Local Currency, Global Dream: New BRICS Economic Model Supported By India's UPI Diplomacy

The BRICS countries are engaged in the effort to create a common payment system to weaken the hold of the US dollar. Russia and China have already started using their local currencies instead of the dollar in their mutual trade. India has also implemented a special arrangement for exports in the Rupee. Now, the BRICS countries are collectively moving towards an alternative financial mechanism, in which a shared digital currency or payment platform could be developed. The objective of this system is to bypass American sanctions, reduce transaction costs, and make trade among member countries simpler and more independent. These countries are planning to reduce their dependence on Western payment systems like SWIFT and will promote regional or bilateral mechanisms in its place. Experts believe that this new system could give more power to the Global South and India can play a balancing role in it.

Manoranjan Sharma, Chief Economist at Informatics Ratings, says that in today's multipolar world, the center of economic power is shifting away from America and the Global North. The dominant position that the dollar and America have held so far is now set for a major decline. Countries attempting to 'de-dollarize' their economies are being threatened by the US with tariffs of up to 100 per cent and sanctions. But its impact will remain limited, because every year about 10 trillion dollars of wealth is siphoned from the Global South to the Global North. A group like BRICS has both a solid reason and the potential to establish a new financial framework to end the unjust economic hierarchy of the current dollar-centric system.

Challenging Dollar Dominance

In 1944, the Bretton Woods Conference established the US dollar as the primary currency for global trade and payments. In this post-World War II system, most international transactions began to be conducted in dollars. This meant that whether two countries traded with each other or with a third country, the payment was often made in US dollars. In recent decades, this unipolar currency system has come into question, especially as the United States began to use economic sanctions as a political weapon. Countries like Iran, Russia, Venezuela, and China considered this a threat to their financial sovereignty. The exclusion of Russia from the SWIFT network following the Russia-Ukraine war further solidified this fear.

From this point, the BRICS countries (Brazil, Russia, India, China and South Africa) accelerated their search for alternatives to the dollar. This group is not only encouraging trade in local currencies but is also working on creating its own payment system and an alternative currency bloc. This is not a change that has happened in a single day. It is the search for an alternative global financial framework that would reduce the currency dependence of weaker nations and strengthen local economies.

Why did the need for an alternative system to the dollar arise?

Fear of US Sanctions: When the US excluded Russia from the SWIFT system, other countries also realized that excessive dependence on the dollar could make them hostage to US policies.

The Importance of Local Currencies: Countries like India, China and Russia are now beginning to prioritize trade in their own respective currencies. This not only reduces the demand for the dollar but also helps countries to preserve their monetary sovereignty.

How does the multi-currency trade model work?

Let's suppose India buys crude oil from Russia. Usually, it would have to pay in dollars, but now it wants the option to pay in rupees. But how would Russia then spend those rupees? If India pays China or the UAE in rupees, and those countries use it in India-dependent nations like Sri Lanka, Nepal or Bhutan, the utility of the rupee increases. Similarly, if China accepts yuan and Russia is paid in yuan, that currency can be utilized in China-Pakistan trade. This means a currency is not just about one country's need, its utility depends on its acceptance and distribution system.

Common Currency: A Difficult Path

Dr Nilanjan Ghosh, Vice President of Development Studies at ORF, says that at this stage, talking about a common currency is not easy. First of all, it requires fulfilling several criteria, such as financial and monetary similarity. There must be uniformity among all these countries. Financial and monetary similarity is an economic concept that explains the extent to which the financial and monetary policies of different countries or regions are similar or harmonious with each other. If we talk about the BRICS countries, they are all emerging economies, but their pace of economic development is different. For example, India's growth rate is higher than all other BRICS countries, even China. Therefore, to say that they will be able to implement this common currency right now is a distant prospect. Steps will have to be taken at many levels for this.

If in the future, countries of the Global South also start adopting a BRICS currency, it could genuinely become a challenge for the dollar, as India and China are now emerging as global powers in terms of GDP and trade volume. If a concrete agreement were to materialise between the BRICS and Global South nations, it could challenge the dominance of the US dollar. This is entirely speculative for now, as no common currency currently exists.

Akshay Ranade, an international relations analyst, says that if we look at the current context, it is not in a position to immediately challenge the importance of the dollar. As of today, this seems to be correct. There are two or three important reasons for this. The first is that the technology being transferred is a recognized technology throughout the world, including in Western countries. Whether it is SWIFT's technology or any other system, it is widely accepted.

The dollar is an inherently beneficial currency; this means the currency itself is an asset. Speaking of large countries, the Chinese currency is strong, but apart from the Euro or the Pound, there is no other currency strong enough to pose a challenge on its own. Even if a common payment system is formed, it will remain internally limited. Building this trust will take a significant amount of time. It certainly has symbolic importance. For example, India has not yet started this with BRICS as a whole, but has begun trading in local currencies with some other countries like Russia and Iran. This type of transaction reduces global pressures and sanctions.

BRICS can be a big step in this direction

Manoranjan Sharma believes that the proposed BRICS common payment system, BRICS Pay, could be a major step in this direction, which could challenge the global hold of the dollar. However, the differences in the levels of economic development among BRICS countries, and the differences in political ideologies of countries like China and India, do not make this process easy.

BRICS has previously achieved partial success in creating alternative financial structures, such as the BRICS Contingent Reserve Arrangement, the New Development Bank, and a common payment platform based on CBDCs (Central Bank Digital Currencies). Currently, the member countries are studying the format, operating system and management of BRICS Pay. Although its launch date is not yet set, BRICS Pay could arrive in the near future, and it is possible that this will cause a stir in the global financial landscape.

However, it is also important to understand that complex issues such as uneven levels of development, a lack of mutual trust, and the dollar's current overwhelming global presence could prevent this BRICS experiment from being completely successful. In this context, it would be fair to say that the BRICS common payment system is not a 'panacea' (a surefire cure), but it is certainly an important step towards challenging the existing system.

An Alternative System Risks Heightened Diplomatic Tensions

Could this alternative system create tension in the diplomatic relations of BRICS with the US and Western countries?

Dr Nilanjan Ghosh says, "Absolutely, it's possible. The US already views China as a major challenge, and China also wants to compete with the US. Therefore, US-China relations are already not smooth. Similarly, geopolitical tensions exist between Russia and the US. If BRICS creates an alternative system, it could further complicate their relations with the US. However, the equation with the European Union is slightly different."

As far as India is concerned, it has always adopted a balanced and issue-based diplomacy. India's position in this entire geopolitical and geo-economic landscape is quite unique. India has never blindly followed any single bloc, whether it be the West or Russia. For example, when the Russia-Ukraine war happened and the European Union imposed sanctions on Russia, India did not do so. Instead, India bought oil from Russia, which also benefited its domestic interests. But despite this, India's relations with the West did not sour. Therefore, I believe that India will maintain a balance in this new system as well and will maintain good relations with all sides.

Ranade says, "Today, I think its symbolic value is greater and until we can create a system—that is, until major countries can jointly develop a system that is trustworthy, widely accepted, and has a currency as influential as the dollar—it will remain merely symbolic. A question also arises: now that this is being discussed, and if we say this discussion is still about a distant prospect, don't you think a possibility of some tension or confrontation in political relations with the West, especially America, could arise? This initiative will be seen as a challenge to the institutions of America and the West."

Manoranjan Sharma says that the alternative economic and political framework proposed by BRICS (Brazil, Russia, India, China, South Africa) could create tension in relations with the United States and its Western allies. The main reason for this is that BRICS aims to challenge the dominance of existing Western-led institutions like the IMF and the World Bank, reduce dependence on the dollar, and promote a multipolar global governance. In the eyes of Western countries, these efforts are a direct challenge to the current Liberal International Order. Especially with the ongoing Ukraine war and trade conflicts, the aggressive anti-Western policies of Russia and China make the BRICS agenda even more controversial.

UPI: From Digital Payments to Digital Diplomacy

Digital payment systems like UPI are now becoming a part of digital diplomacy. India has expanded UPI to countries like Singapore, UAE, Bhutan, Nepal, France and Mauritius. If UPI succeeds internationally, it could make the Indian Rupee a viable alternative for transactions. It makes mobile-based currency transactions simple, secure and fast.

Is it technically feasible and secure to implement a digital platform like UPI at the BRICS level? Dr Ghosh says the biggest question is, who will lead this initiative? India has played a pioneering role in the UPI sphere; this is a 'first-mover advantage'. China also has its own UPI-like system. But the situation in the rest of the BRICS countries is not clear. If such a digital payment system is adopted at the BRICS level, India can certainly play the role of a technical leader. India has both the experience and the infrastructure.

Manoranjan Sharma believes that it is technically entirely possible and could also be strategically important to implement a system like India's Unified Payments Interface (UPI) at the BRICS level. By doing so, India could play a global leadership role in the field of digital payments. However, there are certainly challenges related to security concerns, strategic complexities and leadership. But if India tackles these challenges while making proper use of its technical expertise, it can play a strong and leading role in the global digital payment framework.

Akshay Ranade says, "I believe that this is certainly an opportunity. But at the same time, it is also a problem that BRICS is not a homogenous organisation. We also have our own bilateral issues with some of the countries in this group. In such a scenario, creating an institution that can officially handle all transactions is certainly a challenge. But I feel that there is an opportunity here as well."

India's Diplomatic Strategy

Manoranjan Sharma says that India currently faces the challenge of adopting a very complex and balanced diplomacy. On one hand, India wants to strengthen the voice of the Global South and is a supporter of multipolarity, while on the other hand, it also maintains strong strategic partnerships with countries like the US, the European Union, Japan and Australia, especially through platforms like the Quad. India's policy is based on strategic autonomy, meaning it neither fully aligns with the Western camp nor becomes part of a China-Russia-centric pole.

This Effort Is Regional For Now

Ranade believes, "We can market a technology like UPI very aggressively at the global level. This doesn't necessarily have to be at the BRICS level; it can be advanced bilaterally with various countries. If two countries decide to adopt this system, it is possible. Because many technologies like PayPal are very difficult to adopt. However, at a multilateral level, this would require a robust multilateral institution that can oversee all these transactions. Currently, no such institution exists. And I think that is the biggest hurdle.

The question is, will these countries be able to become part of such a transparent and trustworthy system? This seems a bit doubtful at the present time. Because the existing financial framework is quite secure and globally recognized. Another reason for this is that the currencies and countries that are already globally established have immense influence and trade volume. For a new institution to be created and to gain global trust would be a huge undertaking in itself. Therefore, as of today, this effort will remain limited to the regional level.

India is also advocating for the promotion of trade in local currencies and supports this idea. However, we are proceeding in this direction very cautiously because the idea of it being an immediate success does not seem realistic at present."

A lack of mutual trust is a big issue among BRICS countries

Will the new payment system being developed by BRICS be able to become a viable and trustworthy alternative to established mechanisms like SWIFT, especially in terms of security, transparency, and global acceptance?

Dr Ghosh says, "Security is the most critical aspect of this entire system. This will be the biggest challenge, especially because a lack of mutual trust among the BRICS countries is also an issue. Besides this, there is significant disparity in the level of technical capabilities among the BRICS nations. Although BRICS has adopted a strong stance on issues like terrorism, technical cohesion is still a distant goal. Therefore, until this trust deficit is bridged and technical uniformity is achieved, it will be difficult to create an alternative model to a global and recognized platform like SWIFT."

BRICS currency liquidity will remain a challenge

Will this BRICS initiative free the Global South, that is small and developing countries, from dollar dependence, or will they just become dependent on a new 'club'?

Dr Ghosh says, "We certainly do need an alternative currency. But it depends on the volume of mutual trade among the countries of the Global South. The liquidity of a BRICS currency would also be a major question. Until there is sufficient trade and investment among these countries, an alternative currency or payment system cannot be effective. And then the question will remain: will they truly be independent, or just become dependent on a new center of power?"

Ranade says, "If it is initiated at a pilot level for a specific commodity or sector, and we observe how that system works, then it can be gradually scaled up. But to assume that we will immediately create a common currency payment system does not seem possible right now. If we look, BRICS includes large countries like Russia, Brazil, India and China, and now some new members have been added who are also large and influential. In such a situation, it is natural for the question to arise: could smaller countries just be made part of a new dollar-like system of dominance?"

Because our stake is in both areas, maintaining good relations with major countries and, at the same time, increasing cooperation with the Global South. Therefore, no country will proceed in this direction very aggressively.

Adopt An Incremental Approach

Akshay Ranade believes, "Today, we don't even know its ratio of success. I think BRICS will adopt an 'incremental approach,' meaning it will move towards a common payment system by developing gradually, one that is flexible and allows member countries to join slowly. I think this will definitely take time. It won't be so easy that we can immediately set up a new system. But I am sure that someone will definitely start it as a pilot project for a specific sector or commodity, and from there, they will try to scale it up. But to believe that a common currency or payment system will be ready today is a bit of a distant prospect."

Directly challenging the global financial framework through such a system is a long-term strategy for now. However, if we develop it at a pilot level in a way that slightly increases our economic sovereignty and provides us with a bit of a protective shield from global pressures, then it should be seen not as a struggle for balance, but as a utility-based system.

(This article was translated for The Daily Jagran by Akansha Pandey.)