The Trump disruption roller-coaster ride has the potential to inadvertently kick off India’s second round of structural reforms. However, the rhetoric of seeking opportunities that has so closely followed news related to Trump’s trade salvos needs to be questioned. It should be replaced by a more serious conversation on India’s ongoing slow-moving economic polycrisis and the need for structural reforms to make the most of the present challenge.
India has been an exception in striking optimistic notes, in the middle of a global economic tipping point. Commerce Secretary Piyush Goyal rightfully described this as emerging from the wellspring of an aspirational India. Various analysts and commentators have also noted that Trump’s blackmail enables a rare political opportunity for the government to institute deep reforms—starting with sweeping tariff reductions.
This comes at a time when there has been growing consensus that India’s super-rich have remained ‘coddled’ and have failed to emerge out of layers of protection to compete on their own. They have failed to move up the efficiency and technological ladder—partly explaining India’s relative exclusion from global value chains. Former RBI Deputy Governor Viral Acharya, in a paper last year, demonstrated how India’s conglomerates have created a significant presence across numerous sectors over the last eight to nine years and then deepened their dominance within key sectors—in what he terms as a ‘breadth-first and depth-next’ strategy.
The blame has also fallen on the super-rich due to various interdependent macro indicators. This includes most unfortunately, stagnant manufacturing output, rising youth un/underemployment that risks wasting India’s once-in-a-lifetime demographic dividend, a military that is still heavily reliant on imports, falling foreign and domestic investments, as well as declining consumer spending. This growing polycrisis has been noted (somewhat indirectly) by the Finance Ministry’s two consecutive Economic Survey reports. The 2023-24 report even suggests the drawing of Chinese investments and closer cooperation as a panacea despite strategic concerns.
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Strengths on paper
India’s chosen development pathways over the last eight years have increasingly relied on foreign policy trends, assessments and opportunities. This includes India’s optimism during the first trade war of attracting China-escaping firms (2018-20), western efforts at de-risking from China (semiconductors, critical minerals, etc), benefitting from the China plus one framework (Production Linked Initiatives and higher exports to the US in sectors such as electronics and renewables).
By most measures, the general results have been less than satisfactory despite the government’s sincere and well-thought-out efforts and policies. This under-satisfaction is largely explained not by design failures of such policies (PLI being the best example) but by continued weak economic parameters of the overall economy in terms of both existing capabilities as well as the overall investment climate, especially in the manufacturing sector.
In other words, despite India’s strengths on paper—population, democratic institutions, political stability, the English language and low labour cost—it has been passed over by investors as a favoured destination for manufacturing.
Manufacturing supply chains can align and re-align between Asia and Europe for de-risking reasons several times over. But until India undertakes the much-delayed second-generation structural reforms (land, labor, rationalised taxes, infrastructure, investment protection, policy certainty, among others), it will not be in a position to draw in such investments. Governments, by nature, may be incentivised (through political constraints) to extend only piecemeal concessions and incentives, but investors respond only to more holistic and comprehensive ‘package’ offers.
Hence, aspirational India is more than justified in seeing a great opportunity in this present crisis. However, it will take more than a few tweaks and adjustments (including tariff reductions or repo rate adjustments) in order to realistically move toward the realm of opportunities.
It is worth recalling that in response to the first US-China trade war in 2018, India undertook a very significant initiative to cut corporate tax rates from 30 to 22 per cent and right down to 15 per cent for new manufacturing investments. This decision to forsake revenue (estimated at 1.84 lakh crore as of 2022) was undertaken with the calculation that the corporate sector will utilise the tax break to enhance investments and upgrade production, leading to indirect revenues in the longer run as well as wage and job growth. This, however, has failed to occur. Corporate taxes have fallen from 32 to 26.5 per cent since 2019, while the share of taxes on income has grown from 21 to 31 per cent during the same period.
This experience, along with more recent examples such as the general failure and expiry of PLI, only goes to show that even major adjustments could be wasteful or counter-productive without deeper and more structural reforms. India had also, similarly, following global trends, reversed the trend of declining tariffs, gradually raising average rates from 6.2 to 12 per cent from 2013 to 2023-24. Non-tariff barriers demonstrated a similar trend as well. Instead of protecting domestic industry and spurring manufacturing investments and gains, companies have simply been content to earn profits from a more ‘captured’ market.
Due to political constraints, India has adopted a policy of incremental reforms across various sectors over sweeping systemic ones. This has been an experiment in achieving much-desired economic outcomes without putting in the proportionate political and socio-economic risks and costs. Present macro-indicators prove that this broad approach of narrower incrementalism has not succeeded. What is needed now is ever-increasing consideration toward structural reforms.
In other words, to best prepare for the coming disruptions in global trade, to provide India’s 12 million yearly entrants with reliable jobs, and to upgrade India’s military-industrial complex, Delhi would have to undertake serious and costly reforms. There are simply no alternatives left. Reducing tariff rates would be a good and essential start, but without proportionate follow ups it would also fail in achieving expected outcomes.
Hence, Trump must be thanked for opening the door toward tariff reduction. But the more structural reforms that could follow (ideally) from the same must be based more on conviction (as well as convincing) than on ‘pressure’ from an unpredictable Trump 2.0.
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India’s negotiating strategy
India has both good strategic as well as economic reasons to reduce tariff rates. And India should be prepared to satisfy Trump. However, in the realm of non-tariff barriers or larger sectoral concessions, we need to be more cautious.
Instead of bringing down non-tariff barriers simply to reach a bilateral trading agreement with its largest trading partner, India should assure the Trump administration that it is undertaking a holistic review of economic policies aimed at opening up the Indian economy within a one to two-year period. Whatever perceived disadvantages that the US identifies in this area could be factored in within such a larger and more comprehensive process.
If US interest in fairness and reciprocity is genuine, then it has no reason to reject such an approach. If the US is still interested in shoring up India as a counter-balance to China, then it has even more reason to endorse this approach over one that is based on relatively short-term tactical concessions that could later be resented or even reversed. In fact, the US could also be an intellectual partner and friend in such an endeavour and assist Indian policy advisors toward reaching such a common destination.
As the US tries to bring back manufacturing jobs that it had lost over the decades (with uncertain success), India’s challenge lies in expanding its stunted manufacturing base through structural and much-delayed reforms—a task that at least theoretically appears easier.
This article is part of a series on Trump’s tariffs.
Sidharth Raimedhi is a Fellow at the Council for Strategic and Defense Research (CSDR), a New Delhi-based think tank. He tweets @SRaimedhi. Views are personal.
(Edited by Theres Sudeep)
Structural reforms are beyond extreme left wing Marxist Modi government.
Socialist Delhi does not have the guts lower tariffs of socialist India.