Mains Paper 2: IR | Effect of policies and politics of developed and developing countries on India’s interests.
From UPSC perspective, the following things are important:
Prelims level: Currency Manipulation
Mains level: Impact of unilateral moves by US on India and global economy
- The uncertainties of US Treasury Department that it would be adding India to the list of potential currency manipulators countries or in the watch-list is often seen in news.
- All this comes against the backdrop of growing global trade tensions.
What is Currency Manipulation?
- Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective.
- The typical claim – often doubtful – is that countries manipulate their currencies in order to make their exports effectively cheaper on the world market and in turn make imports more expensive.
Assessment Criteria used by US
- The US Treasury has established thresholds for the three criteria.
- First, a significant bilateral trade surplus with the US is one that is at least $20 billion;
- Second, a material current account surplus is one that is at least 3% of GDP; and
- Third, persistent, one-sided intervention reflected in repeated net purchases of foreign currency and total at least 2% of an economy’s GDP over a year.
- The Treasury’s goal is to focus attention on those nations whose bilateral trade is most significant to the US economy and whose policies are the most material for the global economy.
India in the Watch-list
- The US Treasury, in its report, said no major trading partner met the criteria to be designated as manipulating its currency.
- It has kept India, China, Japan, South Korea, Germany and Switzerland on the monitoring list.
- It said that India’s circumstances have shifted markedly, as the RBI’s net sales of forex over the first six months of 2018 led net purchases fall to $4 billion, or 0.2% of GDP.
- The rupee has depreciated by 13.05% this fiscal.
Do India need to worry?
- India has a goods trade surplus with the US of $23 billion in 2017 compared to $375 billion trade surplus with China.
- India is set to import $2 billion of crude oil and around $2 billion of LNG from the US
- Growing energy imports can reduce the surplus to below $20 billion.
- India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other.
- India being on the watch list could restrict the RBI in the foreign exchange operations it needs to pursue to protect financial stability.
- This comes when global capital flows threaten to overwhelm domestic monetary policy.
- The two most obvious consequences could be an appreciating rupee as well as excess liquidity that messes with the interest rate policy of the RBI.
- Indian policymakers have to be sensitive for the unpredictable nature of policy-making in the US under Trump, especially concerning global trade.