President Trump's announcement of new tariffs on Indian goods has left trade economists and politicians in India grappling with the implications. Starting next week, nearly all Indian products entering the United States will incur an additional tax of 27 percent.
This unexpectedly high tariff comes despite ongoing diplomatic efforts between the two nations, including communication from Trump to Indian Prime Minister Narendra Modi, whom he referred to as "a great friend." The Trump administration cited India's "uniquely burdensome" trade practices as a reason for the tariffs, claiming they hinder American companies from effectively entering the Indian market.
The Indian government is now tasked with determining its response. Currently, India exports more to the United States than it imports, with a trade surplus of approximately $46 billion last year. However, India maintains an overall trade deficit, purchasing more from the global market than it sells, complicating its ability to adjust policies in response to the tariffs.
As the Indian currency weakens, reducing the surplus with the U.S. could exacerbate costs for imports from other countries. The new tariffs will likely challenge some Indian companies in their efforts to sell products to American consumers, though the specific impacts remain uncertain.
While Trump’s assertion that India employs protective trade policies is accurate, some Indian economists view the crisis as a potential catalyst for reform. They argue that increased competition could drive necessary changes in domestic industries. However, the immediate consequences could lead to higher bankruptcy rates among local companies.
Despite the challenges, some investors highlight India's substantial domestic market as a potential buffer. They believe that Indian manufacturers could adapt to rely more on local consumers if American demand diminishes due to higher import costs. M.D. Ranganathan, chairman of Catamaran Ventures, noted that India's vast market could sustain manufacturers even under these new pressures.
Additionally, while India faces tariffs, its competitors are experiencing even steeper rates. Countries like Vietnam are subject to 46 percent tariffs, making India's 27 percent seem relatively favorable. However, it remains uncertain if Indian factories can successfully replace those in Vietnam.
Some of India's key exports will be exempt from the new tariffs, including energy products, pharmaceuticals, and potentially specialized gems. This exemption could mitigate some adverse effects, although future tariff changes remain a possibility.
Textile production may also benefit, as India now appears more competitive compared to neighbors like Bangladesh and Sri Lanka, which face higher tariffs. Manufacturing electronics in India could also become more attractive than in Southeast Asia due to the new tariffs.
Ajay Srivastava, a former trade official, suggested that the tariffs present an opportunity for India to attract global brands looking to diversify their supply chains away from high-tariff countries. However, India continues to face significant challenges in enhancing its manufacturing sector, which has seen its economic share decline despite initiatives like Make in India.
Overall, while the new tariffs present both challenges and opportunities for India, the country's ability to adapt and thrive in the changing trade landscape remains uncertain.