There is a massive churn underway in the global economic environment as the rules-based trading order is being upended by the US President Donald Trump’s tariff disruption. Coercive diplomacy is in play against all countries, including India which has just been slapped with additional duties of 25%—besides the 25% on India’s goods to the US—for importing Russian oil as sanctions on Moscow are imminent for its continued war with Ukraine. The big question is whether India should yield to Trump’s bullying or face the consequences being tariffed at 50%. India has rightly responded that the additional levy of 25% is “unfair, unjustified, and unreasonable” and that it would take all actions necessary to protect its national interests. There is no doubt that 50% tariffs would adversely impact more than half of India’s exports to the US. Prime Minister Narendra Modi has firmly stated that the country is willing to a pay a heavy price for protecting the interests of farmers and fishermen as shrimp farmers in Andhra Pradesh, diamond cutters from Gujarat, and textile and apparel exporters from Tiruppur will get hit by the 50% duty.
The Geopolitical Standoff Over Russian Oil
The additional 25% duty on India for buying Russian oil threatens India’s energy security interests as the availability of deeply discounted crude oil eased pressure on our external accounts. Since 2023, Moscow has provided 36% of our requirements of five million barrels of oil a day. Trump berates India for being the largest buyer when everyone wants Russia to stop the killing in Ukraine. Ironically, it was the previous Joseph Biden administration that encouraged India to source its requirements from Moscow as long as it remained below the cap of $60 a barrel set by the Group of 7 nations. India has, again, forcefully questioned this change of US’s stance while highlighting that western nations who are criticising India are themselves indulging in such trade with Moscow. If India were to stop such purchases, where would it readily find two million barrels of oil a day? Although Trump is convinced that a lower price of oil will bring Russia’s war to an end, his tariffs on India will only result in a tightness of the global oil market and raise prices.
Turning Crisis into a Catalyst for Reform
The global churn represents both a crisis and opportunity for India. While there is transitional pain ahead for us, it is also a good time to get our act together on the reforms front so that we engage with the world from a position of strength. Anand Mahindra, chairman of the Mahindra Group, has eloquently suggested that India should seize this moment like it did in 1991 so that today’s churn over tariffs yields some amrit or nectar for the country. For starters, India must improve the ease of doing business in the states to attract global capital. Secondly, the power of tourism must be unleashed not only as an engine of growth but also to earn foreign exchange and create more employment. Land and labour reforms must be implemented. To bolster its energy security, India must make determined efforts to boost domestic oil production that has been steadily declining. This has been falling for various reasons including low investment due to obstructive regulations, high taxation, and declining output from old and marginal fields. A more facilitative tax regime is necessary to promote exploration and drilling that will improve relative self-sufficiency over the medium term.