Impact of Trade War on Indian Economy

Reference

• In recent years, the trade war between major economies like the US and China has caused instability in the global trade system. Due to globalization, this instability is likely to have an impact on the Indian economy as well.

What is a trade war?

• A situation of trade war arises when countries try to put pressure on each other by increasing import duties.
• For example, the ongoing tariff war between the US and China has disrupted the global supply chain. This has created both new opportunities and challenges for emerging market countries like India by increasing the demand for alternative suppliers.

Possible reasons for the increase in Indian imports due to the current trade war

Shifting from China as an alternative supply hub

• Western countries like the US want to reduce their dependence on China. This has led to some companies looking at India as a manufacturing and supply hub.
• However, in the short term, India still has to depend on China for essential raw materials and products.

Limitations of manufacturing base

• India's manufacturing sector is not yet developed enough to fully meet the domestic demand. This may increase the import of high-tech products, electronics, machinery, etc.

Rupee devaluation and oil imports

Global instability has weakened the value of the rupee, which may increase the burden on imports of oil and other essential commodities.

Looking for alternative markets

Due to tensions between China and the US, many countries are looking at India as an alternative trading partner. This may increase India's exports, but imports for high-quality inputs will also increase.

Possible impact on Indian economy

Dumping of cheap products

• Due to the trade war, countries like China, which are unable to export to the US market, may divert their excess goods to developing countries like India.
• This may adversely affect domestic industries by dumping cheap Chinese-made products in India.

Import growth pressure

• The US-China trade tariffs could push companies away from China to alternatives like India, which could increase demand for some technical and industrial goods in India's imports.
• A fall in global prices could lead to India getting imports at lower rates, which could lead to import growth.

Increase in trade deficit

An unexpected increase in imports could widen India's trade deficit, which could also put pressure on the current account deficit and the exchange rate.

Impact on domestic MSMEs

Dumping of cheap imported products in India could reduce the competitiveness of domestic micro, small and medium enterprises (MSMEs), which could also have a negative impact on employment.

Potential opportunities for India

Increase in export opportunities

The trade war could lead countries like the US to consider importing more from India, especially in sectors such as IT services, pharmaceuticals, auto parts.

India's entry into the global supply chain

India may get an opportunity to get a place in the global supply chain under the 'China + 1' strategy.

Promotion of domestic production

• If India strengthens its industries under the policy of self-reliance (Atmanirbhar Bharat), then domestic production can be promoted in place of imports.

India's policy response

• Promotion of 'Make in India' and 'Atmanirbhar Bharat' campaigns: The government is trying to reduce dependence on imports by promoting domestic production.
• PLI Scheme (Production Linked Incentive): This is promoting domestic manufacturing and encouraging import substitution.
• New Foreign Trade Policy (2023): It aims to make India an integral part of the global supply chain.
• Change in tariff policy: Increase in customs duty to discourage unnecessary imports.
• FTA review: Reviewing free trade agreements to ensure balanced import-export.

Suggestions

• Development of technological capabilities: India needs to develop the capability to manufacture high quality products.
• Need to improve logistics and infrastructure: Without world-class infrastructure, it will be difficult to attract global companies.
• Policy stability and ease of doing business: Clarity and stability in policies are necessary to attract investment.

Conclusion:

The trade war has brought both opportunities and challenges for India. In the short term, an increase in imports is likely, but in the long term, if India strengthens its manufacturing capabilities, it can reduce the country's dependence on imports and play a major role in the global supply chain.