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India has historically turned to economic reforms during times of distress, with the most notable example being in 1991 when the country embraced liberalization in response to a severe financial crisis. Currently, as global trade faces upheaval due to US President Donald Trump's ongoing tariff wars, many believe India finds itself at another crossroads.
Could this be a significant opportunity for the world's fifth-largest economy to move away from protectionism and open its economy further? Will India seize this moment like it did more than three decades ago, or will it retreat into more protective measures?
Trump has frequently labeled India a "tariff king" and a "big abuser" of trade relationships. One major issue is that India's trade-weighted import duties—the average rate per imported product—are among the highest in the world. In comparison, the average tariff rates are 2.2% in the US, 3% in China, and 1.7% in Japan, while India stands at a staggering 12%, according to data from the World Trade Organization.
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High tariffs increase costs for companies reliant on global value chains, hindering their competitiveness in international markets. They also result in Indian consumers paying more for imported goods than their foreign counterparts. Despite growing exports, which are mainly driven by services, India faces a significant trade deficit. With only a 1.5% share of global exports, the challenge becomes increasingly urgent.
It remains uncertain whether Trump's tariff war will prompt India to embrace more openness or reinforce its protectionist measures. Prime Minister Narendra Modi's government, often criticized for its protectionist stance, seems to have started shifting its approach.
Recently, ahead of Modi's meeting with Trump in Washington, India unilaterally lowered tariffs on several US products, including Bourbon whiskey and motorcycles. Commerce Minister Piyush Goyal has made two trips to the US to discuss a potential trade deal, especially in light of Trump's threatened retaliatory tariffs, which could cost India up to $7 billion annually, primarily affecting sectors like metals, chemicals, and jewelry, and also putting pharmaceuticals, automobiles, and food products at risk.
Last week, Goyal urged Indian exporters to "move beyond their protectionist mindset" and encouraged them to approach global markets with confidence. India is also actively pursuing free trade agreements with several countries, including the UK, New Zealand, and the European Union.
In an intriguing development, Indian telecom giants Reliance Jio and Bharti Airtel have partnered with Elon Musk's SpaceX to launch satellite internet services via Starlink in India. This collaboration surprised analysts, particularly given Musk's previous clashes with both companies, and coincided with US and Indian officials negotiating the trade deal.
India's rapid growth from the late 1990s to the 2000s—averaging 8.1% between 2004-2009 and 7.46% from 2009-2014—was largely driven by its gradual integration into global markets, particularly in areas like pharmaceuticals, software, automobiles, textiles, and garments, coupled with a steady reduction in tariffs. However, since then, India has tended to turn inward.
Many economists argue that protectionist policies in the last decade have undermined Modi's Make in India initiative, which prioritized capital- and technology-intensive sectors over labor-intensive ones like textiles. This has created challenges for boosting manufacturing and exports.
High tariffs have also cultivated protectionism within several Indian industries, deterring investments in efficiency. According to Viral Acharya, a professor of economics at NYU Stern School of Business, this has enabled "cozy incumbents" to strengthen their market positions without facing much competition. In a paper by the Brookings Institution, Acharya noted that restoring industrial balance in India requires "reducing tariffs to increase the country's share of global goods trade and reduce protectionism."
With India's tariffs already higher than those of most countries, further increases could cause considerable harm. As Rajeswari Sengupta, an associate professor of economics at the Indira Gandhi Institute of Development Research in Mumbai, stated, "We need to boost exports, and a tit-for-tat tariff war won't help us. China can afford this strategy due to its massive export base, but we can't, as we hold only a small share of the global market. A trade conflict could hurt us more than others."
In this context, India stands at a crossroads. As the world undergoes significant shifts, experts like Aseema Sinha from Claremont McKenna College suggest that India has a "unique opportunity to shape a new vision" for global trade. By lowering protectionist barriers in South Asia and strengthening ties with Southeast Asia and the Middle East, India has a chance to lead in forging a new trade outlook.
Agriculture contributes to only 15% of India's GDP, yet it employs 40% of the workforce. One concern regarding trade policy is that reducing tariffs might lead to dumping, where foreign companies inundate the market with inexpensive goods, potentially harming domestic industries.
According to Ms. Sengupta, India should adopt a "universal reduction" of import tariffs, as its tariffs are among the highest compared to its trading partners. However, there is an important caveat: China's ongoing trade struggles, particularly with the US due to the trade war, may result in Chinese dumping in India in the short term.
"To protect against this, India can implement non-tariff barriers specifically against China, but only in cases of proven dumping. Otherwise, it is in India's best interest to drastically reduce tariffs," she advises.
There is also increasing concern that India may be overly accommodating in its efforts to please the US. Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), argues that India's tendency to adjust trade policies "based on rhetoric rather than economic pressure" demonstrates a lack of assertiveness in global trade discussions. If this trend continues, he warns, India may compromise further in its trade negotiations with the US, thereby "eroding its bargaining power."
"In comparison to other major economies, India's pre-emptive concessions on multiple trade issues—without the US imposing a single country-specific tariff—make it appear exceptionally vulnerable to pressure tactics," he adds.
The broader consensus appears to be that India should leverage the unintended consequences of the US tariff wars. Pranjul Bhandari, chief India economist at HSBC, believes that "potential US tariffs may serve as a catalyst for reforms."
"If supply chains are restructured during a second Trump presidency due to higher tariffs on large exporters, and the world seeks new producers, India may have a second opportunity," she notes.
However, creating jobs in manufacturing for the global market will not be easy. India has largely missed the opportunity to capture low-end, unskilled factory jobs that China dominated for decades. With automation on the rise, India risks being left behind without deeper reforms.