The US government’s reciprocal tariff threat seems to have finally prompted Indian industry to give up on its craving for protection. A range of sectors from gems & jewellery and pharmaceuticals to emerging ones like electronics and automobiles are pitching for a reduction — in some cases even elimination — of import tariffs, as a way to mitigate the potential adverse impact of the US move.
Industry executives and experts in global trade FE spoke to, advocate a nuanced approach on the issue. This is because Indian industries and other stakeholders including farmers and livestock breeders are at disparate levels of preparedness when it comes to facing unhindered competition from the US exporters. Besides, the US is the largest foreign market for Indian producers of goods and services, accounting for 18% of its merchandise exports. Since the economic ties between the two countries are so varied, and their strategic relations are high-stakes, any response to US President Donald Trump’s move must be carefully thought out, they say.
How the Trump administration would structure its so-called “fair and reciprocal” plan is yet to be spelt out. A key question is whether the US plan is for country-level reciprocity or a product-level approach. In the latter case, Goldman Sachs reckons, the tariff differential (or adjustments to be made by India in its customs duties) will be much larger at 11.5 percentage points (pp), versus weighted average tariff gap of 6.5 pp under a country-wide approach.
GTRI estimates the country-level tariff difference at 4.9%. If the US chooses to impose additional tariffs to neutralise the gap, it would be 3.3% on industrial goods, and around 32% on farm goods.
One proposal is for India to offer zero-for-zero tariffs for a slew of tariff lines where India can eliminate import taxes without causing big harm to the domestic industries and agriculture. This would help reduce the tariff differential with the US, but its acceptance by the US is doubtful.
To be sure, zero-for-zero tariffs are not in sync with the most favoured nation (non-preferential) tariff policy under the World Trade Organisation, but it is still seen to be better for India than entering into a full-fledged free trade agreement with the US. A broader FTA could require India to make more substantive concessions. While on the face of it, the US is targeting India’s “high tariffs,” it may be as keen to extract things like lesser control on data flows, a more liberal patenting system, and opening up of government procurement for the US companies.
The sensitivity of India’s exports to higher US tariffs is a function of price elasticity of US demand for India’s exports. According to the International Monetary Fund, the elasticity is around 0.5, which means half the shipments are vulnerable to price hikes to be necessitated by extra tariffs.
The zero-for-zero tariff policy could work for India also because customs receipts are increasingly a smaller part of India’s government revenue. “The revenue requirement from customs duty has steadily decreased, it is around 7-8% now. Therefore, the main reason now is protection to the domestic industry,” Agneshwar Sen, partner, tax and economic policy (international trade), EY India, says.
The implications of any reduction in tariffs by India in response to the Trump administration’s policy must be assessed vis-a-vis how the US tariffs could impact the Indian economy. Goldman Sachs sees potential impact of additional US tariffs on Indian economy to be 01-0.3 pp of GDP. While this is big enough to be a cause for concern, the fallout from stultified global economy and trade need also to be reckoned.
The adverse impact could be mitigated if Indian industry manages to expand export markets beyond the US, focussing on regions where tariffs are relatively low such as Europe, Southeast Asia and Africa, notes trade research firm GTRI. In addition, forming joint ventures with American firms or setting up assembly units in the US might also help.
Sen notes that the US is not a volume exporter. Imports from the US, in many cases, are also intellectual property protected (branded, patented or have a geographical indication protection). The US exporters, therefore, not really competing with similar local produce or that imported from other countries. Reduction in tariffs on a bilateral basis on imports originating in the US would make them cheaper for the consumer in India but is unlikely to have a significant negative economic impact on India’s economy, he believes.
According to Rahul Ahluwalia, co-founder at Foundation for Economic Development, “In general, low tariffs and increasing competitiveness should not be looked at as a threat but as an opportunity. Lowering tariffs will have to be accompanied by competitiveness reforms in India so that our industries can be world-beating. Just like 1991, reforms can unleash India’s entrepreneurial energy and help us compete for global markets, which are 20 times larger than India’s domestic market.”
Sen argues that with globalised supply chains developing where goods at various stages of production have to cross national borders for value addition to the final stage of manufacture, nil or low import duties help these cross border transfers.
This apart, reduction of India’s Customs duty on manufactured imports from the US – chemicals and pharma, machinery, electronics, planes, etc. – will help Indian consumers with lower prices. Given India’s steady economic growth the rising demand will also neutralise the impact, if any, of competitive disadvantage for domestic Indian manufacturers, analysts feel. Tariff cuts in some cases could also be consumption booster, and catalyse value-added exports. For instance, in the jewellery sector where imports of gold and other metals at lower duties could result in lowering of the final export prices of the jewellery.
In view of all this, New Delhi seems to be “working overtime” to strike a deal with Washington before the April 2 deadline for reciprocal tariffs, even as it remains tightlipped on the way the negotiations are progressing. Commerce and industry minister Piyush Goyal reportedly indicated to local industry last week that they should not expect “overprotection,” and be ready for easier imports from the US on a host of sectors. It is not clear as to whether the bilateral trade agreement between the two nations would be formulated even before the timeline set by Trump and Prime Minister Narendra Modi, that is, the fall of 2025.
Global trade expert Abhijit Das says: “India’s approach in the BTA negotiations should be to seek a balanced outcome. The US should (be asked to) provide tariff concessions on products of India’s export interest. Further, India must not give any unilateral concessions to the US.” What if the US imposes reciprocal tariffs on India before the BTA is finalised? In that case, says Das, India may be compelled to defend its interests by braising tariffs against the US. Not respecting intellectual property of US right holders particularly in the pharma sector is what could hurt the US most.
Experts also say even India’s farm sector is not as vulnerable to imports as mostly perceived.