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Question – How will the recent phenomenon of protectionism and currency manipulation in world trade affect India’s macro-economic stability? – 7 May
Protectionism refers to governmental actions and policies to restrict or control international trade.( E.g.: The U.S.A. has placed tariffs on billions of dollars worth of goods from around the world, recent being 25% tariffs on all steel imports, and 10% on aluminum.). Protectionism is used to help a nation recover from an economic downturn. Currency manipulation refers to the actions taken by various governments to change the value of their currencies relative to other foreign currencies (E.g.: China regularly intervenes to prevent its currency Renminbi (RMB) from appreciating relative to other currencies.). Protectionism as well as currency manipulation is seen as an adverse factor for distortion trade practices and global free trade.
The impact of these events on India’s macroeconomic stability is:
- Inflation: Currency manipulation (usually depreciation) is done as a result of expensive imports that limit consumers’ choices and they are forced to pay more for limited quantities of goods and products, resulting in inflation. Similarly, protectionism also limits consumers’ choices. Overall, global competition is an important factor in controlling the price of many goods and services and provides consumers with the ability to spend according to their discretion.
- Economic Growth: Protectionism leads to an increase in import costs, as manufacturers and producers have to pay more for equipment, goods and intermediate products from overseas markets. This will reduce real GDP.
- Employment: Protectionism is not only about limiting the flow of goods and services, but also refers to skilled human resources. Any restriction on this will not only boost unemployment, but will also hamper development.
- Current Account Deficit: In the absence of a strong export base, intermediate goods that form part of the global supply chain become more expensive due to protectionism, leading to a higher current account deficit. High current account deficit adds further pressure to the rupee, further exacerbating the cost of foreign borrowing.
- Impact on Industries: Protectionism can promote inefficiencies of the new industry as it will have no incentive to make itself efficient through the use of technology and long-term investment.
- Impact on exports: In monetary policies in 2018-19, RBI consistently observed that protectionism challenges India’s growth rate, as it affects Indian exports, especially in the textiles, pharmaceuticals, gems and jewelery sector. It has also affected employment generation potential.
Since protectionism and currency manipulations do not appear to stop in future, it is necessary for India to carefully avoid these perverse dilemmas. Indian policy makers have to be innovative and flexible in response to the current uncertainties of the global world.