India is Strong in the New Tariff War
- Dr. Jayantilal Bhandari
On April 2, US President Donald Trump imposed new reciprocal tariffs on both friendly and enemy countries to boost American manufacturing and remove trade imbalances. A 26 percent tariff has been imposed on India. Trump's new tariff announcement has caused panic in markets and stock markets around the world. Although the government in India has spoken in Parliament about protecting domestic industries in the wake of Trump's new tariff policy, the country's industry will now have to focus on global competition and research and development (R&D) instead of tariff protection.
It is worth noting that in the financial year 2024, America's share in India's total exports was about 18 percent, which was about 77.5 billion dollars. Such height of exports makes America the largest trading partner of India. Therefore, Trump's tariffs may affect many major export sectors of India. These include textiles and apparel, automobile parts, gems and jewellery, electronics, agricultural products. But India may be less affected by the impact of tariffs compared to other countries. According to SBI Research, the impact on India's total exports may be limited to 3-3.5 percent.
There is no doubt that domestic demand, domestic economic factors, new trade agreements, record food grain production, and record export of processed food products are proving to be effective weapons for India in Trump's tariff war. Undoubtedly, consumption is visible in India due to the growing middle class in the country. The middle class of the country is giving new economic strength to the consumer market of the country. The number of middle-class people in India has increased rapidly on the strength of high growth rate and high growth rate of urbanization along with economic reforms in the country. According to the recently published document titled The Rise of Middle Class India, the number of middle-class people in India has increased rapidly to around 43 crores in the year 2021 and this number is estimated to increase to 102 crores by the year 2047. This class is defined as families with an annual income of Rs 5 lakh to Rs 30 lakh. Certainly, due to the increasing purchasing power in the hands of the middle class of India and the dreams of consumption and prosperity seen in the eyes of Gen Z and Millennials, while many countries of the world are eager to increase economic and business relations with India, the big companies of the world with their renowned brands are knocking on the multi-faceted consumer market of India with new strategies.
Certainly, India is moving ahead with new global trade equations to avoid Donald Trump's tariff blow and increase its share in global trade. Recently from 26 to 29 March in New Delhi, senior trade representatives of India and the US held fruitful talks to finalize the framework and terms of reference for the proposed trade agreement to take bilateral trade between the two countries to the level of $ 500 billion by 2030. While on the one hand, the government is rapidly moving ahead with the strategy of free trade agreements (FTAs) and bilateral trade agreements. Now while trade agreement talks should be started soon with Norway, Hungary, Guatemala, Peru, Chile, India has also started talks with Oman, India should also move ahead speedily towards finalizing FTAs with Canada, South Africa, Israel, and Gulf Countries Council.
It is also important that just as the country's foodgrain reserves became the country's weapon in the war against Corona five years ago, similarly, at this time, record foodgrain production and record food processing products in the country are appearing to be a strong weapon to reduce any kind of loss caused by the US tariff as well as the reduction of duty and non-tariff barriers. Since estimates of a decrease in foodgrain production globally in the year 2025 have been presented, the 3 to 3.5 percent loss in India's Gross Domestic Product (GDP) due to Trump's tariff can be largely compensated by the export of foodgrains and agro-processing. Certainly, the increasing foodgrain production and strong rural economy in the country have become the economic strength of the country.
No doubt, despite such a strong economic base, along with Trump's tariff challenges, we also have to be cautious about global geopolitical tensions, trade policy uncertainty, instability in international commodity prices and financial markets, and economic pessimism abroad. We also have to note that a sharp decline in food prices and low core inflation create scope for a reduction in policy rates, but in view of declining inflation and rising food production, the government should avoid losing sight of the long-standing challenges in the agriculture sector. Certainly, in order to compensate for any damage caused to the country's economy by Trump's tariffs at this time, as well as to face any other global economic challenge in the future, the government will have to move forward rapidly towards improving agriculture and the rural economy.
Now, amid the new tariff challenges, India's goal must necessarily be to expand exports beyond the 'traditional markets'. India should explore export possibilities in areas where it has a competitive edge. There should be diversification of trade beyond 'traditional partners'. In this sequence, it is important to explore export possibilities in non-traditional markets like Latin America, Africa, and Oceania. Emphasis will have to be laid on the need to identify products with export potential and improve the export strategy in countries with maximum demand for these products. Along with all this, now the country's industry will have to focus on global competition and the need to increase investment in research and resource development (R&D) instead of protection through tariffs. Undoubtedly, India's manufacturing sector should focus on competitiveness and increasing business instead of relying on tariffs for protection. India has historically maintained high tariffs to protect domestic investors. In 1991, liberalization has benefited the industries to move towards global competition. Since tariffs are linked to competition, if we remain under the cover of tariffs, we will not be able to become competitive.
We hope that India will be able to face the challenge of the 26 percent tariff imposed by the US on India on April 2. India's growing domestic demand, new trade agreements, record food grain production, growing food processing industry, and growing agricultural and food processing exports and domestic economic factors will be seen as a strong and effective economic weapon for India. Along with this, when the global competitiveness of industry and business increases, India will also be seen grabbing opportunities to increase global business amidst the challenges of tariff.
(The author is a renowned economist.)