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?

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? (10 Marks, 150 Words)

Despite a broad consensus on the benefits of free trade and multilateralism, the global economy is shifting towards protectionism and bilateralism. UNCTAD (2023) noted 3,000+ new restrictions, and the WTO is projecting trade growth at just 2.6% in 2024. For India, this evolving landscape necessitates safeguards in both bilateral and multilateral trade relations while securing its broader geo-economic position.

Challenges before the Indian economy as the world moves towards protectionism

• Shrinking market access: The US tariffs and duties on key sectors like textiles, gems, electronics, leather, EU’s Carbon border adjustment mechanism (CBAM) and non-tariff barriers threaten India’s export competitiveness and current account stability.
  • Eg: Economic survey (2024-25) called for a new strategic trade roadmap for India, citing rising protectionism and heightened uncertainty amid a shift in global trade dynamics.
  • Eg: India has raised objections to the EU’s plan to introduce steep tariffs ranging from 20% to 35% on high-carbon products such as steel, aluminium, and cement (From January 2026)
• Import dependency: Rise of global protectionism leads to frequent disruptions in supply chains and import restrictions by economies such as the US and China that raise input costs for Indian manufacturers in the electronics, defence and renewable energy sectors.
  • Eg: Indonesia’s 2023 ban on palm oil exports triggered a sharp rise in edible oil prices in India.
  • Eg: India imports nearly 85% of its crude oil, and the Russia-Ukraine war triggered a surge in prices, significantly inflating India’s import bill.
• Restrictions on IT and Services Exports: Developed economies are increasingly imposing restrictive measures such as stricter H-1B visa norms and data localisation requirements, which erode India’s competitive edge in the global IT sector.
  • Eg: Between 2022-23, Indian skilled workers accounted for 72.3% of all H-1B visas issued, reflecting both their dominance and vulnerability to policy shifts.

Challenges before the Indian economy as the world moves towards bilateralism

• Widening trade deficit: India’s trade deficits with its FTA partners have widened significantly after their implementation. India’s FTA utilisation rate remains low at around 25%, developed economies often achieve utilization levels of 70–80%.
  • Eg: Trade deficit with ASEAN expanded from USD 5 billion in 2010 (the year the FTA came into effect) to over USD 43.57 billion in FY23.
• Declining FDI: Increasingly stringent investment regulations in developed economies are constraining the ability of Indian companies to expand abroad and access capital.
  • Eg: The US and EU have introduced stricter foreign investment screening mechanisms, limiting opportunities for Indian firms to acquire advanced technologies and businesses overseas.
  • Eg: As per World Investment Report 2024, global FDI fell by 2% to $1.3 trillion in 2023 amid slowing growth and intensifying geopolitical tensions.
• Impact on India’s geopolitical influence: Global shift towards bilateralism has diminished the role of WTO-led negotiations, thereby constraining India’s ability to push for equitable trade frameworks.
  • Eg: During India’s G20 Presidency in 2023, it strongly advocated WTO reforms, major powers such as the U.S. and EU persisted with unilateral tariff measures, undermining India’s efforts to reinforce multilateralism.

Measures to protect India’s economic interests as the world moves towards protectionism and bilateralism

• Enhancing Trade Diplomacy and Strategic Alliances: India needs a proactive trade diplomacy approach to counter protectionism and secure favorable market access. 
  • Eg: Deeper engagement in G20, WTO, and BRICS can help shape trade rules in line with national interests, while expanding partnerships with Africa and Latin America can help diversify markets. 
• Expanding Services and Digital Trade: India should leverage strengths in IT, fintech, and digital services to counter protectionism, push for liberal visa regimes in FTAs, and align data protection laws with global norms.
  • Eg: Promoting fintech startups and expanding cross-border services will sustain growth and global competitiveness.
• Strengthening Energy Security: Diversifying energy imports through long-term supply agreements while investing in renewables to cut dependence on volatile fossil fuel markets. 
  • Eg: Expanding solar, wind, and hydrogen capacity along with boosting private investment in clean energy.
• Fast-Tracking FTAs: India needs to expedite FTAs with key partners like the EU, UK, Canada, and GCC to secure preferential access and counter rising protectionism. A calibrated approach is needed to balance domestic industry protection with global competitiveness.
• Strengthening Industrial Policy: Fostering a stable, investor-friendly environment by simplifying land, tax, and labor regulations, strengthening IPR protection, and improving ease of doing business. 
  • Eg: Expanding SEZs and industrial corridors will draw global capital and build competitive manufacturing hubs.
• Strengthening Financial and Monetary Resilience: India should safeguard macroeconomic stability through robust forex reserves, inflation management, and a diversified trade currency basket. 
  • Eg: Promoting internationalization of rupee can reduce dollar dependence and cushion external shocks.
• Strengthening Manufacturing: India should boost domestic manufacturing and reduce import dependence by expanding PLI scheme, streamlining logistics, and focusing on high-value sectors like semiconductors, electronics, and green tech. Aligning trade policy with export-led growth will enhance competitiveness and GVC participation.

India can leverage its USD 500 billion manufacturing push under the PLI scheme (NITI Aayog) and strong domestic demand contributing 60% of GDP growth (IMF 2025), to turn protectionist headwinds into an opportunity for resilient, diversified, and innovation-driven growth.

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