Since the beginning of 2015, more than 20 central banks around the world have eased monetary policy leading to what economists say “currency wars”. It is said that even the US has entered this war. Examine the factors causing currency wars and their impact on world economy. Also examine India‘s role in it. (200 Words)
Following the economic recession of 2008 and reduced global demands, most of the countries have boosted their economic growths by following a beggar-thy-neighbour policy than boosting domestic production and demand. This is done to ensure economic growth and employment.
The reasons for currency wars:
- Developed countries : like canada and australia have depreciated their currency due to falling oil and commodity prices
- China : devalued currency due to slow growth
All these resulted in appreciation of US dollar. Thus even the United States has entered currency wars to shield itself from the effects of other currencies.
Impact on global economy:
- Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars. And that could spell trouble for the US as it tries to conclude the mega-regional Trans-Pacific Partnership
- It leads to a growing tendency where export growth is primarily led by currency manipulation rather than increase in productivity. Thus, the emphasis of countries shifts to using this tool rather than enhancing productivity.
- It leads to excessive volatility in world economy especially in emerging economies like India which have witnessed excessive volatility in foreign inflows and exchange rate.
- It can only lead to short-term growth and its utility can be easily exhausted when other countries resort to it as has been the case.
- Currency wars also lead to diplomatic conflicts as witnessed in case of USA and China.
If all the countries keep on depreciating currencies that will be a zero sum game without achieving any real progress in growth. The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbour export measures
India should focus on achieving domestic led growth by increasing the competence of its products in international market instead of depreciating its currency because India is still at a nascent stage of its manufacturing sector and cannot afford to currency manipulation.