Category: Effects of liberalization on the economy, changes in industrial policy – GS3H

A fraught moment: U.S.-China Trade War

Why in News:

  • The U.S. and China need to take sustained steps to de-escalate tensions over tariffs

Details:

  • The U.S.-China trade war has flared up again after a deceptive lull over the last few months, when both sides were trying to negotiate a
  • Trump tweeted that he would raise the 10% tariff
  • imposed on $200-billion worth of Chinese goods to 25%. The latest revival in tensions between the world’s two largest economies elevates the risk of a global trade war to its highest level since the first signs emerged in 2018. The increase in tariffs imposed on goods crossing international borders essentially represents a new tax on a global economy already facing a slowdown
  • The International Monetary Fund trimmed its projection for global growth in 2019 to 3%, from a 3.5% forecast made in January, citing slowing momentum in “70% of the world economy”.
  • Were tensions in trade policy to flare up again, it could result in large disruptions to global supply chains and pose downside risks to global growth, the IMF warned
  • world economy faces the very real risk of an escalation in this trade war where other countries, including India
  • it could result in U.S. job losses too as the import of Chinese parts become uneconomical for smaller businesses
  • Indian policymakers would do well to closely monitor the latest escalation in trade tensions pans out for global demand and international energy prices, given that the RBI has flagged oil price volatility as a factor that would have a bearing on India’s inflation

Impact on India:

  • The trade war may impact Indian economy more adversely.
  • A trade war would slowdown global growth overall, worsening India’s already dismal export numbers. The biggest impact could be on the rupee which is already battling historic lows against the US The rising price of oil threatens to widen India’s current account deficit, impacting India’s macroeconomic stability. Reducing investment flows into India. However, India which runs a $51.08 billion trade deficit with China may stand to benefit. China imports 100 million metric tons of soybean which serves as protein source and feeds its food processing industry, this presents a huge opportunity for India.
  • India may also seek the opportunity to reduce its own trade deficit against India may be able to gain some traction in textile, garments and gems and jewellery if Chinese exports to the US slow down.

Trump Raises Tariffs On Chinese Goods

why in news:

  • The Trump administration raised import taxes on $200 billion of Chinese imports from 10% to 25%.

Background: / China’s Dominance:

  • China joined WTO in 2001 and since then it has very clearly used the existing Free Trade system to its huge advantage.
  • China exports more than 2 trillion worth of goods whereas it imports are just 1.32 trillion. The balance in trade which is in favour of China is 236 This is  clearly unsustainable.
  • It has created mass manufacturing empire for itself which is hurting other countries including India –low- end manufacturing by offsetting high costs with better infrastructure and more reliable and extensive supply networks. As factory wages in China have risen to the highest in emerging
  • Asia, however, other developing countries with lower costs have begun to steal away investment and jobs, helping to promote industrialization and boost growth at home.
  • Trump is sending a clear message – China cannot dump their goods around the world.

What Happens Now:

  • China holds $1.17 trillion of U.S. government debt. If there is a trade war, China could reduce its S. debt holdings as a political weapon against the Trump administration tariffs proposal.
  • If that happens, the dollar could fall and other countries could follow suit and sell their holdings.
  • If China reduces it’s buying at a time when the U.S. is increasing its supply of new Treasuries into the market, which could lead to a rout in the bond market.

Effect on India:

  • It invariably leads to a higher inflationary and low growth scenario.
  • Inflation is generally good for assets such as gold, while having a negative impact on currency and some sectors in the equity market.
  • The three external risk factors — higher tariffs, rising interest rates, and elevated bond sales
  • —at a time when the domestic banking system is grappling with a renewed stress of bad loans, is a serious threat to India.

INDIA HAS OVERLY RESTRICTIVE MARKET BARRIERS

Why in News: 

  • U.S. is India’s largest export destination, India is only the 13th largest for the U.S. due to “overly restrictive market access barriers.Tariff and non-tariff barriers, multiple regulations put foreign firms at disadvantage

Details:

  • India is already the world’s third largest economy, and by 2030, it will become the world’s largest consumer market because of the     rapid     growth      of      the      middle      class,  India is only the U.S.’s 13th largest export market, due to overly restrictive market access barriers,”
  • Meanwhile, the U.S. is India’s largest export market, accounting for something like 20% of the total. There is a real imbalance.”
  • while American technology and expertise can play an important role to meet India’s
  • developmental needs, U.S. companies faced significant market access barriers in India. These include both tariff and non-tariff barriers, as well as multiple practices and regulations that disadvantage foreign companies,”
  • India’s average applied tariff rate of 13.8%, and that remains the highest of any major world economy
  • goal is to eliminate barriers to U.S. companies, operating here, including data-localisation restrictions that actually weaken data security and increase the cost of doing business,

Price controls’

  • “Other obstacles include price controls on medical devices and pharmaceuticals, and
  • restrictive tariffs on electronics and telecommunications products
  • U.S. would not be able to sell oil to India at lower rates because oil is owned by private players and the U.S. government would not be able to force them to offer concessionary rates.

Tariff or customs duty

  • A tariff or customs duty is a financial charge in the form of a tax, imposed at the border on goods going from one customs territory to another.
  • Tariffs applied to imports are usually collected by customs officials of the importing country when goods are cleared through customs for domestic consumption.
  • Tariffs can also be imposed on exports also but the import tariffs are the most common type of tariffs and have been the main focus of attention of GATT/WTO negotiations.

Impact of Tariffs

  • There are two main purpose of imposing tariffs by the Governments. To protect their domestic industries from the competition of imports. To collect revenue.

GST BUOYANCY

Why in News

  • GST collections hit a record high, the next step should be to simplify the tax regime

Details:

  • The GST inflows of ₹1,13,865 crore in April are the
  • highest recorded since the tax regime was introduced in July 2017
  • They represent an increase of over 10% compared to the same month a year ago
  • GST revenues have crossed the ₹1 lakh crore mark Healthier GST collections, if sustained, will also mean less pressure on the Centre to cover its fiscal deficit. In the absence of more disaggregated data, it could be argued that tax rate cuts by the GST Council in December too may have spurred higher volumes for some goods and services. The rush to pay tax arrears at the end of the financial year may have been another seasonal factor contributing to better tax collection

GST

  • It is a destination-based taxation system.
  • It has been established by the 101st Constitutional Amendment Act.
  • It is an indirect tax for the whole country on the lines of “One Nation One Tax” to make India a unified market. It is a single tax on supply of Goods and Services in its entire product cycle or life cycle i.e. from manufacturer to the consumer.
  • There is a provision of GST Council to decide upon any matter related to GST whose chairman in the finance minister of India.

GST Council

  • It is the 1st Federal Institution of India, as per the Finance minister. It will approve all decision related to taxation in the country.
  • It consists of Centre, 29 states, Delhi and Puducherry.
  • Centre has 1/3rd voting rights and states have 2/3rd voting rights. Decisions are taken after a majority in the council.

RBI to Inject Rs. 37,500 Cr through OMO in FEB

In News:

  • The Reserve Bank of India (RBI) said that it will inject Rs. 37,500 crores into the system through purchase of government securities in February to increase liquidity.

Background:

Open market operations (OMO):

What is it?

  • Open market operations are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
  • These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

What its Signficance?

  • In India, liquidity conditions usually tighten during the second half of the financial year (mid-October onwards).
  • This happens because the pace of government expenditure usually slows down, even as the onset of the festival season leads to a seasonal spike in currency demand. Moreover, activities of foreign institutional investors, advance tax payments, etc. also cause an ebb and flow of liquidity.
  • However, the RBI smoothens the availability of money through the year to make sure that liquidity conditions don’t impact the ideal level of interest rates it would like to maintain in the economy. Liquidity management is also essential so that banks and their borrowers don’t face a cash crunch. The RBI buys g-secs if it thinks systemic liquidity needs a boost and offloads them if it wants to mop up excess money.
  • The cental bank’s signal that it will move to a ‘neutral’ liquidity stance from a ‘deficit’ stance, hints at more liquidity in the system in future. This could arm banks with more funds for lending, and lead to softer interest rates in the economy.
  • This is good news for both businesses as well as individuals. However, large open market purchases by the RBI can give the government a helping hand in its borrowing programme and are frowned upon for this reason. In April 2006, the RBI was barred from subscribing to primary bond issues of the government.
  • This was done to put an end to the monetisation of debt by the Reserve Bank. However, that didn’t stop the process. With rising fiscal deficit, the RBI has been criticised for accommodating larger government debt by way of OMO.

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