US-China Relations: India at Crossroads- Part II

For about 100 years, the USA was undoubtedly the leading economic and military power of the world. Its dominance in global affairs will continue for at least another 50 years. The next serious competitor, if they are lucky, can hope to replace the USA as the number one economy by 2070. The present global monetary regime is based on the 1945 Bretton Woods agreements that originally established the gold standard, meaning, the central bank of the countries must back up their currency-issue with adequate gold. By 1970, the USA abandoned this Gold Standard Rule and ensured the beginning of the Petro-Dollar Regime. As per this regime, a substantial part of the trade in oil can only be bought by paying for it in dollars. Thus, Dollar became the global currency. It is reported that 38.7% of the current global transactions are carried out in USD. Next to USD, Euro is the commonly accepted International Currency having 36.7 % of the global market share. Somewhere down the line, many nations started feeling that there are manipulations in the Global Currency Market that enabled people like George Soros to make a lot of money bringing (close to) bankruptcy the Bank of England and the state of Malaysia. Many of the developing nations had to continuously downgrade the value of their local currencies against the USD in order to comply with the tough conditionalities of the IMF/World Bank, often compelling them to stiffer real interest rates. Since the dollar remains the only major international currency, it enables the United States of America to unilaterally cut off any country from international dealings in USD, thereby, preventing the country concerned from participation in global trade. The Ukraine crisis and the imposition of strict US economic sanctions on Russia served as a real wake-up call for OPEC countries and China which holds a good lot of USD reserves. Hence, these countries are thinking of their own international currency. Instead of China floating an international currency of its own, it has thought it fit to promote an International Currency Unit that will become an alternate international currency which in due course will become a credible alternative to USD/Euro. Apparently, around 20 countries would together have about 28% share of global trade and 42% of the population. The question now is, should India be a part of this International Currency which obviously will be Chinese-backed and supported by Brazil, Russia, South Africa, Saudi Arabia, UAE, Indonesia, Malaysia etc.,


2. For a substantial part of the last 40 years, the USA has been at war with someone or the other, either directly or indirectly. The United States is the major producer of oil besides being the top consumer. Nevertheless, it is a net exporter of oils/gas energy and has everything to gain as and when oil prices hit the roof. Hence, for the last 50 years, the USA has exercised a very tight grip over the international oil market and used this grip to strangle countries that were not willing to toe the US line. Iran, Cuba, Venezuela, and North Korea are the most notable victims of US strangulation, though these countries are not fully free from blame. In fact, even India was subjected to some type of sanction or other till the beginning of this century and some sanctions continue even today. Hence, even India, at some point in time had thought that it would be wiser to have a parallel Rupee/local currency trade at mutually negotiated exchange rates. For Example, India today pays Russia in rupees for the purchase of oil and recently the Russian minister indicated that it has a large quantum of Indian Rupees which Russia wants to convert into a new international currency. Because of the economic sanctions, Dollar and Euro option are out of the question. Hence, Russia prefers an International Currency that is delinked with either Dollar or Euro. Chinese Yuan may be acceptable to Russia but a Chinese monetary unit will have less economic credibility than an International Currency that is backed by a group of nations who will hold significant shares in the Global Trade. In the beginning, India was very enthusiastic about the proposal. But, in the Dollar and Euro trade, India enjoys a marginal surplus. As against the proposed BRICS currency, India will face huge trade deficits because Indian exports to the BRICS market is not so much in comparison with Imports (as of now). Besides, India, desires a better market access to the USA by becoming a substitute for Chinese manufactured goods, and so will have to tread this path carefully. It would end up irritating the USA, which will not be in India’s best interest. Mercifully for India, the United States of America has grown out of its fascination with Pakistan after USA’s not-so-glorious exit from Iran, Iraq, and Afghanistan. Coincidentally, the foreign policy objectives of the USA and India have the common goal of stopping the Chinese hegemony. Few countries in the world can stand up to China today except these two. In international relations there are no friends or foes. Nations have interests. An intelligent foreign policy should protect the national interests. When there is a convergence of national interests, countries find it easier to cooperate and become natural allies. That has what has happened in India’s relationship with USA and China. This is not to mean that the USA is a better friend than China. The US efforts to control the Global oil market had resulted in the total ruin of Iran, Iraq, Venezuela, and Russia, even though these countries produce huge amounts of oil. The US has not been particularly concerned about the sensibilities of its friends when its national interest changed. Pakistan is a recent entrant to this category. The US also let down the Kurdish population at least twice, even though the Kurdish people had been traditional supporters of the US foreign policy objectives in Middle Eastern affairs. But, the record of other countries such as Russia, China, Germany, the UK, or France is no better than that of the US. So, for other countries, it is actually a choice between two evils and the entity making the choice will have to choose a ‘lesser evil’.


3. As of now, the US is indifferent to the proposed international currency. But, the inclinations (support) of Saudi Arabia, Kuwait, and other significant oil producers to accept the proposed international currency will definitely compel the United States to take note of the developments without at the same time getting unduly perturbed about this idea. But, for India to accept the Chinese-led initiative of a global alternate currency, China must show some flexibility and accept India as a standalone international player instead of hyphenating it along with Pakistan in the same way the United States and Europe did for the past several decades. After all, India today is the 5th largest economy. It is likely to become the 3rd largest economy by the end of this decade. Hence, India’s support and participation in the proposed International Currency is crucial for the viability of the suggested alternative. India today is one of the leading members of the Southern Alliance and there is a lot of scope for India in the area of trade with African, Asian and South American countries who do not want to get caught in any superpower rivalries. Hence, India would have to play its cards adroitly. Border problems between India and China have remained for seven decades. They will continue to plague our relations for a few more decades. China has already declared its intention to possess Taiwan, if necessary, by force. The US military intelligence has predicted that this should happen before 2027. At this point, it would be prudent for China to keep the Indian border simmering without bringing it to a boil. So, till the Taiwan issue is resolved in China’s favour, India is unlikely to face a full-scale war as it did in 1962. Besides, China is fully aware that Indian Armed Forces have more hardened battle experiences in comparison with China which has not fought a war in the last 40 years. Furthermore, China will have to trade more with India if it has to replace the United States of America as the most dominant global economic power. So, China also should be willing to make some concessions to India for getting India onboard the proposed global currency.


4. Nowadays, nobody is speaking much about the United Nations. People say every year that there must be reforms to the UN Security Council; one of the major reforms suggested was that the UN Security Council should become more broad-based with the induction of additional Permanent members such as Germany, Japan, Brazil, India, and Saudi Arabia. Almost all countries have agreed on the above names. China is steadfastly opposing the Indian induction as a Permanent Member of the Security Council apparently to please its so-called all-weather friend Pakistan. It does not have any objection to the induction of other members identified in the list. These other members except Germany will be part of the proposed international currency. So, unless China gives up its opposition to India’s Permanent Membership in the UN Security Council, it will not be in the best interest of India to become part of the Chinese initiative of a new international currency.