Context:
President Donald Trump’s threat to impose reciprocal tariffs on India does evoke certain economic concerns. Beyond that, such a threat seems to provide an opportunity for India to revisit its protectionist trade policies and adopt a more liberal approach toward enhancing manufacturing and exports.
Challenges in the Indian Trade Regime Today
High Tariffs & Protectionism
- India has one of the highest tariff structures in the world.
- Manufacturing tariffs: 13.4% greatly over 3x higher in comparison to the US (3.6%) and EU (3.8%).
- Agricultural tariffs: 40%, far exceeding that of the US (7.1%) and EU (9.4%).
- Many goods are subject to tariffs greater than 50%, restricting the Indian trade policy.
Unpredictable Trade Policies
- India would hardly ever raise applied tariffs less than WTO bound rates.
- The passing of dated Quality Control Orders (QCOs) on various items, polyester and viscose included, creates non tariff barriers that add uncertainty to the business climate.
Complexity & Administrative Drudgery
- 65 different ad valorem tariff rates and 145 unique specific tariffs as per 2024.
- These issues are compounded by an array of cess and duties.
- Recent cases like Volkswagen’s $1.4 billion penalty for classification issues highlight complexity costs.
Possible US Retaliations and Consequences
- To retaliate, Trump has imposed 100% tariffs on Indian export, which can effectively cripple these industries like textile, engineering goods, and auto components.
- This might result in eroding investor confidence, thereby damaging India’s global trade reputation.
- This might put India’s China+1 opportunity in jeopardy: Global firms will be discouraged from diversifying their supply chains into India.
Two Possible Options for India
An Approach of Bargaining Using Transactions (Risky)
- Proceed with bilateral negotiations to reduce some tariffs and give concessions to the USA.
- This, on the other hand, could trigger a sustained period of uncertainty, postponing investment decisions.
- Increased risk of post agreement monitoring by the USA, which will burden the businesses with compliance.
Structural Trade Reforms (Recommended Course)
- Tariffs should be unilaterally rationalized to uplift competitiveness and manufacturing exports.
- Key Reforms Required
- Introduce a uniform tariff in the range of 5 10%% to simplify the structure.
- Remove QCOs and non tariff barriers restricting imports.
- Make low cost inputs accessible, enhancing competitiveness for Indian exports.
