November , 2018
Trade war, rupee depreciation, and the India economy
13:15 pm

Kishore Kumar Biswas

The trade war, rising rupee exchange rate, rising current account deficit, and the like have been major topics of concern for Indian economy watchers. They have sparked contentious political debates. While these are important issues, the larger focus on employment generation should not get diluted.

The present international trade order is highly influenced by the U.S. economy under the Donald Trump administration. Before becoming president, Trump promised to increase employment opportunity of the Americans in their own country and lower their dependence on imports. In the first year of Trump administration, the trade deficit reached the highest level to $ 800 billion. As a result, the Trump administration imposed tariff imports in early March 2018 on steel and aluminium. It was mainly seen to be directed at Chinese imports. This is because Trump claimed that

China had been involved in “unfair practices” in foreign trade. Within a short span of time, China adopted retaliatory imposition of tariff on American imports and that was the beginning of the trade war.

Is thereeconomic logic behind U.S.' imposition of tariff?

It is not a recent phenomenon that the current account deficit (CAD) of the US economy is negative. It has been negative (except some periods) since the 1980s. The main reason behind this its deficit in goods trade. The service trade was positive and increasing from 1980s. But negative goods sector outweighed positive service sector trade. Professor BiswajitDhar at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, shows (EPW, September, 15) the trend in the trade amount with China by using the US Census Bureau of the US Department of Commerce. Dhar shows that trade deficit with China has been a negative for the last three decades. By 1990, it reached $10 billion. It reached $100 billion within a decade. In 2017, US’s trade deficit with China was $375 billion but its overall trade deficit stood at $ 775 billion. Dhar pointed out that in such a situation if all imports from China is stopped, the US will still be left with a gaping hole in its trade balance. Therefore, China is not the only factor for the US’ mounting trade deficit.

The main reason behind US’ high trade deficit, as pointed out by Dhar, is that the US economy is high-consumption driven. As a result, savings are low. The trade deficit of an economy is equal to the savings-investment gap. Presently, the US economy is known for its low savings, at around 18% of the GDP. The saving-investment gap is higher in the US. Therefore, trade deficit is higher. It is known that trade deficit is equal to saving-investment of an economy. The US has to borrow money from international capital market.

The problem started when the capital market itself was in stress when global financial crisis started in 2007-08. Then, how can the nature of consumption be changed in the US is a question. In this situation, the US policy of imposition of higher tariff may not be fruitful.

Exchange rate of rupee is rising

The rapid fall of price of rupee is big problem for the Indian economy. In April 2018, price of $1 was Rs. 65 but in September 2018 that climbed Rs. 73. Higher exchange rate means import price will be higher. It might increase inflation and that in turn, will make the economy less competitive. On the other hand, if inflationary pressure is high, exports should be the gainer. But practically, this does not happen. As studies show that in this situation, importers bid for re-pricing of import goods. But the net result depends on the relative strength of the importers and exporters.

The Indian rupee is not only depreciating in terms of the US dollar but also other currencies like the Euro, Yen, and Pound Sterling. It hasn’t depreciated against the Argentinean Peso and Turkish Lira. That is why India has to think of its internal weakness. Rising oil price is a problem and at the same time, India’s huge dependence on imported oil has made the matter worse. At the same time, out-flow of capital is also a factor for rising exchange rate of rupee. The foreign investors park money in other countries when the Indian financial sector is in problem, further causing depreciation of the rupee. Additionally, the weak performance of a portion of corporate, banking sector, and other financial sector drag down the strength of the rupee.

India’s role in this context

To have a good share in the international trade, India must be highly competitive. The country is yet to get the benefit of exporting goods where it is a comparativeadvantage. This sector is labour-intensive. India is not leading in exports, garments, electronic items, leather products, handicraft items, etc. in the international market. A good export strategy would help in earning forex and boost the rupee. Further, India needs to have a robust internal marketing strategy and improve mass consumption of domestic products. A long-term vision of the economy with fixed-time deliverables is crucial for this.



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