What impact might the current global trade phenomena of protectionism and currency manipulation have on India’s macroeconomic stability? (250 words) [UPSC 2018]
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Model Answer
Introduction
Protectionism refers to the use of tariffs and non-tariff barriers to safeguard local industries from foreign competition. For example, the U.S. imposed 25% tariffs on steel and 10% on aluminum imports. Currency manipulation occurs when a central bank intervenes to devalue its currency, boosting exports by making local goods cheaper. These practices, seen recently in global trade, distort free trade and have implications for economies like India.
Impact of Protectionism on India
Reduction in Exports:
Protectionist policies reduce demand for Indian exports in sectors such as textiles, pharmaceuticals, and gems-jewelry. The rise in tariffs increases the price of Indian goods in foreign markets, reducing their competitiveness. For example, U.S. tariffs negatively impacted Indian textile exports (Source: Ministry of Commerce, India).
Opportunities in New Sectors:
On the flip side, Chinese tariffs on U.S. goods have created opportunities for India to export soybeans and medical equipment to China (Source: World Trade Organization). Countries seeking alternatives to China may look toward India, boosting exports in certain sectors.
Higher Import Costs and Inflation:
Protectionism increases the cost of intermediate goods, leading to higher input costs in India’s manufacturing sector. This, in turn, raises inflation and reduces real GDP growth. The widening Current Account Deficit (CAD) further stresses India’s economy (Source: Reserve Bank of India).
Impact of Currency Manipulation
Impact on Exports:
Theoretically, a weaker rupee should boost Indian exports. However, due to ongoing protectionism and weaker currencies in competing markets (such as China’s yuan), India’s export growth has been subdued (Source: IMF).
Increased Forex Volatility:
Currency manipulation heightens volatility in foreign exchange markets, impacting India’s foreign reserves and the balance of payments. Unstable currency levels can weaken investor confidence and affect capital inflows (Source: Ministry of Finance, India).
Conclusion
Protectionism and currency manipulation have mixed impacts on India’s macroeconomic stability. While protectionism offers new export opportunities, it also hinders growth in key sectors. Currency manipulation, on the other hand, exacerbates forex volatility. India must focus on boosting self-reliance to counter these external shocks.
Impact of Protectionism and Currency Manipulations on India’s Macroeconomic Stability
Introduction
Recent trends in protectionism and currency manipulations in global trade have significant implications for macroeconomic stability in India. These phenomena influence trade dynamics, inflation, and economic growth.
Protectionism
Protectionism involves raising trade barriers like tariffs and import quotas. For India, this could result in higher costs for imported goods and raw materials. For example, the US-China trade war saw the imposition of tariffs, which affected global supply chains and led to increased costs for Indian manufacturers relying on imported components.
Protectionist policies in major economies can restrict India’s exports. India’s textile sector faced difficulties when several countries imposed anti-dumping duties on Indian textiles, impacting export volumes and earnings.
Reduced trade volumes can slow down economic growth. For instance, India’s economic growth could be constrained if key markets adopt protectionist measures that diminish demand for Indian goods and services.
Currency Manipulations
Currency manipulations involve artificially altering exchange rates to gain trade advantages. This can lead to increased exchange rate volatility, impacting India’s trade balance. For example, if major economies engage in currency devaluation, it can lead to volatility in the value of the Indian Rupee (INR), affecting export competitiveness and import costs.
A weakened INR due to external currency manipulations can lead to imported inflation. For instance, rising costs of imported crude oil can lead to higher domestic fuel prices, impacting inflation and cost of living in India.
Currency instability can also affect capital flows. Investors may be deterred by the risks associated with currency volatility, potentially leading to reduced foreign direct investment (FDI) and portfolio investments in India.
Recent Examples
Conclusion
Protectionism and currency manipulations pose risks to India’s macroeconomic stability by affecting trade volumes, inflation, and capital flows. India’s economic policymakers need to navigate these challenges through strategic trade policies and currency management to ensure sustainable growth and stability.