How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?. (UPSC IAS Mains 2018 General Studies Paper – 3)
Protectionism refers to government actions and policies that restrict or restrain international trade. Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies. In 2018-19, the global economy witnessed a spurt in both of these phenomenons. Both protectionism as well as currency manipulations are considered as trade distortion practices and are counterproductive to global free trade. These not only have impact on global economy but also affect macroeconomic stability of individual economies.
The effects of these phenomena on the macroeconomic stability of India are:
- Inflation: Currency manipulation results into 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. Overall, global competition is a key factor in keeping the price of numerous goods and products down and gives consumers the ability to spend.
- Economic growth: Protectionism leads to increased import costs as manufacturers and producers have to pay more for equipment, commodities, and intermediate products from foreign markets. This will lead to decrease in real GDP.
- 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 the growth.
- Impact on Industries: 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.
- Impact on Exports: In the successive monetary policies in 2018-19, RBI has observed that protectionism poses challenge to India’s growth rate, because it affects the demand of Indian exports, especially in the textile, pharmaceutical, gems-jewellery and service sector. It has also affected the employment generation capacity of the sectors.
- Current Account Deficit: In the absence of robust export base, the intermediate goods that form part of the global supply chain becomes more expensive because of protectionism, leading to widening CAD. Higher CAD further puts the rupee under pressure and raises the cost of overseas borrowing.
Since, protectionism and currency manipulations do not seem to halt in coming future, it is necessary for India to walk through these murky waters carefully. Indian policy makers need to be innovative and flexible in responding to the current uncertainties of the global world.
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