Tariff shocker can be India’s chance at trade reform

By Andy Mukherjee

Donald Trump’s “Liberation Day” package of tariffs is being interpreted in India in three different ways.

The immediate reaction is relief mixed with schadenfreude: At 26 per cent, the tax on India is not the slap on the wrist that diplomats in New Delhi would have hoped for, especially after making concessions to Elon Musk’s Tesla Inc, and Starlink Inc, as well as to Alphabet Inc. and Meta Platforms Inc. But it’s at least less severe than China’s 34 per cent and Vietnam’s 46 per cent.

The second view, popular among geopolitical analysts, is that this is nevertheless a betrayal of an important ally: Is it fair to be punished like this for agreeing to be America’s bulwark in Asia against China’s rising dominance? Has Prime Minister Narendra Modi erred in placing too much trust in his friendship with Trump, and by refusing technology and capital from Beijing?

The final opinion, which some businesspeople hold privately, is that the White House’s shocker on trade is a once-in-a-generation opportunity: It can help resolve an unfinished political debate from the early 1990s on just how open the Indian economy must be, to whom, and for what.

Marry the three assessments, and the obvious conclusions are rapprochement and reform. Modi should mend bridges with Chinese President Xi Jinping and seek to actively participate in intra-Asian production networks. At the same time, for a quick exit from Trump’s doghouse, New Delhi should dangle the carrot of duty-free (and hassle-free) access for American firms to the most-populous nation.

This has to go on alongside technical negotiations. For instance, in coming up with the rate of 26 per cent, how did the Trump administration conclude that India was charging American exporters double of that? Did it count the South Asian nation’s goods and services tax as a trade barrier? If the GST is lowered, but agriculture remains behind high tariff walls, will India qualify for Trump’s global rate of 10 per cent?

Until those wrinkles are ironed out, Indian exporters will suffer along with the rest of the world. The broader economy may have to put up with capital costs that remain elevated globally. Beyond that, however, the only interests that have to be sacrificed are of a tiny group of local tycoons. For 600 million workers and 1.4 billion consumers, Trump’s trade war is a wake-up call to revive the three-decade-old liberalization project.

The Hindu right-wing Bharatiya Janata Party, which was in opposition when the project began, didn’t care much about pre-1990s, Soviet-style state socialism. But it was also suspicious of the agenda being thrust by the West. The BJP’s intellectual fountainhead, the Rashtriya Swayamsevak Sangh, or the RSS, wanted an economy in which a large number of local manufacturers, traders and shopkeepers are at the vanguard of production with multinationals tapped only for their technology. When Kentucky Fried Chicken was trying to open its first restaurant in 1995, a prominent BJP leader famously quipped: “Computer chips, yes. Potato chips, no.”

Over the next 30 years, the BJP would wield power in the federal government more than half of the time, including a continuous run since 2014. Yet, when it comes to trade and investment, the early 1990s commitment to greater international openness has prevailed, albeit with a serious setback in the past decade under the most popular leader in the party’s history.

Modi didn’t exactly align with the ideological preference of the RSS. Under him, however, a small group of local billionaires lobbied for and received protection from foreign competition, packaging their goal of dominance as national interest. Import taxes, which had fallen steadily since 1991, shot up again to among the highest in the world.

A longstanding territorial dispute with China erupted as border clashes in 2020, leading to a prolonged economic estrangement: The trade deficit with the neighboring economy ballooned to $100 billion a year, and yet New Delhi wouldn’t let Chinese firms reinvest those gains in India. That also meant missing out on technology, like BYD Co’s five-minute supercharger that can help control emissions in polluted cities.

Rapprochement of investment relations with Beijing and reform of trade under pressure from Washington will put the squeeze where it should be: on large conglomerates such as the Tata Group and the empires run by Mukesh Ambani and Gautam Adani, the two richest Asians. They should accept bold risks with uncertain payoffs, like DeepSeek. Or they must stop expecting to be coddled by state protection.

Chest-thumping nationalism has merely meant a transfer of billions of dollars in subsidies to assemble mobile phones or solar panels and call it a success of Modi’s “Make in India” program. But if opposition on the political left is unhappy with stalled manufacturing and high youth unemployment, many in the ruling right wing aren’t exactly thrilled with the relentless rise of a few big firms, especially as genuine entrepreneurship remains hampered by red tape.

The RSS might be pleased with the rapid spread of Hindu nationalism in the social sphere. But its economic vision of computer-chips-not-potato-chips remains a chimera. India still doesn’t make semiconductors, though it now has more than 1,100 KFC stores. China has more of both.

A complete repudiation of the discredited ideology of self-sufficiency is overdue, and a global trade war offers an excuse for Modi to rebrand himself as the antithesis of Trump. After all, that’s how the 1990s reforms also started; a balance-of-payment crisis exacerbated by the collapse of the Soviet Union turned staunch socialists into overnight free marketers. There’s no need for New Delhi to feel shackled by “Liberation Day.”