In the dynamic landscape of global trade, the recent surge in protectionist measures and currency manipulations has cast a significant shadow over the macroeconomic stability of India. As nations increasingly prioritize domestic interests, erecting trade barriers and engaging in strategic currency interventions, the repercussions for India’s economic equilibrium become pronounced. Protectionist policies, often manifested through tariffs and non-tariff barriers, threaten to impede India’s access to international markets, disrupting established supply chains and hindering export-driven growth. Simultaneously, currency manipulations, whether deliberate or circumstantial, can lead to fluctuations in exchange rates, adversely impacting India’s balance of payments and the overall stability of its economy. This complex interplay between protectionism and currency manipulations poses challenges for policymakers in navigating the delicate balance between fostering domestic industries and ensuring a globally competitive economic environment. As India grapples with the evolving dynamics of international trade, a comprehensive understanding of these phenomena becomes imperative for formulating resilient macroeconomic policies that can withstand the uncertainties arising from a rapidly changing global economic landscape. In this intricate web of challenges, the path to sustaining macroeconomic stability for India hinges on strategic responses that align with the nation’s economic objectives and navigate the intricate web of global economic forces.
Tag: Effects of liberalization of economy.
Decoding the Question:
- In the Introduction, write about protectionism and currency manipulation.
- In Body,
- Reasons for increased protectionism and currency manipulation.
- Discussing the impact of protectionism and currency manipulation is affecting macroeconomic stability of India.
- Conclude with suggesting ways to counter these menaces for global economic governance.
Answer:
Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition. E.g.: The U.S.A. has placed tariffs on billions of dollars worth of goods from around the world, recently being 25% tariffs on all steel imports, and 10% on aluminum.
Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective, such as stimulate exports and retard imports. E.g.: China regularly intervenes to prevent its currency Renminbi (RMB) from appreciating relative to other currencies.
Increasing trend of protectionism and currency manipulations:
- Recently, the trade war between China and the USA led to a rise in protectionist policies and impacted developing countries like India on its macroeconomic policies.
- The USA removed India from the Generalized System of Preferences (GSP) list.
- Withdrawal of the USA from the Trans-Pacific Partnership (TPP).
- Other European countries are also getting involved in these trade wars.
- India’s withdrawal from signing the Regional Comprehensive Economic Partnership (RCEP) treaty.
The effects of Protectionism and Currency Manipulation on Macro-Economic Stability of India:
- Inflation: Currency manipulation (here depreciation) results in costlier imports which limits the Consumers’ choice and they end up paying more for the limited quantity of goods and products, thus causing inflation. Similarly, protectionism also limits the choices of consumers.
Example: The Indian rupee depreciated against the US dollar from around 63 rupees per dollar in 2017 to over 75 rupees per dollar in 2020. This depreciation increased the cost of imported goods, such as crude oil, machinery, and electronics, which contributed to inflation in the country.
- Global contraction in trade: Protectionism led to a slowdown in the global economy. Decreased export from India will result in declining forex reserves and can potentially lead to a balance of payment crisis and devaluation of currency.
Example: During the global financial crisis after covid-19 in 2020-2021, India’s exports, which heavily rely on global markets, experienced a sharp decline by around 13% in 2021. This decline in exports affected India’s economic growth and macro-economic stability.
- Currency War: The policy response of central banks globally to counter the effect of trade war is turning into a currency war.
Example: In response to the appreciation of the Chinese yuan, several countries, including India, actively managed their exchange rates to remain competitive. India’s central bank intervened in the foreign exchange market to prevent excessive appreciation of the rupee, thereby participating in the currency war to safeguard its export competitiveness.
- GDP: Protectionism leads to increased import costs as manufacturers and producers have to pay more for equipment, commodities, and intermediate products from foreign markets. The Indian Consumer Price Index (CPI), a measure of inflation, increased from 3.5% in 2019 to 6.2% in 2020.India’s exports contracted by 7.8% in the fiscal year 2020-2021, while imports declined by 18% during the same period.
Example: The COVID-19 pandemic led to disruptions in global supply chains, affecting the availability and prices of essential commodities.The imposition of tariffs by the United States on Indian steel and aluminum exports in 2020 negatively impacted India’s steel industry.
- Employment: Protectionism is not only about restricting the flow of goods and services, but also the skilled human resource. Any restrictions on this will not only promote unemployment but will also hamper growth.
Example: After covid-19 the tightening of visa regulations and restrictions on the movement of skilled professionals in countries like the United States, U.K.,France, and China have affected Indian IT and manufacturing companies. India loses 60% employment during this period.
- Industrial Growth: Protectionism may promote inefficiencies by the infant industry as it will have no incentive to make itself efficient through use of technology and long-term investments.
Example: In 2021-2022 protectionist measures, such as increased import 7% duties on automotive components or stricter regulations on foreign automobile manufacturers, can impact the supply chain and efficiency of the automobile industry in India states like Maharashtra, Gujrat, karnataka, tamilnadu etc.
- Current Account Deficit: In the absence of a robust export base, the intermediate goods that form part of the global supply chain becomes more expensive because of protectionism, leading to widening CAD.
Example:India’s current account deficit widened to 2.1% of GDP in the fiscal year 2020-2021. The increase was partly driven by higher import costs due to protectionist measures, such as import tariffs on certain goods. The widening CAD can put pressure on the country’s foreign exchange reserves and currency stability.
Conclusion
Hence, The recent phenomena of protectionism and currency manipulations in world trade pose significant challenges to the macroeconomic stability of India. Policymakers must carefully navigate the implications of these phenomena, striking a balance between protecting domestic industries and fostering an open and competitive global trade environment. By adopting prudent policies and pursuing international cooperation, India can strive to maintain macroeconomic stability and foster sustainable economic growth in an increasingly interconnected world.
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