources with some numbers:

• The cost of producing 1 MWh of electricity from coal remained steady between 2009 and 2019, with only a 2% decrease.

• The cost of nuclear energy has increased by 26%.

• Technological advancements have led to a drastic 70% reduction in the cost of onshore wind energy.

• Solar energy has shown tremendous potential, with the amount required to produce 1 MWh of electricity reduced by 89%.

Forecasts for renewable energy resources

Renewable energy sources are becoming increasingly viable, which makes green hydrogen a strongcandidatetopower India.Let'stakeacloserlookathowitcouldimpact India'seconomy:

Transportation:

Whileelectricvehiclesaresuitableforcars,theirrangeandweight-carryingcapacitylimitthem for extensive commercial use. Hydrogen car fuel cells, on the other hand, occupy 50% less space than electric batteries for the same range. While a Tesla Model S can give you a 400km range in half an hour of charging, and with a regular AC charger taking more than 4 hours, a Hyundai hydrogen truck with a payload of 34 tonnes can give you the same 400 km range in just 8 minutes. Moreover, while electric vehicle batteries cannot carry a load beyond a certain point, hydrogencaneven powertrains.Thus,hydrogenhas thepotentialto revolutionizeIndia's transportation industry.

Steel Industry:

1. Reduction of carbon emissions: The steel industry is a significant contributor to carbon emissions due to its reliance on coal for energy. Green hydrogen can be used as a clean alternative to coal, which can help reduce the industry's carbon footprint. By using green hydrogen in the steel-making process, the industry can significantly reduce its carbon emissions and contribute towards achieving India's climate goals.

2. Cost-effectiveness: Green hydrogen can be produced using renewable energy sources like solar and wind power, which can help reduce the cost of hydrogen production. In addition, the use of green hydrogen can also reduce the cost of steel production by eliminating the need for coking coal, which is expensive and subject to price fluctuations.

3. Improved efficiency: The use of green hydrogen in the steel-making process can also help improve the process's efficiency. Hydrogen can be used to reduce iron ore, which can result in a reduction of energy consumption and an increase in the process's efficiency. This can help reduce costs and increase the industry's productivity.

Chemical Industry

The use of green hydrogen can help improve the efficiency of chemical production. Hydrogen can be used as a feedstock or energy source in a wide range of chemical processes, including methanol production and ammonia synthesis.

How Green hydrogen can help counter the implications of Carbon Border Tax

The basic idea of a carbon border tax is to place a tax on imported goods that have a high carbon footprint. The tax would be based on the amount of carbon emissions generated during the production of the goods, with the goal of making the cost of imported goods more reflective of their true environmental impact. This would create an incentive for countries to reduce their carbon emissions and encourage the adoption of cleaner production methods.

The European Union has been a leader in the development of a carbon border tax, with plans to introduce a CBAM in 2023. Other countries, including Canada and Japan, have also expressed interest in implementing similar policies.

The implementation of green hydrogen has the potential to assist Indian exporters in evading carbon border taxes entirely. Provided that Indian companies are able to create goods utilizing green hydrogen and prove that their merchandise has a low carbon footprint, they might be exempt from carbon border taxes in countries that have such rules in place.

In addition, the use of green hydrogen can aid Indian exporters in remaining competitive in a world that is progressively focused on decreasing carbon emissions. As more nations adopt carbon border taxes and other measures aimed at reducing carbon emissions, the demand for low-carbon goods is expected to rise. By adopting green hydrogen, Indian exporters can establish themselves as pioneers in the production of low-carbon goods, which mayassist them in avoiding carbon border taxes and maintaining a competitive edge in the global market.

Job Opportunities

The Green Hydrogen Mission of India has the potential to create a significant number of job opportunities across various sectors, including manufacturing, research and development, construction, and maintenance of hydrogen infrastructure. A report by The Energy and Resources Institute (TERI) suggests that the green hydrogen industry could create up to 4 million jobs in India by 2050. The majority of jobs will be in the construction and installation of electrolysers and hydrogen infrastructure, as well as in the manufacturing of electrolysis equipment and fuel cells. The report also suggests that the transition to green hydrogen can create job opportunities in industries that rely on fossil fuels.

Assessment of financial implications

At present, India's energy imports cost more than $160 billion in foreign exchange each year. It is projected that these imports will increase twofold within the next 15 years if corrective measures are not implemented. The adoption of green hydrogen has the potential to result in significant savings on energy imports for India, with estimated savings ranging from $246 billion to $358 billion over the same time period. In addition to the financial benefits, the use of green hydrogen can enhance energysecurityand reduce price volatilityfor Indian industries, ultimately strengthening India's foreign exchange position in the long term. India is not only targeting personal consumption but also focussing on green hydrogen exports helping India’s allies to decarbonise.

Conclusion

Green hydrogen has emerged as a critical element in India's energy transition plan, with potential benefits such as enhancing industrial competitiveness, reducing reliance on energy imports, creating exports, reducing CO2 emissions and improving public health and quality of life. The use of hydrogen can significantly reduce emissions in hard-to-abate sectors, thus complementing other energy-efficient measures. However, several challenges must be addressed, including high production costs, expensive transportation and storage, unclear regulations, and financing issues.

Policymakers, industry players, and financial institutions must take decisive actions to enable the development of a hydrogen economy in India. With appropriate policy support, industry action, and market generation and acceptance, coupled with growing investor interest, India has the potential to become a global leader in the hydrogen energy ecosystem. This would not only facilitate economic development but also job creation and improved public health, aligning with India's goals for sustainable growth.

References: https://www.abc.net.au/news/science/2021-01-23/green-hydrogen-renewable-energy-climateemissions-explainer/13081872 https://rameznaam.com/2020/05/14/solars-future-is-insanely-cheap-2020/ https://www.iea.org/reports/india-energy-outlook-2021