US President Donand Trump's April 2 deadline on reciprocal tariffs on India is nearing. However, the meaning of reciprocal tariffs continues to be unclear considering the trade profiles of both nations is very different. India’s imports from the United States include mineral fuels and oils, pearls and stones, nuclear reactors, electrical machinery etc, while exports comprise textiles, marine products, pharmaceuticals, gems and jewellery, electronics, among others.
A Citi research has estimated the potential losses to be around $7 billion annually with auto and agriculture being the most vulnerable.
Even as policymakers and trade negotiators try to navigate this political and economic landmine, there are constituencies to protect and political optics at stake.
The opposition has been lashing out at the government on the negotiations as US President Donald Trump claimed that the Indian side has agreed to reduce tariffs.
Congress general secretary Jairam Ramesh has questioned the government on whether the interest of Indian farmers and manufacturers is being compromised by reducing tariffs. While no official statement has been made, Dr Shamika Ravi, Member, Prime Minister’s Advisory Council told Moneycontrol that the current situation is a window of opportunity.
“I think the current situation is a window of opportunity to lower tariffs and see what are the reforms needed in trade for it to directly feed into growth,” Ravi told Moneycontrol in an interview.
She added that a fresh approach to trade means not just enhancing competitiveness but also actively supporting new-age sectors. “Because many of the new-age startups are in a position to scale up beyond Indian markets," she said.
Referring to President Trump’s call to increase tariffs across nations, she added that this will have an impact on China as well. President Trump imposed 10 per cent tariffs on all imports from China in February and raised the tariff subsequently to 20 per cent. China, she noted, has reduced its protectionist policies especially in the last few months.
“In the last four months they have removed a lot of protectionist measures they had. If you look at the data over the past 5-6 years, in net we (India) have been liberalizing the markets. US, China and Germany are more protectionist in terms of the instruments and policies they have brought in the last five years But India in that sense is a bit like Japan. In net, we are liberalizing. Trade for us is one of the components that is feeding into growth,” she added.
On the possible responses to the Trump tariff threats from the Indian side, she said: "In the past we have brought in tariffs whose average life span has been three weeks or two weeks we have announced policies and have rolled them back. It has to be done in a calibrated away ... we are in the midst of trade agreements. EU being one of the largest. We will also weigh in what China will go through."
Why protectionism hurts
While India is one of the most open economies in the world in terms of opening up of sectors to foreign direct investment (FDI), sectors such as banking allows up to 74% FDI, defence nearly 100% – 49% through automatic approval and 49% through government approval.
She said that India’s tariff barriers could be hurting its competitiveness, adding that the country needs to re-focus on enabling manufacturing of world class products and not by protecting the domestic markets.
“We will have to bring in all measures to raise the competitiveness of our markets. Many sectors in our economy have enjoyed protection for some time. When you have seen protectionist measures in other markets - it’s through export subsidies, targeted towards exports. Most of the other markets have protected trade by way of the state bearing the cost of either improvement in quality of the product, which means export or basic subsidies. This has led to production of world class products. We have to do the same. At the moment the support we are giving is in the nature of creating barriers - so as to give protective markets. We are not targeting global markets through our trade policy,” Ravi said.
She added that the global economy is changing and India has an enormous task of industrializing the economy. "Giving too much protection and access to domestic market without sufficient competition will be detrimental to trade and in the long run detrimental to our growth.”
On private sector seeking protection of domestic industry through higher tariffs, Ravi said: "Our national champions, the public sector units have carried their weight in the form of major boost in terms of connectivity, or banking but the economy as whole, when you talk of automobiles, various segments – we have to foster more competition.”
On the role of the private sector, Ravi asserted that she is not entirely encouraged.
“Our national champions have been the old folks. I am not entirely encouraged by private investments - if you look at the trends in the investment of these firms. The government’s objective has to be nature of trade which will lead to tech transfers, which will raise productivity. Without investing in R&D, it will be very difficult to continue to protect domestic markets.”
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