The coming Union Budget would do well to send an unambiguous signal through large-scale customs duty cuts that tariff escalation or preservation is not on India’s agenda. New Delhi must place itself at the vanguard of the global response to the Donald Trump administration’s mindless retreat into protectionism. Instead of responding in kind, India should double down on free trade and economic openness. With 90% of customs revenues coming from less than 4% of tariff lines, and free trade agreements (FTAs) with as many as 50 countries under negotiation, India has ample headroom to lower duties across most remaining lines with minimal revenue loss.
Customs receipts now account for barely 4% of the Union Budget and are steadily losing significance as a revenue source. Tariff protection, therefore, can be confined to a narrow set of finished industrial products and a wider basket of agricultural items, where domestic sensitivities are real. Lower duties on a broad range of industrial raw materials and intermediates would promote value addition and job creation at home. Easier access to such inputs also sits squarely with the objective of atmanirbharta. The recent rollback of quality control orders on several basic industrial imports signals that the policy needle has already begun to shift.
Tariff Rationalisation
India urgently needs abundant supplies of low-cost inputs for sunrise sectors such as electric vehicles, semiconductors, and renewable energy. That is why incentive schemes are being rolled out to tap rare earths and other critical minerals, with the aim of building integrated domestic supply chains. But India must also ensure that external shocks-such as China’s arbitrary curbs on rare earth magnet exports-do not derail its manufacturing ambitions, which are still real but not open-ended. While most capital goods already enter through preferential FTA routes with little or no duty burden, raw materials for many traditional industries continue to face high tariffs and non-tariff barriers.
Trump’s jibe about India being a “tariff king” does not withstand close scrutiny. While India’s simple-average import tariff is among the highest in the world, the actual tax burden on imports is far lower. Customs collections amount to just 3.8% of the value of merchandise imports, indicating a comparable effective tariff rate. What lends partial credibility to the criticism, however, is India’s pause in tariff liberalisation after 2009 and a brief phase of tariff escalation between 2018 and 2023. Though this trend has been reversed, the correction needs to go much further.
Antidote to Trumpism
For Trump, tariffs are not merely a negotiating tool but a source of revenue and leverage. His treasury secretary, Scott Bessent, recently claimed that the US was “reaping the rewards” of this strategy, noting that tariffs now account for roughly 5% of federal revenues, up from about 2% earlier. The administration is also betting on “tariff-jumping” foreign investment-firms setting up plants in the US to circumvent import duties. This is a distorted strategy and unlikely to endure. The true antidote to protectionism lies in freer flows of goods, services, and capital. It is entrepreneurial logic, not political fiat, that ultimately reshapes global supply chains. Strong profit motive is what drives entrepreneurs across the globe. The rapid reconfiguration of trade routes in response to Trump’s tariffs demonstrates this amply. Indian exporters, too, have shown an ability to adapt. The Budget should reinforce-not restrain-this instinct by decisively moving India away from tariff defensiveness and towards openness.
