Recent trends suggest a severe slowdown in the global economy, most seriously in the advanced countries. Two big economies have already entered the recession phase, technically.
The United States appeared to escape the recession but ended with a severe economic slowdown. With China also slowing down sharply, there are apprehensions that globalisation, which helped many economies to grow, appears to be showing the opposite impact. This is forcing some countries to de-globalise by introducing quantitative and qualitative restrictions or introducing/increasing import duties.
A strong believer in market economy philosophy, the US is restricting capital movement by banning US investments in China, especially in sensitive technologies like computer chips, and has introduced a licence system for investments in other technology sectors in China. These might offset the gains from globalisation most countries have benefitted from. Importantly, the situation has forced other emerging market economies to introduce restrictions to protect domestic industry from external competition.
What has worsened the de-globalisation process is the Ukraine-Russia war. It has disturbed the oil and agriculture-related markets where these countries were net exporters. Moreover, disruptions to global supply chains since Covid-19 have added additional pressure on international trade.
The WTO referred to these points in one of its recent reports, clearly suggesting the global trade slowdown could be structural and could take long recovering.
Globalisation helped India immensely---especially in services sectors where it has a comparative advantage---significantly increasing its trade/GDP ratio. A major reform was sharply reducing import duties from over 300% to under 10%. However, following current global developments, India appears to have been forced to increase import duties.
It has also banned wheat exports last year and rice recently. What surprised many was the ban on importing laptops, tablets and personal computers, which now require a Valid License for Restricted Imports. The given reasons were security concerns, increasing trade deficit with China and encouraging domestic manufacturing as part of Aatmanirbhar Bharat. Do these policies help India achieve its trade objectives?
Going by experience, one could theoretically and empirically argue that such protectionist policies do not yield intended results but could lead to unintended disruptions and create supply bottlenecks for domestic production.
These policies could lead to an unintended rise in the domestic cost of production and weaken the limited competitiveness edge that some Indian companies have in the global market.
India's service sector has been competitive globally mainly due to cost and skills advantage, which is absent in manufacturing. Import restrictions and duty increases would only add to the woes of domestic manufacturing in the medium to long run (although, in the short term, it could be advantageous for a few companies).
There were arguments on the rice and wheat bans that India could use these items for strategic purposes, similar to countries using oil, technology and other products for their strategic purposes. Such policies could have huge repercussions on domestic agriculture and food processing industries, domestic food prices, and the rural economy.
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However, this author feels these policies could have more to do with the expectations on production in the current year, with the risk of El Nino looming heavily on this year's food production. With the recent jump in food inflation and the expected slowdown in overall agricultural output, the government appears to have played safe to dampen any expectations of prolonged food inflationary pressures, especially in the election year.
Another issue discussed more on the international trade side is the rupee and the de-dollarisation issue. Even in the recent BRICS joint statement, the member countries appear to have pushed for trade in bilateral currencies and work for de-dollarisation.
Like the other BRICS member countries, RBI has already allowed Vostro account for many foreign Russian banks to settle trade in their respective domestic currencies. De-dollarisation has been in discussion now and then; it is important to understand that even the bilateral rates are to be determined by their cross rates with the US dollar as bilateral currencies are not traded in the foreign exchange markets.
Or one may have to work out the fixed rate between the two countries in the short term. However, one clear advantage of trading in bilateral currencies is that it would reduce significantly the foreign exchange market transaction cost. However, the risks could be unknown and substantial.
To sum up, the various policies adopted on the trade side have positive intentions of enhancing domestic production, and it could lead to a reduction in the countries' potential growth.
Any uncertainty and ambiguity regarding these policies could discourage the activities of foreign and domestic investors. Instead, India needs to go for structural reforms, especially reforms of factors which make domestic manufacturing uncompetitive.
(Views are personal.)
N R Bhanumurthy
Vice Chancellor
Dr BR Ambedkar School of Economics University, Bengaluru
(nrbmurthy@gmail.com)