Will the Import Duty Conflict Prompt India to Open Its Markets?

Historically, India has opted for economic reforms during crises, with the standout example being the shift in 1991 when liberalisation followed a major financial turmoil.

Currently, with US President Donald Trump’s retaliatory tariffs and the ensuing global trade turmoil, many believe India faces another pivotal moment.

Is this a chance for the world’s fifth largest economy to abandon its protectionist stance and further liberalise its trade policies? Will India embrace change as it did over thirty years ago, or will it take a step back?

Trump consistently labels India a “tariff king” and criticises its trade practices. The reality is that India’s trade-weighted import duties – the average tariff per imported product – rank among the highest globally. The US’s average tariff is just 2.2%, while China’s is 3% and Japan’s 1.7%. In contrast, India’s tariff averages an astounding 12%, per World Trade Organization statistics.

Elevated tariffs inflate costs for businesses reliant on global supply chains, curtailing their competitiveness internationally. They also result in higher prices for imported goods for Indian consumers when compared to other nations. Despite an uptick in exports, primarily propelled by the service sector, India continues to face a substantial trade deficit, with its share of global exports merely at 1.5%, amplifying the urgency of the situation.

The impact of Trump’s tariff conflict on India’s potential to liberalise or reinforce protectionism remains uncertain. Modi’s administration has often faced scrutiny for its protective measures yet appears to have adjusted its approach in recent years.

Recently, leading up to Prime Minister Modi’s conversation with Trump in Washington, India took steps to unilaterally reduce tariffs on Bourbon whiskey, motorcycles, and various US products.

Commerce Minister Piyush Goyal has made two visits to the US to negotiate a potential trade agreement, in response to Trump’s impending retaliatory tariffs scheduled for April 2. Analysts from Citi Research estimate that India could face annual losses up to $7 billion due to reciprocal tariffs, significantly impacting industries like metals, chemicals, and jewelry, while also putting pharmaceuticals, automobiles, and food goods at risk.

Last week, Goyal encouraged Indian exporters to “move beyond their protectionist mindset” and pushed for a bold approach to engage globally with confidence, as per a statement from his ministry.

Moreover, India is actively negotiating free trade agreements with multiple nations including the UK, New Zealand, and the European Union.

In a surprising development, Indian telecom giants Reliance Jio and Bharti Airtel have partnered with US entrepreneur Elon Musk’s SpaceX to introduce satellite internet services via Starlink in India. This move has taken analysts by surprise, especially after Musk’s recent disputes with both firms, coinciding with the ongoing negotiations for the trade agreement.

India’s rapid economic growth from the late 1990s to the early 2000s saw growth rates of 8.1% between 2004-2009 and 7.46% from 2009-2014, largely driven by its gradual entry into global markets, especially in fields such as pharmaceuticals, software, automotive, textiles, and clothing, along with a reduction in tariffs. However, since then, India has leaned towards inward-focused policies.

Many economists argue that protectionist measures introduced over the past decade have hindered Modi’s Make in India campaign, which prioritized capital- and tech-heavy sectors over labor-intensive ones such as textiles, resulting in challenges in boosting manufacturing and exports.

High tariffs have also catalyzed protective behaviors across various Indian sectors, stifling investments in efficiency, according to Viral Acharya, an economics professor at NYU Stern School of Business.

This situation has allowed established players to consolidate their power without facing significant competition. As noted by Mr. Acharya, a former central banker, restoring industrial harmony in India entails “lowering tariffs to increase the country’s global goods trade share, thus mitigating protectionism.”

With India’s tariffs exceeding those of numerous other nations, any further increases could be particularly harmful.

“We must enhance our export levels, and engaging in a tit-for-tat tariff conflict won’t be beneficial. While China can sustain this strategy due to its extensive export capabilities, we cannot, given our limited market share,” cautioned Rajeshwari Sengupta, an associate economics professor at the Indira Gandhi Institute of Development Research in Mumbai. “A trade dispute could inflict greater damage on us compared to others.”

At this junction, India finds itself facing crucial decisions. With the global trade landscape shifting, the country has a “remarkable opportunity to define a new paradigm” in international commerce, according to Aseema Sinha, a trade scholar at Claremont McKenna College.

By dismantling trade barriers in South Asia and reinforcing partnerships in Southeast Asia and the Middle East, India could assume a leadership role in constructing a novel trade framework, establishing itself as a significant participant in a “re-globalised” ecosystem, asserts Ms. Sinha, also the author of Globalising India.

“Through tariff reductions, India could emerge as the primary hub for trade and economic activities across the region, attracting diverse international stakeholders,” she adds.

This could facilitate job creation within the country where the agricultural sector, accounting for 15% of India’s GDP, employs 40% of the workforce, indicating low productivity levels. Construction is the second-largest employer, typically utilizing casual laborers.

India’s hurdle lies not in amplifying its flourishing service industry, which constitutes nearly half of total exports, but in managing the large mass of unskilled labor lacking essential qualifications for service roles.

“Although high-end services are thriving, a substantial segment of the workforce remains poorly educated and underutilised, often found in construction or informal job settings. For meaningful employment to be available for millions entering the labor market annually, India must accelerate its manufacturing exports, as relying solely on services will not suffice for the unskilled labor force,” says Ms. Sengupta.

A significant concern regarding tariff reductions is the risk of dumping, wherein foreign firms inundate the market with inexpensive products, potentially harming local industries.

According to Ms. Sengupta, India’s optimal trade approach would involve a “universal reduction” of import tariffs, as it currently faces some of the highest tariffs compared to its trading partners.

However, it must be noted that ongoing trade tensions with China, especially regarding its disputes with the US, may prompt Chinese dumping in India in the “short run.”

“To guard against this risk, India could implement non-tariff barriers specifically against China, but only when there is clear evidence of dumping. Beyond that, it is in India’s best interest to pursue broad-based tariff reductions,” she adds.

Additionally, there’s an increasing worry that India may be excessively accommodating in its efforts to appease the US.

Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), cautions that India’s susceptibility to adopt softer trade policies based on rhetoric rather than actual economic pressures indicates a weakness in global trade negotiations.

Should this trend continue, India risks making further concessions in its trade agreements with the US, which could severely diminish its negotiating leverage.

“Relative to other major economies, India’s tendency to acquiesce on numerous trade fronts without the US imposing specific tariffs makes it appear particularly vulnerable to coercive strategies.”

A prevailing opinion suggests that India should leverage what could arise from the unintended fallout of Trump’s tariff disputes. Pranjul Bhandari, chief India economist at HSBC, asserts that “anticipated US tariffs may serve as a trigger for reforms.”

“If supply chains shift again during Trump’s second term due to increased tariffs on large exporters, and the global community seeks new production partners, India might be afforded another opportunity,” she states.

Creating manufacturing jobs for the global market will not be straightforward. India has largely missed its chance at low-end, unskilled factory jobs that China has monopolized for decades. With automation on the rise, without substantial reforms, India risks being sidelined.