Nitin Pai: The Indian economy can be shielded from Trump’s tariffs

As I have written in these pages before, India’s size, diversity, demographics and popular expectations drive its growth. A dip in trade with the United States might shave  up to half a percentage point off India’s growth rate this year. This is smaller than how much a bad monsoon affects India’s economic output.

Also Read: Mint Snapview: India must flex its digital-market muscle to counter Trump tariffs

India must not concede to President Trump’s political demands. To do so would allow the proverbial camel to enter the tent. Instead, New Delhi should keep its negotiating lines open, be ready to find new common ground and build mutually beneficial options in both the geo-economic and geopolitical domains. 

In the meantime, we should be prepared to bear some pain. As Trump’s policies run through the US economy, the US-China contest unfolds and crises in Eastern Europe as well as West Asia throw up new realities, it is likely that Washington will rediscover the reasons for better relations with India. That will be a good time to make deals. How long will this take? Maybe a year. What if it doesn’t happen? If we discover that the pain is more than we can bear, we could still make some concessions that Washington demands. 

India’s policy response to Trump’s tariffs will almost certainly involve some combination of financial support for affected sectors, domestic economic reforms, incentives for local demand and export diversification to other markets. Overall, the economic impact is manageable and will be managed. 

It is the geopolitical dimension that leaves us with a sense of crisis. India is not the only American strategic partner that Trump has alienated. So, at one level, we shouldn’t be surprised that he didn’t make an exception for India. Yet, his demeaning rhetoric and attempt to use Pakistan to goad India into submission is surprising. This has struck a severe blow to a process of convergence that began with talks between Jaswant Singh and Strobe Talbott more than 25 years ago. It will have long-term consequences. 

Also Read: Indian agriculture and dairy sectors are strong enough to withstand US tariff vagaries

The case to purchase defence equipment from the US has already become harder to make. Every corporate board will want to mitigate the risk of relying on American vendors and supply chains. Every regulator will demand that the companies it governs demonstrate that they are not reliant on Western firms and technology for critical functions. Even if Trump rescinds his tariffs by month-end, American technology and companies will no longer enjoy the trust they did until last week. 

The geopolitics of today’s situation is reminiscent of the period between 1989-1991. During that crisis, India compensated for the loss of the Soviet Union by opening up its economy and looking East towards South East Asia. This formula is as valid today as it was then. 

That is why New Delhi’s fundamental response to Trump’s tariffs should be to unleash a fresh dose of economic reforms. Do another 1991. The reform agenda is too well known—certainly within the government’s economic brain trust—to need spelling out here. Suffice it to say that the focus should be on structural reforms and not on palliatives for tariff-hit sectors. At the minimum, these reforms should be intense enough to cancel out the harm by Trump’s tariffs. 

Also Read: Rethink policy: Let’s take Trump’s tariff tirade as an opportunity for tax reforms

It is understandable for people to demand economic retaliation against the US or an embrace of China and  Russia in response to Trump’s actions. This, however, would be a big error. Here’s what a cold and hard reading of reality tells us.

One, it is in India’s interests to open its economy to global trade. Our trade barriers limit entrepreneurship, competitiveness and growth. Two, despite Trump’s recent moves, the US is still India’s most important economic and political partner. Three, as much as an amicable relationship with China is desirable, Beijing has deep reasons to not care. Four, market power tends to concentrate into global oligopolies in the information age economy. Five, the nature of the future global economic order is uncertain. 

India’s economic statecraft must set a course that navigates through these five factors. There are no categorical solutions, only contextual ones. 

PS: In response to my query, Perplexity replied that “between 1565 and 1901, Western powers systematically forced at least 32 separate instances of trade opening across Asia... virtually every major Asian political entity experienced some form of coercive trade imposition. This represents one of history’s most comprehensive examples of economic imperialism."

PPS: ‘It is wrong to put temptation in the path of any nation; For fear they should succumb and go astray; So when you are requested to pay up  or be molested, You will find it better policy to say:

“We never pay any-one Dane-geld,

No matter how trifling the cost;

For the end of that game is oppression and shame, And the nation that plays  it is lost!"’

—Rudyard Kipling (irony intended)

The author is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy.