By Partha Chatterjee, Dean of academics, Shiv Nadar University
It’s a season of change
And if you feel strange
it’s probably good
—Year of the Snake by Arcade Fire
It is a year where we are witnessing more than just change—it is upheaval, and it is hard to feel good about it. Since World War II, there has been a broad agreement on open and orderly trade. It was never perfect, and it was crumbling in certain ways. But in the wake of Trump’s tariff war, the scaffolding that was holding it together is about to give way. The whole configuration is poised to change, and India in particular will have an impact on the reconfiguration. India is one of the nations that is worst hit by Trump, who has imposed 50% tariff on its imports. This could potentially reshape not only trade between India and the US, but also have much broader geopolitical relationships. While the recent Shanghai Cooperation Organization summit provides a glimpse of it, what emerges is still uncertain. India, which has cultivated the US as a strategic partner over the last few years and has the US as its largest trading partner, faces stark choices.
Geopolitical choice: Russian oil vs. Economic fallout
Half of the 50% tariff that the US has imposed on India is on account of India buying a large amount of crude from Russia. So, the first choice India must make is whether it should continue buying oil from Russia. So far, it has not stopped. More than economics, this is driven by the need to assert geopolitical independence. From a purely economic lens, things are greyer. Russia has emerged as a major supplier of crude oil to India in the last three years. If such a switch is possible in such a short time, it can also be reversed. The question is if that will fan inflation. Crude prices were $71 per barrel (bbl) in 2021 before the Russia-Ukraine war. It shot up to $101/bbl when the war began, but fell thereafter and has stabilised to about $80/bbl.
While India buys a large share of Russia’s exports of crude, it is only 1.5% of global volumes. If India stops buying from Russia, it is unlikely that there will be a catastrophic surge in global prices. Moreover, according to a study published in the Reserve Bank of India Bulletin in July, a 10% increase in crude prices will increase inflation in India by only 20 basis points. As such, though there will be a cost, the economic fallout of discontinuing the import of Russian crude will be manageable. So, the decision to continue to buy Russian oil is due to other strategic considerations. If India continues to buy Russian oil, and the 50% tariff on Indian goods remains in place, there will be economic consequences. The most obvious is that the high tariffs will impact exports from labour-intensive sectors like textiles and gems.
These two sectors together export about $20 billion to the US, which is about 30% of each of these sectors’ exports. A fall in exports for these sectors will reduce dollar flows to India, possibly offsetting any gain in the reduced outflow of dollars due to buying oil at a lower price. This will also lead to job losses, unless Indian exporters can find alternative markets for their products, which is not easy. It requires understanding that market and competition, managing regulatory and customs hurdles, and finding a network of buyers. Can the new bonhomie with China, or for that matter BRICS, help? Unlikely.
India has a record high trade deficit with China to the tune of $99.2 billion in the last financial year. The trade surplus with the US is $41.2 billion. China is also an exporter of textiles and gems. In fact, China’s exports of textiles to the US are about five times that of India’s. India, on the other hand, exports mostly raw products like ores, organic chemicals needed for pharmaceuticals, and cotton. It is unlikely that the Indian exporters will find much solace in the closer relationship with China. The story is similar for Russia or some other members of BRICS.
Diversifying Trade
However, India can find hope in relationships with economies like the European Union (EU) or the UK. Trade patterns between India and these economies are somewhat similar. India already exports to these countries. The EU is the second-largest market for India’s textiles after the US, and India exports significant amounts to the UK—though in both economies, it lags exports from countries like China and Bangladesh. So, the network and the know-how already exist, and there is also room to grow.
The recently concluded India-UK comprehensive economic and trade agreement eliminates duties for most of India’s exports, giving further impetus to trade. It was announced that India expects to conclude the years-long negotiations with the EU by the end of this year. India must work expeditiously to ensure the contours of the agreement are similar to the India-UK one and it is in place as early as possible. India’s choices will potentially reshape the world order. This is just the beginning of the season of change, we can only hope we feel good by the end of it.