How would the recent phenomena of protectionism and currency manipulations in world trade affect the macroeconomic stability of India?

GS 3

Economy

2018

15 Marks

The global resurgence of protectionism and currency manipulations in 2024-25 presents significant macroeconomic challenges for India, requiring strategic policy responses to maintain economic stability.

Global Protectionism and Currency Manipulation Flow

Impact of Protectionism on Indian Economy

India's merchandise exports declined to $437.1 billion in FY24 due to rising global tariffs and trade barriers
Key sectors like IT services, pharmaceuticals, and textiles facing reduced market access
US-China trade war spillovers affecting Indian exporters through supply chain disruptions
Non-tariff barriers increasing compliance costs for Indian manufacturers
Trade diversion favoring countries with preferential trade agreements

Sector	Export Impact (%)	Key Challenge
IT Services	-8.2%	H1-B visa restrictions
Textiles	-12.5%	Higher tariffs in EU/US
Pharmaceuticals	-6.8%	Regulatory barriers
Auto Components	-15.3%	Supply chain disruption

Currency Manipulation Effects on Macroeconomic Indicators

Exchange Rate Volatility
- Rupee depreciated to ₹83.12 per USD by end-2024, highest ever recorded
- Artificial currency devaluations by major economies creating competitive disadvantage
- Impact on India's $648 billion forex reserves requiring active RBI intervention
- Import cost inflation affecting essential commodities and crude oil
- Current Account Deficit widened to 2.8% of GDP in Q2 FY25
Inflationary Pressures
- Imported inflation through higher input costs affecting manufacturing
- Retail inflation touching 6.2% in October 2024, above RBI's comfort zone
- Core inflation remaining persistently high due to supply chain costs

Policy Responses and Stabilization Measures

RBI's Monetary Strategy
- Maintained repo rate at 6.50% to balance growth-inflation dynamics
- Enhanced forex market interventions through dollar-rupee swaps
- Implementation of Local Currency Settlement System with trading partners
- Strengthened External Commercial Borrowing guidelines
Government Initiatives
- PLI schemes worth ₹1.97 lakh crore to reduce import dependence
- Accelerated India-UAE CEPA implementation generating $2.5 billion additional trade
- Enhanced focus on Atmanirbhar Bharat to build domestic supply chains

Rising protectionism necessitates India's continued emphasis on diversifying trade partnerships while strengthening domestic manufacturing capabilities through strategic initiatives like the National Manufacturing Policy to ensure long-term macroeconomic resilience.

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