History of the US Dollar as the Reserve Currency of the World

There was a streak of events in history that made the economy of the US strong enough following the British economy that its currency, the US dollar, is now the world's reserve currency.

It all began in the late Eighteenth century when the USA emerged to be one of the most significant economies for numerous economies of the Western world, especially Latin America.

Early Beginnings

• 1785: The United States formally designated the dollar as its currency following the Continental Congress' declaration.
• 1792: The Coinage Act founded the U.S. Mint and implemented a fixed-basis bimetallic standard using gold and silver.
• 1800s: As the British pound sterling, the world's largest Empire's currency, dominated world trade, the U.S. dollar slowly increased in stature as the economic power of America developed.

The 19th century witnessed the United States evolving from a fledgling power to a powerhouse of economics. As the industrial strength of America grew, so did the global presence of its currency, the US dollar. Nevertheless, throughout the 19th century, sterling was still the world's most prevalent reserve currency, leaving very little room for any other currency. But the US dollar continued to grow its footprint and became indispensable to most countries in bilateral exchanges with the US as the US reconfigured its industrial capacity. The British Sterling was still the most powerful currency in the world during the 19th century.

Changing US Trade Policy and World Economy

The trade policy of America has evolved over one century post the First World War. As soon as the Second World War started, the USA saw an opportunity in that war that was going on in Europe and elsewhere in the world. The US was convinced that Europe would undergo the hammer of the war, and post-war, a lot of reconstruction and other business opportunities were openly available. The fall of Japan in the war made the USA the only big economy in the world to take care of the needs of Europe and the rest of the world!

The US invested in capacity building across all the sectors, which eventually helped to earn huge money during wartime. Because of the wartime crisis, the US accepted gold for transactions, which led to a huge accumulation of gold in the US. Following World War II, the United States provided the Marshall Plan (European Recovery Plan) to Western Europe to rebuild Europe, championing free trade by reducing interstate trade barriers and globalisation, helping establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organisation (WTO). This system aimed to gradually reduce global trade barriers.

Is Golbalization Going Dead?

The US President Trump has announced reciprocal tariffs. However, it is available with a rider of a 90-day pause for most of the economies except China and a few other retaliatory economies. This has created chaos in the whole world in general and the security markets in particular. Now, the US has the highest average import tariffs since 1938, when its tariffs peaked at 15.5%, which started falling once the Second World War started in 1939. Post implementation of reciprocal tariffs, the average import tariff rate would be 14.5% in comparison to 2.4% in 2024.

It should be noted that globalisation and free trade were the brainchildren of the USA, which were implemented across the globe through the UNO, IMF, World Bank, WTO (erstwhile GATT) and other multilateral agencies and negotiations to achieve the economic goals of the developed economies in general and the USA in particular. The US used these two concepts and these agencies to turn the US dollar into the reserve currency of the world, eventually replacing gold.

Should India Respond to the Unilateral Reciprocal Tariffs?

India has become an important player in international trade post its integration with the global economy after liberalisation in the 1990s. At present, India has a trade-to-GDP ratio of about 40%. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. Reciprocal tariffs are used as tools either to retaliate or challenge the trade balance. The USA has announced it to impose 26% tariffs on Indian exports to the USA. Though the USA has pushed a 90-day pause button for most countries, barring China and a few countries which have responded to the 2nd April annulments of the US President.

Reciprocal tariffs are in alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. According to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs lowering welfare. Reciprocal tariffs can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of reciprocal tariffs would depend upon the extent, targeting, and tenure.

Anything But China

America's new motto is 'Anything But China'. Considering the dominating personality of the US President Trump which is more consistent with the US’s image of Inspector, the present day US seems to be quite against Chinese hegemony in manufactured goods which dominates not only the US markets but the whole world ignoring the fact that it is the US who allowed China to create manufacturing hegemony to just keep dollar as only global exchange and reserve currency. However, a lot of water has gone through the rivers, and China aspires to become the new Inspector of the world and the US is not liking this!

President Trump started a trade war against China in 2018, which couldn’t achieve much for the US. However, in this, he seems to be determined to tame China by imposing high tariffs on Chinese goods. In response to the US tariffs, China announced retaliatory tariffs against the US to counter the 2nd April announcement of the US President and has been caught red-handed. The US has increased the tariffs on Chinese goods to 125%. The US has retaliated against every country that has increased tariffs against the US when it pushed a 90-day pause button on the implementation of the reciprocal tariffs. However, if the world sustains this shock, it will accelerate the de-dollarisation movement, and this movement will gain momentum as the US has indirectly announced that it doesn’t want to be the big brother of inspector of the world!

Indian Stock Market to Grow Despite FIIs Withdrawing

The Indian stock market has been in jitters for some time. In the last 6 months, FIIs have withdrawn huge amounts of money from the Indian market. In the last 1.5 months alone, FIIs have withdrawn about ₹1 lakh crores from Indian markets. Despite this, the market has gone by about 15% and 6% only in the last six months and 1.5 months respectively.

What does it mean for Indian markets?

This simply means that Indian markets, though still being affected by the FII investments are not as dominated as were previously! The young investors in India are on the scene. They have invested about ₹2 lakh crores in markets in the last 6 months. Rather than leaving the market, they are investing, unlike the earlier trends!

This shows the confidence and optimism of young investors in Indian markets and the Indian economy. This confidence will change the attitude of FIIs. Also, the new Trump Administration in the USA would become more predictable. These together will attract back the FIIs to India.

Adani Group, SEBI and the Report of Hindenburg Research

On 10th August 2024, Saturday, the Hindenburg Research published a so-called explosive report on the Security and Exchange Board of India (SEBI) chairman Madhabi Puri Buch and Indian conglomerate Adani Group. The report made an allegation that the SEBI chairman’s involvement in offshore funds and money siphoning. This report neither did generate the kind of discussion nor have the same reactions from the stock market the way a similar report in January 2023 had on the Indian stock market and Adani Group stocks!

This time, the Adani Group as whole has lost its market capitalization by just about 1% than the market capitalization before the said report, released on 10th August 2024! However, a similar report by Hindenburg Research in January 2023 wiped out the value of some Adani Group companies by 83%. Adani Total Power lost about 83% of market capitalization post revelations in January 2024. The whole Adani group had come under huge pressure. The whole group lost about $150 billion in valuation. Many financial institutions raised concerns about the future of Adani Group. It also had to cancel its FPO. Gautam Adani, the group chairman of the India conglomerate lost its position from the list of top ten richest people in the world!

Why? Has the short seller Hindenburg lost credibility at least in the Indian security market? A short answer to this question is perhaps, yes!

Reliance Industries has Got the US Nod to Import Crude Oil from Venezuela

Reliance Industries has got the US nod to import crude oil from Venezuela. ONGC has also applied for a waiver to buy crude oil from Venezuela! It is quite possible that ONGC will also get a similar nod. It should be noted that Reliance Industries is the second largest buyer of crude oil from Venezuela.

This decision of the USA will increase India's access to cheap crude oil. I am sure that India's strong relationship with Russia, increasing share of Russian crude oil in Indian basket and the recent visit of Indian Prime Minister Narendra Modi to Russia which was widely circulated in the world media by the Russian state media must have played a significant role in this decision. The US wants India to cut its crude oil import from Russia. So India must have argued that until and unless India has access to other cheap alternatives, how could India cut its crude oil imports from Russia? The US must have agreed and nodded to the application of Reliance Industries for waiver to enable India to explore more and perhaps better alternatives than Russia. It must be noted that the US had imposed sanctions in 2019. This was the time when India’s crude oil import from Russia started increasing which had increased to 40% of the total Indian crude oil basket!

What is Angel Tax?

Abolition of angel tax would be very beneficial for the Indian startups. But before I discuss the impact of angel tax on Indian startups, it would be appropriate to answer what is angel tax?

Angel Tax is a tax imposed on Indian startups receiving funding from angel investors on the fair market value. Angel tax in India before Union Budget 2024 was 30% of the fair value of the startups. Angel tax was introduced in the Union Budget 2012 by then Finance Minister Shri Pranab Mukherjee.

For example, if the fair value of a startup is Rs 1 crore and it raises Rs 1.5 crore from angel investors, the excess amount of Rs 50 lakh is subject to this tax.

Union Budget 2024 Aimed at Demographic Dividends

It has been 10 years since the government gave any tax relief to the middle class! It was expected that the Finance Minister Nirmala Sitharaman would be increasing the tax deduction limit under 80C of Income Tax Act from ₹2.5 lakhs to ₹4 lakhs or ₹5 lakhs along with standard deduction in the first Budget of Modi 3.0 with the purpose to increase the demand in the Indian economy which would lead to more jobs because of increased disposable income. However, the budget is not that generous as far as the deduction is concerned. I, along with other economists, was sure and still am that if only the standard deduction limit is increased, then it would not be able to achieve the dual goals of increasing economic activities in the economy as well as controlling the falling savings in the economy.

Why has the GST Collection Data for June 2024 not been Released?

On 1st July 2024, India completed 7 years of implementation of GST in the Indian economy. Initially it was a roller coaster ride with many states objecting on various issues along with implementation confusions and glitches. As a result many had expected it to fail but India has implemented GST smoothly across the nation. It is a great achievement as it has unified the Indian markets as far as taxation is concerned.

However, some concerns are being raised with July moving towards August! Every month in the first week, India has been regularly and religiously releasing the GST collection data. It was religiously followed till June 2024. But since 1st June 2024, GST collection data has not been released. None knows, why has it not been released?

People are now speculating about it with so many conspiracy theories. However, media reports suggest that the GST collection in the month of June 2024 was ₹1.74 lakh crores which is 7.7% greater than the collection of June 2023.

Artificial Intelligence and the Associated Fears

There has always been resistance to any change in this world. Status-quo is the motto of most people even if the change can improve the circumstances! Who wants to come out of their comfort zone? After some time, even discomfort and pain also creates its own comfort zone for the individuals!

For many, scratching their sores becomes a pleasant habit for them!

In the beginning of the twentieth century, there was a lot of opposition to calculators; mainly in the academics. A lot of professors come out on the roads protesting and demanding a ban on the use of calculators in the academics saying that it would negatively affect the mathematical ecosystem! However, time has turned the calculator into a most trusted ally of mathematics!

In the same way, there was a time when there was a lot of opposition to computers across the globe in almost every section of society. The use of computers was also opposed saying that it would eliminate people's jobs by increasing the use of machines in the industries (automation) but it proved very wrong. Rather the use of computers has increased the number of jobs unprecedentedly creating many new industries and jobs. The only difference it has brought in is that it just changed the very nature of jobs! Today there is a huge demand for high skill jobs in the market instead of low skill jobs.

The Fall in the Share of the Households in the Capital Formation in India

Post pandemic, the share of the households in the capital formation in the Indian economy is falling. Household savings had increased increased significantly during the pandemic because of increased risk aversion of the citizens. The households post pandemic have used the savings and heavily borrowed to buy different classes of assets resulting in a fall in the household savings to 61% in financial year 2023 from 78% in financial year 2021. However, it should also be noted that the household financial liabilities in India had increased to 5.8% of the GDP which is highest since financial year 2012.

The fall in the share of the households in the capital formation is a cause of concern for any economy. For a developing economy like India with a share of more than 70% of the population below age of 25 years, it is even more worrisome. It would have a multifaceted impact on the overall well-being for the economy and the citizens.

The fall in the share of the households in the capital formation in Indian economy would lead to many problems like higher inequality in income as well as wealth, fall in consumption, slowdown in housing market, lower wealth accumulation and bad savings and financial health of the citizens in medium to long term which at present when inequality is at very high level in country.

What is Open Credit Enablement Network (OCEN)?

The government of India launched the Open Credit Enablement Network (OCEN) last year. It is an initiative in India aimed at democratizing credit access and fostering innovation in the financial ecosystem. It is a kind of a virtual credit marketplace which brings distributors, lenders, and borrowers together in one location. Basically OCEN is a set of protocols that enables seamless interaction between the lenders, loan service providers and borrowers by creating a standardized framework for credit underwriting, disbursement, and management for small-ticket financing with brief tenures by enabling distant lenders to conduct business in remote areas and permitting access to data from other sources.

Peculiar Case of Inflation in India

Someone asked me why do most of the non-BJP ruled states have higher fuel prices than that of BJP ruled states? Don't they realize that it'll be the reason for high general prices?

First of all, I wanted to ignore this question due to its political reason but after a while I decided to respond knowing the fact that the answer to this question is very peculiar. If I try to remain politically correct, there would not be a factual and satisfying answer to this question. It is not possible at all to be politically correct and answer this question both at the same time!

As a matter of fact, most of the non-BJP ruled states are charging higher VAT on petroleum products than the BJP ruled states. As a result, the oil prices are higher in Non-BJP ruled states. But it is not that simple. It is more complex than it looks at face.

Pesticide Use in India and the World

The Food and Agriculture Organization (FAO) of the United Nations has published a report with a title of “Pesticides Use, Pesticides Trade and Pesticides Indicators; Global, Regional and Country trends, 1990–2020”. This report is providing some very important insight about the global agricultural practices. The information is to some extent very surprising and frightful.

The following graph represents the pesticides Kilogram /Hectare used in different countries in agricultural activities.

Relationship of India with the UAE

In geopolitics and foreign policy making, things are often very long term, move slowly and look very deceptive and sometimes illusive also. From outside they often seem to move in the north direction but actually they lead in the south direction or might be in the east or west. It can be anything.

From the way the world perceives India today, it is very clear that India is doing well in the foreign policy making and positioning and placing its bets and people.

Relationship of India with most of the nations across the globe is improving dramatically. This is also true in the case of the United Arab Emirates (UAE). The relationship of India with the UAE has never been so strong the way it looks today and it is becoming stronger day by day. None could have even thought of it 10-15 years back but Modi Government has done wonders in the last ten years to completely change it by serving and securing the economic interest of UAE.

UPI vs. NEFT vs. IMPS: Which is Preferred?

India has many ways to transfer money supported by the Reserve Bank of India (RBI) and National Payment Corporation of India (NPCI) using banking platforms, BHIM app, payment banks as well as payment wallets. These methods are Unified Payment Interface (UPI), Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS), Electronic Clearing System (ECS), Mobile Wallets, Prepaid Cards, Debit Cards, Credit Cards, Unstructured Supplementary Service Data (USSD), and AADHAAR Enabled Payment System (APES). At present, of all these ways, three ways of payment have turned out to be the most popular and those are UPI, NEFT and IMPS.

Visa Free Entry to Indians is Increasing

Rising economic might of India is increasing the importance of India in the global economy. It should be noted that the Indian economy is the fastest growing large economy in the world and is expected to become the third largest economy in the world by 2030 and probably a $5 trillion economy by the end of 2028 itself.

This simple but very important fact is forcing the countries of the world to review their overall public and economic policies in the matter of India to fit in the new reality. They are adjusting their policies at every level irrespective of the political spectrum.

India Needs to Increase Investment in Agriculture

According to The World Bank, 60% of the total land in India was found to be suitable for agriculture in 2021 against the world average of 38.4%. However, the share of cultivated land was only 53.7% of the total land in India of which 50.4% is arable and 3.3% is covered permanent crops, 24.4% of total land area is forest land and rest is used for other different purposes.

As per the definition given by Food and Agriculture Organization of United Nations (FAO), agricultural land covers only 38.4% of the world’s land area in 2011. However, only 10.9% of the global land area is arable that can be used for growing crops and just 1.2% of global land area is covered by permanent crops.