India must deftly walk the tariff tightrope

US President Donald Trump, aided and abetted by Elon Musk and a few other advisers, has plunged the world economy, trade and development aid in a big turmoil.

Trade tariffs are being used as weapons of trade destruction (WTDs) to attain non-trade objectives — throwing out illegal immigrants from America, stopping the spread of fentanyl, keeping the dollar propped up as global currency and annexing foreign territories. The tariff war unleashed is erratic and dysfunctional. Tariffs are brandished in an on, off, on again and off again manner, as is amply evident from tariffs imposed — and postponed — on Canada, Mexico and others.

India has been pilloried as a tariff king and a country ripping off America by imposing highest tariffs which prevent American companies from exporting to India. India has been put on notice with the threat of ‘reciprocal tariffs’ from April 2, 2025.

India has maintained a strategic silence and not publicly wrangled with Trump thus far. Commerce Minister Piyush Goyal has been shuttling between India and the US.

What is the core of the India-US trade tariff imbroglio? Will India be able to do a deal with Trump without getting its nose bloodied? What are India’s good options?

Trump’s entire focus is on merchandise trade. India has a large trade deficit with the world ($210.8 billion during April-December 2024), but runs a surplus with the US ($45.7 billion in 2024: exports $87.4 billion and imports $41.8 billion). This rankles Trump.

India’s tariffs generally, and on agricultural goods, automobiles and alcohol particularly, are undeniably very high — 100 per cent on chicken legs, 100-165 per cent on cars and 150 per cent on alcohol. In the Budget 2025-26, the government proposed an olive branch by reducing tariffs on some products of American interest, such as bourbon whiskey, to 50 per cent. The gesture has not humoured Trump.

The exact contours and coverage of threatened reciprocal tariffs (normally, the same tariff on similar goods by both sides) have not been spelt out as yet. India seems to have offered lower tariffs under a bilateral foreign trade agreement (FTA) on an item-by-item basis. The Americans, perhaps sensing India’s vulnerabilities, are asking for an across-the-board reduction of tariffs. Americans seem to be having an upper hand at the moment.

During the 2023-24 financial year, India exported $77.5 billion worth of goods to the US (17.7 per cent of the total exports of $437.11 billion). The US is the largest export market for India (the UAE, with $35.6 billion of exports, was a distant second). India’s imports from the US were only $40.8 billion, much lower than imports from China ($101.7 billion).

Pharmaceuticals products, diamonds and telecom equipment were India’s top exports to the US, whereas India’s top imports were petroleum products, coal briquets and machinery. Automobiles are not India’s major exports to the US. Americans import automobiles from the rest of the world and hardly export. India and America do have trade in agriculture products, but in terms of the dollar value, it is small.

The war of attrition over India’s high tariffs on agriculture products, automobiles and telecom (also pharmaceuticals) products is, therefore, more emotional than real, which seems to be getting the better of the Trump administration. There is hardly any likelihood of America’s exports increasing from the tariff onslaught. If India were to slash tariffs on American goods to the US level, it is unlikely that Americans would be able to increase the exports of these products by even 10 per cent.

India, however, has two big vulnerabilities. First, high walls of India’s tariffs supposedly protect its farmers and industries. Tariffs on American chicken legs and apples ensure better prices to India’s farmers. Tariffs on automobiles protect India’s automobile industry. High tariffs on whiskeys protect excessive excise revenues of state governments and profits of the India Made Foreign Liquor (IMFL) industry.

Second, European countries and others negotiating FTAs with India for years have also been asking for lower tariffs on precisely the same items — automobiles, agriculture and telecom products. If it gives in to American pressure, India will find it impossible to deny the same to the European Union, UK and others.

Trump has indeed pushed India between a rock and a hard place.

India is in a much better economic and financial situation than it was in 1991, when it was on the verge of defaulting on its international loan payments. India had reached that highly troubling state in 1991 on account of myopic and overprotective policies pursued for decades.

Faced with that dire situation, Indian policymakers took bold decisions — dismantling pernicious licence permit raj, opening foreign investment, technology and competition, unleashing private entrepreneurship by de-reserving industries from public enterprises’ exclusive monopoly, eliminating export subsidies and adopting a flexible currency regime.

These decisions changed the destiny of India. Thanks to the dismantling of the overprotective regime, India has now become the fifth largest economy with a GDP of nearly $3.8 trillion.

India’s overly protected agriculture and automobile industries are a throwback to the 1950s and 1960s.

Then, India was hugely dependent upon cereal imports and had two highly inefficient car producers. The situation today is completely different. India is not only self-sufficient in cereals but is also the largest exporter of rice in the world. The country has significant overall agriculture trade surplus; we import pulses and edible oils but export most other agriculture commodities. Similarly, India’s automobile and telecom industries have become quite large and are thriving.

It is high time India eliminated high tariffs on agriculture and manufactured goods for not only the US but for all. In return, it should aggressively seek technology and investments from the world, including the Chinese, for building a large and competitive manufacturing economy, capitalising on India’s cheap and skilled labour.

In addition, India should proactively retrain its vastly surplus farmers and non-farm labour to provide services to the world in the zone of humungous opportunity — sports, travel, entertainment and personal services (STEPs).

Therein lies India’s economic salvation and prosperity.