​Rational response: On U.S.’s tariffs and statements, India’s response

The Government of India has so far handled the issue of the 50% tariffs imposed by the U.S. with maturity and pragmatism. Despite provocative statements by senior U.S. government officials, India has refrained from being baited and has instead stuck to its established position. So, while U.S. Trade Adviser Peter Navarro called the Russia-Ukraine war “Modi’s war”, India has remained calm and has instead been preparing on how to deal with the new reality of 50% tariffs. At the same time, Indian officials have said that negotiations on a trade deal with the U.S., though paused, are not off the table. Even the additional 25% ‘penalty’ tariff imposed on India is not a deal breaker, they have said, even though it renders any trade deal inconsequential. This is an eminently practical approach. A knee-jerk cessation of trade talks with the U.S. would hurt India further, but the gains from any potential trade deal will also be undone if these penalty tariffs remain in place. The messaging by the government to industry, too, has not been of denial but of reassurance: they know there is pain coming, and a plan is in the works to alleviate it. The solutions seem to be looked at from a suitability point of view, and not for optics. Rather than announce flashy fiscal incentives, the government has demonstrated awareness that such incentives would hardly make a dent in the face of the 50% tariffs for India while competitors face less than half that. Instead, the government is focusing on what it can effectively address, such as the impending liquidity crunch exporters are going to face.

The Centre has been reasonably pragmatic about how to secure the overall economy from the tariff impact as well. Exports make up about one-fifth of India’s GDP. The U.S. accounts for about one-fifth of that, and even within that, about 40% of India’s exports to the U.S. will not be affected by the 50% tariffs. So, even though the sectoral impact of the tariffs could be quite severe for some sectors, the macroeconomic impact is likely to be limited. The dual approach of rekindling dialogues with China, while also trying to propel domestic consumption through GST rate cuts should, therefore, go a long way in mitigating the hit. There is some talk in the government about easing the norms laid out in the COVID-19-era Press Note 3, which curtails Chinese foreign direct investment in India. This should be encouraged, with adequate guardrails to ensure national security. The Centre and States must also cooperate next week to ensure that the GST rate cuts go through, without compromising too much on the States’ fiscal health. Now is the time for level-headed action, not emotional outbursts.