Model Answer
0 min readIntroduction
The post-Cold War era largely championed free trade and multilateralism, fostering global economic integration. However, the world is now witnessing a significant retreat from this paradigm, moving towards protectionism and bilateralism, characterized by increased tariffs, non-tariff barriers, and preferential agreements between fewer nations. This shift, intensified by geopolitical tensions and the COVID-19 pandemic, presents both formidable challenges and unique opportunities for the Indian economy, which has long relied on global trade for its growth trajectory. India, as a major emerging economy, must strategically adapt its policies to navigate this evolving global trade landscape and sustain its economic development.
Challenges for the Indian Economy
The global pivot towards protectionism and bilateralism poses several critical challenges for the Indian economy:
- Reduced Market Access: Higher tariffs and non-tariff barriers (like stricter quality standards and environmental regulations such as the EU's Carbon Border Adjustment Mechanism) in major markets threaten India's export competitiveness. Sectors like textiles, gems, electronics, leather, and steel are particularly vulnerable. For instance, increased US tariffs on certain Indian goods can directly impact these industries.
- Supply Chain Disruptions: The trend of reshoring, near-shoring, and "friend-shoring" by developed nations can fragment global supply chains, increasing input costs for Indian manufacturers, especially in electronics, defence, and renewable energy, where India has import dependencies.
- Impact on Services Exports: Developed economies are increasingly imposing restrictive measures like stricter H-1B visa norms and data localization requirements, which can erode India's competitive edge in the global IT and services sector.
- Investment Uncertainty: Geopolitical tensions and unpredictable trade policies can deter foreign direct investment (FDI) into India, affecting long-term investment commitments.
- Diminished Multilateral Influence: The weakening of multilateral institutions like the WTO limits India's ability to advocate for equitable trade frameworks and reforms, as major powers increasingly resort to unilateral measures.
- Industrial Competitiveness: Rising input costs due to supply chain disruptions and limited access to advanced technologies can impact the competitiveness of Indian industries.
Strategies to Meet These Challenges
India needs a multi-pronged approach combining domestic reforms and proactive international engagement:
1. Enhancing Domestic Competitiveness and Self-Reliance:
- Production Linked Incentive (PLI) Scheme: Expanding and effectively implementing the PLI scheme across key sectors (e.g., electronics, pharmaceuticals, automobiles, textiles) can boost domestic manufacturing, reduce import dependence, attract investment, and enhance export capabilities.
- Infrastructure Development: Continued investment in robust infrastructure through initiatives like the Gati Shakti National Master Plan and logistics corridors can reduce costs and improve the efficiency of supply chains.
- Ease of Doing Business: Further streamlining regulatory processes, reducing compliance burdens, and improving the overall business climate will attract both domestic and foreign investment.
- Skill Development and R&D: Investing in advanced skill sets, particularly in high-tech manufacturing and digital sectors, and promoting research and development will foster innovation and value-added production.
2. Proactive Trade Diplomacy and Diversification:
- Diversification of Export Markets: India is actively working to reduce over-reliance on traditional markets and explore new opportunities across Asia, Europe, Africa, and Latin America. This involves identifying 40 major importing countries to expand market reach.
- Strategic Free Trade Agreements (FTAs): Rapidly concluding and leveraging FTAs with key strategic and economic partners (e.g., UAE, Australia, UK, EU, EFTA, Canada, GCC, and EAEU) can secure preferential market access and integrate India into new supply chains. India recently signed the India-UK Comprehensive Economic and Trade Agreement (CETA) and the India-EFTA Trade and Economic Partnership Agreement (TEPA).
- Strengthening Global Value Chains: Positioning India as a reliable alternative in "China-plus-one" strategies, attracting global companies, and promoting value addition beyond traditional markets.
- Focus on Services and Digital Trade: Leveraging India's strong services sector, including IT and digital trade, and advocating for favorable international norms for these sectors.
- Calibrated Protectionism: While advocating for free trade, India can strategically use tariffs and other measures to protect nascent domestic industries, provided these are time-bound and aimed at fostering global competitiveness.
Conclusion
The global shift towards protectionism and bilateralism presents significant headwinds for the Indian economy, primarily through restricted market access, disrupted supply chains, and investment uncertainties. However, it also offers a renewed impetus for India to strengthen its domestic manufacturing base and diversify its trade relationships. By strategically leveraging initiatives like the PLI scheme and Make in India, investing in infrastructure and skills, and actively pursuing comprehensive Free Trade Agreements and market diversification, India can enhance its resilience. A calibrated approach balancing domestic needs with proactive global engagement will be crucial for India to not only mitigate these challenges but also emerge as a more self-reliant and influential player in the evolving global economic order.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.