Tariffs as a catalyst for another 1991 moment: Trump tantrums can spur India towards reforms

India's most profound and impactful economic policy reforms have often been catalysed by moments of crisis or significant external pressure, transforming challenges into facilitators for necessary change.

In the summer of 2013, a prominent financial analyst at Morgan Stanley introduced the controversial term "Fragile Five," categorising a group of emerging market economies—Turkey, Brazil, India, South Africa, and Indonesia—as particularly vulnerable.

This designation stemmed from their perceived over-reliance on volatile foreign portfolio investments to fund significant current account deficits and ambitious growth projects, leaving them susceptible to global financial shocks and capital outflows.

Just ten years later, by 2023, India had dramatically transformed its economic standing, ascending to become the world's fifth-largest economy. This significant milestone saw India surpass the United Kingdom, its former colonial power, driven by robust domestic consumption, rapid digital adoption, and strategic manufacturing initiatives like the Production Linked Incentive (PLI) schemes.

Looking ahead, the narrative promises even more dramatic shifts. Despite this, just forty-five days later, on July 30, 2025, the US administration led by President Donald Trump announced a sweeping 25 percent tariff on key Indian goods, accompanied by a harsh declaration from the US President describing India as a "dead" economy in an effort to contain its growing influence.

Nevertheless, India's trajectory is set to continue, with forecasts suggesting it will become the world's third-largest economy by 2028, just as the US prepares for its next Presidential elections and the current administration concludes its term. The stark contrast between external perception and internal resilience highlights the inescapable symbolism of India's remarkable economic ascent.

The imposition of tariffs by the US has, undoubtedly, created a stir amid rising risks of India’s export competitiveness. However, this external pressure, while challenging, simultaneously presents a crucial opening for strategic and plucky policy reforms.

Historically, India's most profound and impactful economic policy reforms have often been catalysed by moments of crisis or significant external pressure, transforming challenges into facilitators for necessary change. The current situation, reminiscent of past turning points, presents a similar prospect.

This period of disruption can be leveraged to foster greater self-reliance, strengthen domestic industries, and enhance the overall resilience of its economic framework.  This could well be the occasion to cut bureaucratic hurdles and red tape to enhance India's attractiveness to both domestic and foreign investors and entrepreneurs. This will significantly improve the ease of doing business and foster a more dynamic economic environment.

The Income Tax Bill, 2025, which seeks to comprehensively simplify and codify a new direct tax structure in a contemporary context, mirrors the government’s intent to walk the talk on reducing compliance burdens for businesses of all sizes, from startups to large corporations. A more transparent and predictable tax framework will encourage investment and reduce instances of tax disputes.

There is also a compelling case to accelerate the pace of justice by ensuring timely resolution of commercial disputes and contract enforcement. Reducing the backlog of pending litigation will significantly improve the overall business environment, building confidence among investors and fostering quicker economic transactions.

India’s infrastructure creation has become visible symbols of transformation. From the iconic trans-harbour road in Mumbai, to the Dhola-Sadiya bridge over the Brahmaputra, to the rapid drop in port turnaround times, ports, airports and highways have turned India’s image of a country with creaky roads to highway hotspots. Such projects act as powerful forceful multipliers for the broader economy, dramatically cutting down logistics costs, and increasing India’s competitiveness.

The disruption in geoeconomics can be the right catalyst to press the reset button on India’s infrastructure upgrade plans to move onto a faster lane, aggressively upgrading physical infrastructure, including roads, railways, ports, and energy grids, alongside robust digital infrastructure. Enhanced connectivity and efficient logistics are critical for industrial growth, supply chain resilience, and integrating remote regions into the national economy.

India stands to unlock big growth opportunities and significantly reduce its economic vulnerability to external shocks and fluctuating global trade dynamics. A strategic pivot towards strengthening domestic consumption and internal growth drivers can become a powerful mitigating factor against external pressures, such as tariffs. If India can successfully achieve a robust growth rate of 9% in the non-export sectors of its economy through comprehensive deregulation and ambitious reform initiatives, the impact of international trade barriers will diminish considerably.

This current period of geopolitical and economic shifts offers India a unique and opportune moment to not just react to challenges, but to solidify its position as a major global economic power, less susceptible to the whims of international trade relations and more focused on its intrinsic strengths.