Time for an overhaul

The Union government on July 11, 2022 admitted in the Parliament that the value of the Indian rupee (INR) against the dollar had fallen by Rs 16.08 (25.39 per cent) in the last eight years. The finance ministry informed that in 2014, as per the Reserve Bank of India (RBI), the exchange rate was Rs 63.33 to a dollar. By July 11, 2022, it had fallen to Rs 79.41. This Thursday (September 28) INR almost touched Rs 82 (Rs 81.95) to a US dollar. Deccan Herald reported that the Indian central bank sold dollars via state-run banks on Thursday as the rupee gave up most of its intraday gains and threatened to fall to new record lows.

Quoting Reuters, Mint informed that the RBI has drawn down its foreign exchange reserves by nearly USD 100 billion to USD 545 billion from a peak of USD 642 billion a year ago, and more is coming. Economists have forecasted that

those reserves are to fall to USD 523 billion by the end of this year. That suggests the RBI will run down forex reserves at a rate last seen during the global financial crisis of 2008 when they fell by over 20 per cent. It may be recalled that RBI has already burnt reserves at a much quicker pace than during the crisis period in 2013 when the US Federal Reserve had suddenly cut government bond purchases, reported LiveMint.

Bloodbath in the currency market

The strong dollar — pushed up by the US Federal Reserve's tightening policy to rein in inflation — is decimating world currencies. Though the Indian rupee has depreciated significantly against the US dollar, other currencies are also facing the heat of a stronger dollar. Relative to the dollar, the yuan has fallen about 9.5 per cent so far this year. But even the 9.5 per cent tumble is a momentous fall in the yuan's history — and worse may be in store, as the Fed prepares for another 75-point rate hike to control US inflation.

Forbes has reported that the US dollar continues to surge against other currencies, globally, as investors pack into the safe asset and concerns of a global recession intensify. The Dollar Index — a weighted geometric mean of the dollar's value relative to the following currencies: Euro (EUR), 57.6 per cent weight; Japanese yen (JPY), 13.6 per cent weight; Pound sterling (GBP), 11.9 per cent weight; Canadian (CAD), 9.1 per cent weight; Swedish krona (SEK), 4.2 per cent weight; and Swiss franc (CHF), 3.6 per cent weight — was up 12 per cent to more than 114 points on Wednesday, by far its highest level since 2002. The index has surged nearly 20 per cent this year, and Morgan Stanley analysts on Monday predicted it will climb another 4 per cent to 118 by the end of 2022 — almost matching a 36-year high of nearly 119 in 2002.

The Euro, dollar index's biggest component, has tumbled 18 per cent against the dollar over the past year and was worth USD .96 on Wednesday, its lowest level since 2002, just two months after reaching parity with the dollar for the first time in two decades. The British pound has also started tanking amid concerns of increased government borrowing to help pay for tax cuts in the United Kingdom — only worsening already rampant inflation, falling to an all-time low of USD 1.035 against the dollar on early Monday, a more than 20 per cent loss in value year-to-date. The yen has similarly slumped against the dollar this year, shedding about 25 per cent in value to a 24-year low, prompted by the Japanese central bank's steadfast commitment to low-interest rates as other countries pursue more aggressive monetary policy.

And the Chinese Yuan fell about 5 per cent against the dollar on Wednesday to its weakest level since 2008; it's down about 20 per cent this year. The offshore Yuan, which is traded outside mainland China, fell to 7.2386 against the dollar on Wednesday, the Bloomberg news agency reported. The onshore Yuan, which is circulated in mainland China and more tightly controlled than its offshore counterpart, fell to a low of 7.2302 per dollar in early trade, the weakest since the global financial crisis in 2008. The declines come despite China's central bank Monday announcing moves to stem the Yuan's decline by making it more expensive to bet against the currency, reported Al Jazeera.

Meanwhile, Chinese officials claim that while the yuan is on track for a record fall against the dollar, it has actually held up relatively well against a trade-weighted basket of currencies. The yuan exchange-rate index calculated by China's foreign exchange trading platform shows the Yuan sitting roughly at where it was at the start of the year. But the Vice Commerce Minister Wang Shouwen said, "Our companies are reporting falling orders, as the demand from major markets is declining. The slowdown in external demand is the biggest uncertainty faced by China's trade.

Nevertheless, contrary to these depreciating currencies, the Russian Ruble has steadily appreciated against the US dollar in recent months. The US dollar and Russian Ruble are the actual winners of the Ukraine crisis. In the third week of September, the Ruble gained 4.5 per cent against the dollar, hitting 56.7 and climbing to a high not seen since August 25. The rally came while other global currencies weakened against the dollar, which hit a fresh 20-year high. It appears that the much-hyped western sanctions have made the Ruble much stronger than before.

Consequences of a strong dollar

Exchange rate movements have complex drivers, commented the noted economist Kaushik Basu who has rightly detected the worrying fact that over the last five years the rupee has fallen not just against the US dollar but also against the Chinese Yuan (from Rs 9.8 to Rs 11.4 for 1 Yuan).

Incidentally, both the USA and China are India's two largest trading partners. At the end of fiscal year 2021-22, the United States surpassed China to emerge as India's top trade partner, with total trade between the two countries valued at USD 119.42 billion. The US is the only trade partner in the top 10 club with which India enjoys a trade surplus of USD 32.7 billion. India's exports to the world's largest economy stood at USD 76.1 billion and imports at USD 43.3 billion. A weaker Indian rupee is likely to benefit exporters though import costs would also increase. The sectors which are likely to gain are Information technology, pharma, garments, tea, and steel.

India-China trade touched USD 115.42 billion in 2021-22. India's exports to China were USD 21.2 billion while imports stood at a massive USD 94.1 billion, resulting in a huge trade deficit of USD 72.9 billion. It will be beneficial to India if the two countries agree to settle their transactions in their own currencies. A small but viable basket of commodities may be considered for rupee-yuan trade. Allowing direct convertibility can help cut currency risks for Indian traders who import huge quantities of goods from China. Limiting the basket to a few items will help the Indian government keep the enormous trade deficit with China in check. For China, the move would help broaden the Yuan's influence and improve liquidity overseas. Bank of China Ltd. started a Yuan clearing and settlement service in Pakistan in May 2018, and similar Yuan hubs have been set up in Russia and Canada to allow traders to settle transactions, reported The Print. Russia has also initiated a similar move with its partner countries like India.

The amalgam of five major emerging economies — Brazil, Russia, India, China, and South Africa (BRICS) — is conferring upon the prospect of creating a single currency. The option of invoicing trade between the BRICS nations in BRICS currency had already been discussed by the group. This revelation was made on September 28 by Pavel Knyazev, the Ambassador-at-Large of the Russian Foreign Ministry, Sous-Sherpa of Russia in BRICS. "The possibility and prospects of a common single currency, the BRICS-based accounting currency, is being discussed," Knyazev stated during an expert discussion on the prospects for the expansion of the BRICS and the Shanghai Cooperation Organisation (SCO). The discussion was hosted by the Valdai Club, a Moscow-based think tank and discussion forum that is closely associated with President Vladimir Putin. Previously, Tehran had proposed creating a new single currency to facilitate trade between members of the Shanghai Cooperation Organization. If this materialises, which is very likely, the near-total hegemony of the US dollar on the global economy will face a serious challenge in the Eurasian and African regions.

The major adverse consequence of the falling rupee will be cost-push inflation. India imports over 80 per cent of its crude oil, and the global crude prices have sustained at over USD 100 a barrel since Russia's invasion of Ukraine in February this year. The cost of renewable energy will also increase as most of the critical components are imported. High energy prices and a weaker rupee will only add to inflationary pressures in the economy. And in a recession-hit economy with the highest rate of unemployment, cost-push inflation leads to stagflation.

Looming stagflation- the "Argentinization" of the world economy

World Bank President David Malpass on Wednesday (September 28) warned that it could take years for global energy production to diversify away from Russia after its invasion of Ukraine, prolonging the risk of stagflation, or a period of low growth and high inflation. In a speech at Stanford University, Malpass said there was an increased likelihood of a recession in Europe, while China's growth was slowing sharply and US economic output had contracted in the first half of the year. Malpass informed that the bank's upcoming 'Poverty and Shared Prosperity' report (due out next week) showed that decades of progress in reducing poverty had slowed by 2015, even before the COVID-19 pandemic which has sent an additional 70 million people into extreme poverty. The report also predicted a four per cent decline in the global median income, the first decline since the bank began measuring that indicator in 1990.

Euromonitor International's new Global Stagflation Macroeconomic Scenario also documented the possible outcome of global stagflation on major economies. The report apprehends to see a sharp slowdown of the global economy in 2022, while the risk of stagflation looms larger amid high and volatile commodity prices, significant geopolitical tensions, and slower growth in China. According to the study, while the US and the Eurozone economies are facing high stagflation risks, developing and emerging markets could be hit hard if the global economy enters a stagflation era.

According to another report, cited by The Guardian, authored by the United Nations Conference on Trade and Development (UNCTAD), most nations were facing at least one of the three shocks threatening the world today — rising food prices, rising energy prices, and tighter financial conditions. In its annual trade and development report (2021), UNCTD said low-income countries had been hit much harder by the pandemic than during the 2008 financial crisis, adding to their debts and piling pressure on their public finances. The UN's economic arm said there were growing risks that low-income developing countries would fall further behind. Global growth is forecast to fall back to 3.6 per cent in 2022, while an annual average growth rate of 3.5 per cent from 2023 onwards means the global output will only revert to its 2016-19 trends by 2030. Warning that policymakers in advanced economies had not yet woken up to the size of the shock to developing nations, or its persistence, the Geneva-based agency said concerted action among rich countries was required to provide debt relief to poorer countries. In some cases, debt cancellation was necessary to "avoid another lost decade for development", it said.

According to figures cited by the Financial Times's Gillian Tett, total global debt has tripled since 2000 and doubled since 2006 because interest rates were ultra-low. But rates are rising now and the fiscal burden in many countries is soaring amid energy subsidies and pandemic spending (and, in the UK, unexpected tax cuts). Tett suggests plenty of mini-debt shocks are likely over the coming years, from sovereigns to corporate, both in advanced and emerging economies. An over-leveraged economy facing a marked increase in inflation will have to deal with large rate hikes by the Fed and other major central banks, which will raise borrowing costs across the globe and put pressure on emerging markets' financial stability, with 60 per cent of low-income countries in high-risk of debt distress or directly in it before the war in Ukraine, World Bank data indicated.

"The indicators are not looking good", World Trade Organization chief is the latest to warn a global recession is on the way. A number of coinciding crises are slowing global economic growth and threatening to tip the world into a recession, the WTO chief warned on Tuesday, making it the latest global institution to issue a dark forecast for the world economy.

In a recent column in Forbes (August 1, 2022), Agustino Fontevecchia apprehended that for the first time the rest of the world seemed headed down a similar path as Argentina, with inflation looking increasingly uncontrollable and a looming recession that would hit both rich and poor nations alike. Global poverty has been on the rise, just like in Argentina, and there's a very real risk of a cascading global debt crisis, given rising interest rates and slowing or even negative growth. Social unrest has been on the rise, as seen in Sri Lanka due to energy and food shortages, a situation that could quickly spread to other countries on the brink. Argentina's deep economic slump drew thousands to the streets on September 28, Wednesday, as protesters demanded action to counter sky-high inflation and help the country's poor, reported Reuters. Argentina's poverty rate was around 36.5 per cent in the first half of this year and Latin America's third-biggest economy has been battered by inflation that is now approaching 100 per cent.

Conclusion

Many analysts believe that today's global economy is strangely similar to the 1970s stagflation episode. The genesis of the present problem is just an extension of the Sub-Prime crisis (2008) in the USA. The roots of the problem could be traced to 1981 when the newly elected US president Ronald Reagan had introduced the supply side economics (the Reaganomics). Reaganomics has dominated the mainstream economic discourse for nearly four decades. The salient features of that economic doctrine, which was later followed by Margaret Thatcher of the UK, were: (i) regressive tax policy; (ii) rising real wage-productivity gap (iii) consolidation of monopoly power through mergers and acquisitions; and (iv) widening of economic inequality among the citizens.

None of the current global economic problems can be solved without massive changes to the working of the world economy to counter the harms caused by neoliberal capitalism over the last 40 years.

For decades, defying predictions of its demise, the US dollar has been the world's dominant currency. Nearly 60 per cent of the world's foreign exchange reserves are in dollars, but that share has been falling gradually, and the evolution of markets and technology have weakened the dollar's market share in global payments. Currently, the US dollar is gaining strength, primarily due to the conversion of weaker currencies, during this crisis, to a traditionally stable currency. But the question is increasingly being raised about the US dollar's future as the world's dominant currency. Are its days numbered?

Views expressed are personal