Q2. What are the challenges before the Indian economy when the world is moving away from free trade and multilateralism to protectionism and bilateralism? How can these challenges be met?
Possible Introductions
Definitional framing:
Free trade and multilateralism, represented by institutions like the WTO, promote global integration. The recent global drift towards protectionism and bilateralism marks a reversal of globalization, posing critical challenges to export-driven and emerging economies like India.
Contextual / Current Affairs framing:
From the US–China trade war to the EU’s Carbon Border Adjustment Mechanism (CBAM), rising tariffs, sanctions, and bilateral trade deals signal a retreat from multilateralism. India, with a merchandise export market of more than $430 billion, faces direct repercussions.
Historical framing:
Globalization since the 1990s helped India integrate into world markets, fuelling growth in IT, services, and manufacturing. A shift back to protectionism risks undermining these gains and slowing India’s march towards becoming a $5 trillion economy.
Directive Analysis
“What are the challenges” → Identify, categorize, and explain the difficulties India faces (trade, investment, geopolitical, etc.).
“How can these be met” → Suggest concrete measures (policy, reforms, strategic alignment).
Body of the Answer
1. Trade-related Challenges
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- Rising tariffs and non-tariff barriers are reducing the competitiveness of Indian exports. With the WTO dispute settlement system weakening, India has fewer options to contest unfair practices. The EU’s CBAM especially hurts carbon-intensive exports like steel and aluminium.
- Inverted duty structures: Indian manufacturers often face higher import duties on raw materials and components than on finished products, making their goods less competitive.
2. Supply Chain Disruptions
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- The global trend of “friend-shoring” and creation of regional blocs is restructuring value chains. India risks being sidelined in critical sectors like semiconductors, green energy, and EVs if it does not secure strategic partnerships.
- Relocation of supply chains: Trade security considerations may delay or limit India’s integration into global value chains.
3. Volatility in Foreign Investment and Capital Flows
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- Protectionist bilateral deals often include restrictive clauses, making FDI inflows conditional and less predictable.
- X-Factor: Volatility in FDI and FPI correlates with tariff volatility, leading to rupee instability.
4. Geopolitical Challenges
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- Trade is increasingly a tool of geopolitics — e.g., US–China tech restrictions, sanctions. India faces asymmetry in bilateral negotiations with stronger economies.
5. Domestic Sectoral Impacts
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- IT services: Stricter visa rules in the US/EU.
- Pharmaceuticals: Tighter regulatory standards.
- Agriculture: Tariffs and subsidies block exports.
- Strategic imports: Dependence on Chinese semiconductors risks disruption under protectionism.
How These Challenges Can Be Met
1. Strategic Trade Engagements
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- Expand FTAs, join IPEF and QUAD frameworks.
2. Strengthening Domestic Competitiveness
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- Boost productivity via PLI schemes, logistics upgrades, PM Gati Shakti.
- Align exports with green/climate standards for competitiveness.
3. Diversification of Markets
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- Deepen economic ties with Africa, Latin America, and the Global South.
4. WTO Reform & Leadership Role
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- Collaborate with G20 and developing nations for WTO reform.
5. Domestic Social Security Net
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- Skill workforce in AI, EVs, green tech.
- Support MSMEs via credit and technology access.
6. Calibrated Protectionism
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- Use temporary tariffs for infant industries while preparing for global competition.
Possible Conclusions
Future-oriented:
India must turn protectionist disruptions into an opportunity — by building self-reliance, diversifying markets, and becoming a global manufacturing hub.
Philosophical:
As Chanakya advised, “A king’s strength lies in his allies.” India’s growth lies in smart coalitions, not isolation.
Policy-oriented:
Combining domestic reforms with active trade diplomacy will insulate India from global protectionism.
Civilisational framing:
Historically, India thrived as a trading civilisation (Indus ports, spice trade). Reviving this spirit in a fragmented world requires resilience and innovation.
