Navarro reminds Modi of America’s exorbitant privilege

India’s bid to pay Russia in rupees collapsed when Moscow refused to hold a non-convertible currency, forcing refiners back to the dollar, and back under Washington’s grip.

By Andy Mukherjee

Without saying anything really new, Peter Navarro has revealed something important. If India wants to keep earning dollars by selling goods and services to America, it has to recycle them as per Washington’s diktats. 

The White House trade adviser’s op-ed in the Financial Times is aimed at critics who have been shocked by the summary disdain with which President Donald Trump has alienated an ally that past administrations have spent a quarter-century cultivating. Navarro’s main message: “If India wants to be treated as a strategic partner of the US, it needs to start acting like one.”

Basically, the White House expects the same level of loyalty as it got from the Germans in 1967. Back then, the Lyndon B. Johnson administration prevailed upon Chancellor Kurt Georg Kiesinger to not exchange any of the Bundesbank’s dollar holdings for gold, even though they were well within their rights to do so under the prevailing Bretton Woods arrangement. Bonn made a public pledge to not join the rebellious French who  were beginning to question what Valery Giscard d’Estaing called America’s exorbitant privilege.

US-German relations in the 1960s were rooted in the calculus of the Cold War. Historically, New Delhi and Washington have never been as close, yet the latter is going to decide how the most-populous nation will use its trade dollars. That means Prime Minister Narendra Modi has to buy American weapon systems without insisting on technology transfers or local production. The US has no desire to gift cutting-edge military capabilities to a country cozying up to both Russia and China, Navarro says. 

The second constraint is on how dollar incomes are not to be used. Recycling greenbacks from its $43 billion trade surplus with the US to buy crude oil from Russia — only to sell refined petroleum products to other countries in Asia, Europe and Africa to earn yet more dollars — was “deeply corrosive of the world’s efforts to isolate Putin’s war economy,” Navarro says. It has to stop. 

The tone of the piece suggests that the Trump administration is making a calculated bet. However much Modi tries to flex his muscles against US hegemony, he really can’t afford to put $87 billion in annual exports to America at risk of a prohibitive 50% tariff from Aug. 27. Without dollars from its single-largest export destination, how will India pay for the $109 billion it spends on everything from power equipment to kitchen appliances from China? Or buy more from it, as Beijing is bound to insist?

One way to square the circle may be to give the Chinese equity stakes in local joint ventures, so that some of their $91 billion bilateral trade surplus comes back as investment. This may well happen. According to a Bloomberg News report this week, India’s biggest tycoons — from Gautam Adani and Mukesh Ambani to JSW Group’s Sajjan Jindal — have been pursuing under-the-radar deals with Chinese firms that have the most mature and cost-efficient technology in renewable sectors like electric vehicles and lithium-ion cells.

Is Washington sending a natural ally into the arms of its biggest rival? Not really. At best the fraught relationship between the two Asian giants will normalize. After their border clashes five years ago, New Delhi actively suppressed investment proposals from the bigger economy next door. The Modi government announced, with some pride, that between April 2020 and December 2021, China’s share in total foreign direct investments into the country had fallen to only 0.43%. Although that would change now, there’s little risk of India moving into China’s strategic sphere, not after Beijing’s liberal defense assistance to Islamabad in the recent India-Pakistan military conflict.      

Washington’s orbit is hard to escape. To see why, it’s illustrative to look back at the early days of the India-Russia oil trade after the start of the Ukraine war. Back then, there was a great deal of chest-thumping in New Delhi that Moscow will agree to sell crude for rupees. Russian importers would then pay rubles to buy tea and other stuff from India. The rupee-ruble transactions were supposed to be relayed over SPFS, the Russian alternative to the SWIFT messaging system, the “financial data panopticon” through which Washington surveils global trade and finance.

As I noted in April 2022, any such deal wasn’t in India’s long-term interest. Bypassing SWIFT would help Russia, whose banks faced Western sanctions. New Delhi had nothing to gain. Ultimately, the rupees-for-oil trade didn’t even work out. The Russian exporters got tired of holding funds in a non-convertible currency in Indian bank accounts. 

So refiners went back to buying crude with dollars and dollar-linked UAE dirhams, placing India squarely in the grip of the mighty greenback even as discounted Urals crude came to account for more than a third of its imports, from barely 1% before the Ukraine war. Had the benefits of cheaper oil flowed to local motorists, the middle class would have been all for standing up to Trump. That isn’t the case, and Modi has to appease voters now with a long-overdue cut in consumption taxes.

The Chinese have done the same Russian oil trade, and yet the US has singled out India for exemplary punishment. That isn’t hard to explain. Not all sides of this relationship are equal. While advanced economies like the US “are more exposed to China as a supplier, China is becoming less reliant on them as a market,” concludes a new study by Federal Reserve economist Florencia Airaudo, and her coauthors. Control over hard-to-replace inputs, such as rare earths, graphite, and battery materials gives Beijing leverage, they note. 

New Delhi has no such bargaining chips. The dollars India garners from exporting textiles, carpets, gems and jewelry, shrimp, and software code are its to spend, but not entirely freely. As Navarro reminded the critics of the sudden US-India estrangement, America’s exorbitant privilege comes in many hues.