GS3 PYQ (Mains Answer Writing): Currency Manipulation | Indian Economy for UPSC CSE PDF Download

How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC MAINS GS3 )

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, recent 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.
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 (here depreciation) 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.
• GDP: 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.
• 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.
• 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.
• Trade protectionism is re-emerging as a controversial tactic among policymakers and economists in enhancing a nation’s economic well-being. Trade protectionism has been used with the intent of helping a nation recover from an economic downturn. Of-late, it has been adopted by the western countries, particularly to nullify the effect of currency manipulation by China in recent years, which has flooded their markets with cheap Chinese products.

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. 

Way forward

of late, India’s has also been forced to resort to protectionism. In the recent budget, government has increased domestic content requirement for many industries and raised tariffs and duties to incentivize domestic production. While, it may have its associated cost-hikes, but in the present scenario, it is forced upon India to adopt such policy.

Topics Covered - Effects on Macroeconomic Aspects of Currency.