Need for De-dollarization

Source-This post on Need for De-dollarization has been created based on the article“Uncle Sam’s dollar Ponzi scheme” published in “Business Standards” on 3 July 2024.

UPSC Syllabus- GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context- The article critically examines India’s dollar-denominated economic targets and advocates for a shift towards rupee-based goals. China and India are reducing their dependence on dollar reserves: China’s US Treasury holdings now comprise less than 25% of its $3.2 trillion reserves, while India has also  increased its gold reserves by purchasing 24 tonnes from January to April 2024, up from 16 tonnes in 2023.

What are the reasons behind wider acceptance of dollars in the global economy?

1) Safe Haven– The US dollar remains the preferred safe haven currency and is widely used for international transactions.

2) Euro’s Role and Limitations –The euro has not filled this role due to the Eurozone’s rapid expansion without sufficient fiscal controls.

3) Aggressive Behavior-The Chinese yuan faces trust issues because of China’s perceived aggressive behavior.

4) Impact of Ukraine War-Due to the Ukraine war, Europe has become too reliant on the US for security to pursue monetary independence. The dollar dominates because other countries struggle to unite on alternative approaches

What are the reasons behind the rising trend of De-dollarization?

1)  Weakening of the US Dollar-

A) After the 2008 financial crisis, many countries, including the US, printed large amounts of money to stabilize their economies. This continued during the Covid-19 pandemic to support economic recovery and prevent further downturns.

B) Following the Ukraine war, the US and its allies-imposed sanctions on Russia, which included freezing or seizing Russian dollar reserves held in international accounts.

2) Lack Gold Backing-: The USA has delinked the dollar from gold way back in 1971. Any solution that lacks gold backing will not benefit the US dollar in the long run.

3) Future Scenarios-

A) Potential creation of a gold-backed reserve currency by a group of nations may diminish the dominance of the dollar in the near future.

B) In 2021, the US Fed reported that 45% of US cash dollars are held overseas, mostly in $100 notes, by governments, individuals, and criminal groups. Predicting their future moves, like possibly shifting to cryptocurrency, real estate, or gold, poses significant challenges to the dollar’s dominance.

4) Worsening US Economic Situation- US national debt rose sharply from 7.8% of GDP in 1971 to 120% in 2023.In recent years, the US has been accumulating $2 trillion in additional debt annually.

Read More- De-dollarisation of trade: Opportunities and challenges

What should be the way forward for India?

1) India should gradually reduce its dependence on the dollar in its economy.

2) India should set its national economic goals based on real rupee terms rather than dollar values. This approach aligns with India’s capability to manage and control its own macroeconomic policies effectively.

Question for practice

What are the reasons behind the rising trend of De-dollarization? What should be the way forward for India?