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Editorials/Opinions Analysis For UPSC 28 December 2023

  1. Internationalisation of the Rupee
  2. The Evolving Role of the Colombo Security Conclave


Context:

In a significant development in the realm of global trade and finance, India has achieved a historic milestone by making its inaugural payment for oil to the United Arab Emirates (UAE) in rupees. This marks a potential turning point in the endeavor to establish the rupee as a prominent global currency.

Relevance:

GS3- Indian Economy- Growth and Development

Mains Question:

In the context of the first-ever payment for oil made by India in rupees to the United Arab Emirates (UAE), explain what do you mean by Internationalisation of Rupee. What are the benefits and challenges that internationalisation of rupee poses for the Indian Economy? (15 Marks, 250 Words).

Internationalisation of Rupee:

  • The internationalization of the Indian rupee involves the systematic effort to enhance the utilization and recognition of the currency in cross-border transactions.
  • This initiative aims to encourage the adoption of the rupee in import-export trade and various current account transactions, with the ultimate objective of extending its prevalence in capital account transactions.
  • The overarching goal is to establish the rupee as a universally acknowledged and embraced currency in the international marketplace.

Current Status of Rupee’s Internationalization:

The internationalization of the rupee remains in its early stages, with the daily average share of the rupee in the global foreign exchange market standing at approximately 1.6%. India’s share in global goods trade is also modest, at just 2%.

Significance of the Recent Transaction between India and the UAE:

Financial LandscapeBeyond strengthening economic ties between India and the UAE, this move carries broader implications for the international financial landscape.  

The groundbreaking transaction occurred within the framework of a trade agreement between the two nations, where India opted to settle the payment for a shipment of crude oil in its own currency instead of the customary US dollar.
Global Trade and Power DynamicsThis departure from the conventional practice is viewed as a bold step that could have a cascading impact on global trade dynamics.  

The arrangement with the UAE serves as a testament to India’s growing prominence on the world stage. Not only do numerous countries look to India for guidance and support, but they also observe and emulate the paths it charts.  

As External Affairs Minister S Jaishankar aptly noted, the era of a bipolar world has concluded, and we now find ourselves in a multipolar world where several nations play pivotal roles. The decision to make payments in rupees carries not only economic implications but also reinforces the economic and strategic bonds between India and the UAE.  
Diversifying its Currency ReservesIndia’s decision to conduct transactions in rupees aligns with its overarching strategy of diversifying its currency reserves.  

Traditionally, the US dollar has held sway as the dominant currency in international trade. By choosing the rupee, India is taking a proactive measure to lessen its dependence on the dollar and foster the utilization of its own currency.  
Minimise the Effect of Exchange Rate FluctuationsTrading in local currencies presents advantages, including a reduction in currency exchange risks. By bypassing the need for conversions into a third-party currency like the US dollar, both India and the UAE can potentially cut transaction costs and minimize exposure to exchange rate fluctuations. This move may inspire other countries to explore similar arrangements, challenging the enduring dominance of the US dollar in the international financial system.  

The payment made by India to the United Arab Emirates (UAE) in rupees for oil signifies mutual confidence in their respective economies and establishes a precedent for other nations to consider alternative currency options.  

Persisting Challenges:

  • However, it is essential to note that this doesn’t imply that the Indian rupee is on par with the dollar. The US dollar has long been the predominant currency in global trade, constituting nearly 60% of all foreign exchange (Forex) reserves and over 80% of global forex trading.
  • The rupee is not as widely traded as the US dollar or the euro, which may impede its immediate adoption on a large scale.
  • Additionally, concerns about the stability of the rupee and the necessity for a robust financial infrastructure must be addressed for the currency to gain broader acceptance.

Conclusion:

Despite these challenges, this shift signifies a change in the traditional dynamics of international trade and finance. The global financial landscape may witness further diversification in currency usage, challenging the supremacy of the dollar and contributing to a multipolar world economy.



Context:

In early December, Ajit Doval, India’s National Security Adviser (NSA), participated in the sixth NSA meeting of the Colombo Security Conclave (CSC). The meeting conducted a comprehensive review of the CSC’s developments and progress over the past year, culminating in an agreement on a roadmap for the year 2024.

Relevance:

GS2- International Relations- Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

Mains Question:

In the context of the recently concluded sixth NSA meeting of the Colombo Security Conclave (CSC), examine the grouping’s significance for India and its evolving role in the Indian Ocean Region. (10 Marks, 150 Words).

About the Colombo Security Conclave (CSC):

  • Established in 2011, the Colombo Security Conclave (CSC) originally operated as a trilateral maritime security alliance involving India, Sri Lanka, and the Maldives.
  • During its fifth meeting of national security advisers, Mauritius was formally welcomed as the fourth member.
  • Additionally, Bangladesh and Seychelles participated as observers and have received invitations to become full-fledged members.

Sixth NSA meeting of the Colombo Security Conclave (CSC):

  • The primary objective of the meet is to foster a safe, secure, and stable Indian Ocean. Attendees included member states Mauritius and Sri Lanka, as well as observer states Bangladesh and Seychelles.
  • Notably, the Maldives, now under new leadership, was the lone member state absent, highlighting the influence of domestic politics on regional collaboration.
  • It is crucial for India to persist in advocating for an active CSC to effectively address the challenges in the Indian Ocean.

Shifting Dynamics of the Colombo Security Conclave:

  • The Colombo Security Conclave (CSC) highlights the changing dynamics within the Indian Ocean. It gained prominence in 2011 when Sri Lanka joined India and the Maldives to form a trilateral maritime security group. However, tensions between India and the Maldives led to a standstill after 2014.
  • In 2020, India not only advocated for the revival and formalization of the organization but also expressed interest in expanding its scope to include Mauritius, Seychelles, and Bangladesh.
  • This initiative reflects India’s evolving strategic vision for the Indian Ocean, which is increasingly at the center of a multipolar world, with external powers vying for influence in the region. This competition is expected to intensify with the growing significance of the Indo-Pacific.

Significance of the Colombo Security Conclave (CSC) for India:

  • For India, a traditional power in the region, the CSC presents an opportunity to fortify its leadership and security framework. Since gaining independence, India has played a progressively significant role in enhancing security in the Indian Ocean.
  • The limited capacity of island nations to safeguard their seas and counter transnational threats has motivated India to provide assistance in defense and security capacity building, infrastructure development, and equipment provision.
  • India has also served as a crucial first responder in the region, intervening to prevent coups and extending humanitarian and economic aid during crises such as COVID-19.
  • The CSC allows India to institutionalize its role, shape the regional security architecture, and effectively address both current and emerging threats.
  • The CSC focuses on five pillars: maritime security and safety, countering terrorism and radicalization, trafficking and transnational crime, cyber-security and protecting critical infrastructure, and humanitarian assistance and disaster relief.
  • Through these areas of cooperation, India aims to better comprehend and address threats in the Indian Ocean, positioning itself as a preferred partner for Indian Ocean states. This strategic accommodation and flexibility contribute to the security of the Indian Ocean.

Rising Influence of China:

  • The resurgence of the Colombo Security Conclave (CSC) is intricately linked to the rise of China. Since the early 2000s, Beijing has made substantial investments in the Indian Ocean through its Belt and Road Initiative (BRI) projects, aiming to gain access to the Indian Ocean.
  • Presently, China is not only bolstering its naval capabilities but also cultivating robust defense partnerships with Indian Ocean states. It regularly conducts maritime exercises in the region, operates a base in Djibouti, and holds control over Sri Lanka’s Hambantota port.
  • Additionally, China engages in scientific endeavors, such as mapping the Indian Ocean bed. By institutionalizing its presence through forums like the Indian Ocean Region Forum on Development Cooperation, China seeks to challenge the existing security architecture in the Indian Ocean.
  • Despite reservations about some of these developments, India recognizes that many regional countries do not necessarily perceive China as a threat. Moreover, these countries are too dependent on China to adopt an overt anti-China policy.

Resurgence of the Colombo Security Conclave (CSC):

  • Since 2021, the CSC has delved into issues such as terrorism, terror financing, narcotics trafficking, cybercrime and security, marine pollution, maritime law, and coastal security.
  • In 2022, the organization held its first-ever conference of oceanographers and hydrographers, along with another conference on coastal security. The upcoming iterations of these conferences are scheduled for 2024.
  • Joint working groups have been established or are in the final stages of development, covering areas like terrorism, cyber-security, humanitarian aid and disaster relief (HADR), trafficking, and transnational organized crimes.
  • Besides regular meetings of National Security Advisers (NSA) and Deputy NSA, the countries are collaborating on capacity-building in sectors such as counter-terrorism, police, law enforcement, and cyber-security.

The Impact of Political Dynamics:

  • Being a relatively young institution, the Colombo Security Conclave (CSC) is susceptible to changes in domestic politics within its member states.
  • The recent absence of the Maldives from the meeting exemplifies this vulnerability. Two likely reasons could have influenced this decision: firstly, a preference for a closer relationship with China, and secondly, an alignment with nationalist campaigns that have committed to distancing the Maldives from India in defense cooperation.

Conclusion:

All CSC member states are democracies, and these nations leverage both aspects for their domestic and external advantages, particularly as the Indo-Pacific region gains prominence. For New Delhi, whose ambitions, responsibilities, and challenges have significantly increased in the past decade, the CSC will continue to be a vital instrument in consolidating its regional leadership.


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