India's Trade Regime and Trump's Tariff Threat

President Donald Trump's threat of imposing reciprocal tariffs on India highlights critical vulnerabilities in India's trade policies. The response from India must be strategic and well-considered to protect national interests.

Issues with India's Trade Regime

• High Tariffs:
  • India's manufacturing tariffs average 13.4%, significantly higher than those in the US and Europe.
  • Agricultural tariffs are even higher, with numerous goods subjected to tariffs above 50%.
• Uncertainty:
  • India's actual tariffs are lower than its WTO "bindings," allowing the government flexibility to increase tariffs, leading to uncertainty.
• Complexity:
  • In 2024, India had 65 different ad valorem rates and 145 specific tariffs, compounded by numerous cesses and non-tariff barriers like Quality Control Orders (QCOs).
• Case Study: Volkswagen faced a $1.4 billion penalty due to tariff complexities.

Potential US Retaliation

The US may impose severe tariffs in response to India's restrictive regime, potentially harming India's export capabilities and investor confidence.

Options for India's Response

• Transactional Approach: Negotiating with the US by adjusting tariffs and making selective promises is risky, causing uncertainty and potentially impacting investment decisions negatively.
• Principled Rationalisation: Unilaterally rationalising trade policies to improve the domestic economy and tackle issues from the "Make in India" initiative.

Challenges in Manufacturing and Export Growth

• Risks: Increased business risks and an overvalued exchange rate have hindered growth.
• PLI Scheme: The Production-Linked Incentive regime has not effectively supported labor-intensive exports, such as textiles and apparel.

Benefits of a Liberal Trade Regime

Reducing tariffs could enhance India's market share by seizing opportunities from the declining exports of countries like Vietnam and Bangladesh. A uniform tariff structure could also mitigate inefficiencies and reduce trade retaliation risks.

Proposed Tariff Structure

• A uniform tariff between 5% and 10%, or a two-tier tariff with 5% on inputs and 10% on final goods.
• Eliminate all QCOs to simplify trade.

Measures for Specific Sectors

• Manufacturing: Use safeguard and anti-dumping measures selectively.
• Agriculture: Consider targeted tariff reductions for US agricultural imports, as they don’t threaten local farming livelihoods.

Conclusion

The government should emulate the bold economic reforms of 1991 by adopting a liberal trade policy, transforming Trump's threat into an opportunity for economic growth and manufacturing revival.