Prof Virender Koundal
As the global economic landscape evolves with increasing complexity, India finds itself at a critical juncture with a looming threat posed by potential trade protectionism from the United States. The hypothetical imposition of a 50% tariff on Indian goods by the U.S. could significantly impact bilateral trade, disrupt vital export sectors, and challenge India’s economic momentum. However, this looming crisis also presents an opportunity for India to assert its resilience, recalibrate its trade strategy, and deepen its global integration.
The threat of punitive tariffs is not new in international trade. Still, the magnitude of a 50% tariff on Indian exports is unprecedented and could lead to a considerable price spike for Indian goods in the U.S. market. Such a scenario would likely reduce India’s competitiveness and hurt its key export-driven industries such as pharmaceuticals, textiles, jewellery, and machinery. The downstream effects would include potential job losses, reduced foreign exchange earnings, and a dent in investor confidence.
India’s trade exposure to the United States is significant, especially in sectors that have thrived due to cost advantages and reliability. The pharmaceutical sector, for example, supplies affordable generics to the American healthcare system. A steep tariff would increase drug costs in the U.S., reduce the competitiveness of Indian manufacturers, and disrupt the supply of essential medicines. Similarly, textiles and apparel, a labour intensive industry employing millions, could lose out to competitors like Bangladesh and Vietnam, who enjoy preferential U.S. market access.
The gems and jewellery industry, which accounts for a significant portion of India’s exports to the U.S., would also face steep setbacks. India’s role in global diamond polishing and jewellery manufacturing could weaken, harming not only exporters but also the artisan workforce. Machinery and engineering goods exports would similarly be affected, with increased prices discouraging American buyers from sourcing Indian industrial equipment.
Beyond revenue losses, these disruptions could cripple SMEs that form the backbone of Indian exports. Limited cash reserves and market diversification make these enterprises highly vulnerable. In this context, India needs a comprehensive domestic response to bolster resilience and mitigate adverse impacts.
A key pillar of this response lies in strengthening domestic economic fundamentals. Export promotion schemes like RoDTEP (Remission of Duties and Taxes on Exported Products) must be enhanced to help offset additional trade costs. Subsidies on logistics and raw materials for affected sectors would also provide short-term relief. Easier access to credit and reduction in interest rates for export-focused enterprises can prevent bankruptcies and job losses.
To sustain growth internally, boosting domestic consumption becomes crucial. The government can inject fiscal stimulus to raise disposable income, while investing in infrastructure can create employment and increase domestic demand. Support for SMEs should be targeted through emergency credit lines, restructuring options, and up skilling of displaced workers under flagship programs like Skill India.
India’s central bank may also adopt prudent currency management strategies. A gradual depreciation of the rupee could enhance export competitiveness without triggering inflation. However, such a policy must be handled with caution to avoid macroeconomic instability.
From a strategic trade perspective, India must actively pursue diversification. The over-reliance on a single market such as the U.S. makes India susceptible to geopolitical and policy shocks. In this regard, the ‘Look East, Look West’ strategy provides a pathway for long-term resilience.
East and Southeast Asian markets, including ASEAN, South Korea, and Japan, offer promising opportunities for Indian exports. Trade agreements with these regions can be accelerated to secure preferential access for goods like pharmaceuticals, auto components, and IT services. Similarly, re-energizing Free Trade Agreement (FTA) discussions with the European Union could open up high-value markets for Indian goods and services.
Africa and Latin America represent underutilized trade corridors. These emerging economies need pharmaceuticals, textiles, and machinery, sectors where India excels. Strengthened diplomatic and trade ties, coupled with investment in local supply chains, can create mutually beneficial arrangements.
The Middle East also remains a strategic partner, not only for energy imports but increasingly for Indian services, food products, and manufactured goods. Diversifying trade with this region can reduce exposure to Western markets.
Parallel to market expansion, India must sharpen its international trade diplomacy. Proactively engaging with multilateral institutions like the World Trade Organization (WTO) is essential. India should challenge arbitrary trade restrictions under WTO frameworks and advocate for free, rules-based global trade.
Bilateral negotiations with the United States should continue, even amidst friction. India must present data-backed arguments highlighting the mutual benefits of trade, such as affordable generic drugs lowering U.S. healthcare costs, and warn against the economic consequences of protectionism.
India can also form coalitions with like-minded countries facing similar threats. Working with trade partners in the Global South or countries championing open trade (like Australia or the EU) can amplify India’s voice on global platforms.
Longer-term, India needs to upgrade its position in the global value chain through innovation, quality enhancement, and value addition. Increased investment in research and development (R&D) is critical, especially in sectors like pharmaceuticals, electronics, and artificial intelligence. By focusing on patented, high-tech products, India can reduce price sensitivity and become indispensable in global supply networks.
Industry 4.0 technologies, including automation, AI, and the Internet of Things, should be mainstreamed in Indian manufacturing to enhance productivity and competitiveness. Branding initiatives like ‘Zero Defect, Zero Effect’ and quality assurance programs will also improve global perception and demand for Indian goods.
Services exports, particularly in IT, financial services, and business process outsourcing (BPO), must also be leveraged to offset merchandise trade disruptions. These sectors are less impacted by tariffs and represent India’s competitive edge.
India should be prepared to counter common U.S. arguments justifying tariffs. For instance, the often-cited trade deficit with India is largely driven by critical goods like pharmaceuticals, which serve U.S. consumer interests. When services and investments are factored in, the trade imbalance appears less skewed.
Allegations about Indian market access restrictions or IP regime weaknesses must be rebutted with evidence of India’s adherence to WTO rules and balanced development policies. Moreover, Indian subsidies are largely compliant with WTO norms and aimed at rural development and employment, not unfair trade advantage.
In conclusion, while a 50% U.S. tariff on Indian goods poses a formidable challenge, it is not insurmountable. India has the tools, strategies, and diplomatic capital to navigate this threat. By bolstering domestic resilience, diversifying its trade base, investing in innovation, and engaging proactively on the global stage, India can not only withstand this storm but emerge as a stronger and more self-reliant economic power.
The policy path forward must be proactive, strategic, and inclusive. Stakeholders from Government to industry to academia must collaborate to ensure a swift, coordinated response. This episode, if managed wisely, could catalyze India’s next leap in global trade leadership and secure its rightful place in the new world economic order.
(The author is Department of Economics University of Jammu.)
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