Daily Mains Answer Writing - PrayaasPrayaas – February 2019Prayaas – February 2019 – Week 2

Daily Answer Writing for IAS Mains Examination – PRAYAAS Series – Day 56

Q. How would the recent phenomena of protectionism and currency manipulation in world trade affect macroeconomic stability of India? [Answer in 250 Words]

MODEL HINTS

Macroeconomic Stability

Impact of protectionism and currency manipulation on Macroeconomic Stability of India

Impact of protectionism and currency manipulation on Macroeconomic Stability of India

INTRODUCTION

Description of Protectionism
  • Protectionism, refers to the practice of limiting of trade between countries by implementing tariffs on imported goods, restrictions (ex: Visas etc.), quotas and other regulations imposed by the governments.
  • Currency Manipulation on the other hand does not puts trade restrictions directly. It is a tactic to appreciate or depreciate one’s own currency to create market distortion in one’s own favor.
  • Primarily, such policies are incorporated in a country to safeguard the interests of the local producers, businesses, and workforce pertaining to the import-competing sector from foreign players.
  • However, in recent times it has become an instrument for anti-globalization and political dominance.
Some instances of Protectionism & Currency Manipulation in recent times
  • BREXIT
  • Currency War between USA and China
  • Visa Restrictions by many developed countries (H1B by USA)
  • Phytosanitary Measures by European Countries
  • Etc.

BODY

Impact on India
  • These policies are likely to have multiple ramifications for the macroeconomic stability of India. This can be explained as follows.
National Income
  • India is one of the major exporter of services to the world. Indian professionals like software engineers, doctors etc. work in different countries like USA, European countries etc.
  • While providing these services they earn a decent income which they send back home in the form of remittances – which forms a nearly 4 percent of the GDP and a significant part of India’s Balance of Payment (BoP).
  • Therefore, protectionist policies such as visa restrictions etc. are likely to have an impact on National Income as well as BoP.
Export Industry
  • The recent protectionist measures and currency manipulation will also have an adverse impact on the export competitiveness of the Indian exports which can hit the export industry.
  • On one hand it will have an impact on the National Income, while on the other hand it can lead to depreciation of rupee which can further lead to higher import bill and consequently a higher Current Account Deficit and inflation (due to expensive imported products).
  • It is also possible that some of the export units might have to shutdown that can cause unemployment as well.
Fiscal Pressure
  • In the wake of unemployment, inflation, and slow industrial (export) output, the government might have to spend more on welfare schemes and also to revive the export industry.
  • Amidst this, the government expenditures are likely to rise and may lead to fiscal deficit.

CONCLUSION

  • India has opposed the protectionist policies time and again.
  • In the interest of the global welfare especially of the developing and under-developed countries, it is important that India gather support from other countries as well and uses international platforms (like WTO) to get itself heard.
  • Meanwhile bilateral cooperation with many countries can help India to maintain the pace of its exports (goods as well as services).

 

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