Indian Americans are reportedly voting for Kamala Harris over Donald Trump by a margin of 2 to 1. Some Indians, though, are dizzy with admiration for Trump. After all, his White supremacist appeal is the mirror-image of their majoritarian drive in India.
But Trump is bad news for New Delhi, especially in his second coming. He will likely initiate a trade war — primarily with China but also with India, whom he described on 17 September as a “very big abuser” of bilateral trade. The consequences for India of his promised 10-20 per cent global import tariffs will very likely be rupee volatility, tighter monetary policy and therefore slower economic growth in India. Notably, Harris is proposing nothing of this kind — her main economic quibble will be India’s record trade with Russia in the context of the Ukraine war.
Theoretically, a trade war between the United States and China could help India. Trump has promised a higher 60 per cent tariff on imports from China. This could encourage companies pursuing “China+1” policies — offsetting their dependence on Beijing by investing more in other emerging markets — to diversify toward India. However, supply chains are difficult to build in high-tariff environments. High tariffs on imported parts make it less attractive to build products for export. And Trump or not, India has taken a far more protectionist turn under Prime Minister Narendra Modi — something we will discuss below.
The cracks behind the façade
There is bipartisan support in the US for stronger relations with India. This is driven by strategic competition with China, influential Indian communities abroad, and solid, durable educational and commercial links between the two countries. Successive Indian governments have laboured to improve relations. The Quad — which brings together Australia, India, Japan and the US — represents a major countervailing coalition to an assertive China.
But that cheery façade conceals a lot of troubling cracks. The US is unhappy about India’s closeness with Russia, driven in part by the opportunity for cheap Russian oil, and by alleged Indian covert action in the US.
And the threat of a trade war under a Trump administration is real. Consider the former US president’s record:
- 2017: The “Buy American, Hire American” executive order makes it harder for foreigners — mostly Indians — to acquire H-1B work visas
- 2018: The Trump administration imposes tariffs of 10-25 per cent on Indian aluminium and steel, forcing New Delhi to impose retaliatory tariffs on 28 US products ranging from apples to nuts to chemicals.
- 2019: The Trump administration removes India from the Generalised System of Preferences (GSP) that resulted in significant tariff increases for Indian exports of textiles, apparel, leather goods, agricultural products etc.
Things improved considerably during Joe Biden’s presidential tenure. India and the US resolved seven outstanding trade disputes covering trade in agricultural products, solar panels, steel and aluminium etc. Biden made it easier for Indian H-1B visa holders to renew their visas without leaving the US. And in January 2023, the US indicated it would consider restoring GSP benefits to Indian exports.
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India is now more vulnerable
These very gains for India have laid the foundation for future trade conflict. From an American perspective, the trade deficit with India increased to a record $43 billion in 2023, and will likely widen further this year.
Meanwhile, India’s vulnerability to punitive US action has increased. The US is India’s largest export destination, and received 18 per cent of Indian exports in 2023-24, up from 12 per cent a decade ago. The US is the only one among India’s top 10 trading partners with whom it has a trade surplus – that is, it exports more than it imports. Meanwhile, India is only the US’ ninth-largest trading partner, which makes trade with New Delhi relatively less important for Washington.
As it did in 2019, the Indian government will respond to any US tariffs with tariffs on US exports, an inevitable step that will leave consumers in both India and the US worse off. And if Trump targets China with even higher tariffs, India might have to increase tariffs on Chinese products to prevent an influx of cheap imports. Higher US inflation and higher Indian tariffs will all feed inflation in India.
This brings us to the final point — Modi has been the most protectionist Indian PM in decades. According to economist Shoumitro Chatterjee and former Chief Economic Advisor Arvind Subramanian, India has had 3,200 tariff increases since 2015. The average Indian tariff jumped from 13 per cent to 18 per cent in a single year, 2018.
And yet the Modi government has failed spectacularly in its stated goal of curtailing Chinese imports, which rose to a record $101.7 billion in 2023-24, while exports stagnated at $16.7 billion.
And the beneficiaries? Large monopolies that are close to Modi. Former Deputy Reserve Bank Governor Viral Acharya has calculated that the concentration of capital around the five largest corporations in India has contributed to inflation. This is in part because these influential firms can lobby for protection from imports, which raises the prices of imported goods and services for Indian consumers.
The bottom line is that India faces several difficult months if Trump is elected tomorrow. The chances of a trade war that raises inflation and reduces India’s economic growth are much higher under a Trump presidency. Whatever India does in the short term, it must look at trade liberalisation as an opportunity rather than a threat.
Remember that India has been one of the biggest gainers from global trade liberalisation. According to the World Bank, India’s share of global exports rose 77 per cent between 2004 and 2014, and only by another 28 per cent in the nine years leading into 2023. As Modi picks his way on this path, his best guide would be Manmohan Singh. The instinct to liberalise rather than raise tariff walls can only bring more jobs for Indian workers, and more markets and revenue for Indian firms, including Micro, Small, and Medium Enterprises.
Amitabh Dubey is a Congress member. He tweets @dubeyamitabh. Views are personal.
(Edited by Zoya Bhatti)