Will Trump’s tariffs push major reforms in India?
Will Trump’s Tariff War Spark Big-Bang Reforms in India?
India has historically turned to economic reforms in times of distress. The most famous example remains 1991 when the country, facing a deep financial crisis, embraced liberalization and opened its economy to global trade. Now, with US President Donald Trump’s escalating tariff wars disrupting global trade, India finds itself at another crossroads.
Could this be a golden opportunity for the world’s fifth-largest economy to move away from protectionism and integrate further with global markets? Will India seize the moment as it did more than three decades ago, or will it retreat into economic conservatism?
Trump has repeatedly labeled India a “tariff king” and accused it of unfair trade practices. India’s trade-weighted import duty—an average measure of all tariffs imposed on imported goods—remains one of the highest in the world. While the US, China, and Japan have average tariffs of 2.2%, 3%, and 1.7%, respectively, India’s stands at a staggering 12%, according to World Trade Organization (WTO) data.
High tariffs make imported goods expensive for Indian consumers and businesses, reducing competitiveness in global markets. While India’s exports have grown—mainly through services—the country still runs a large trade deficit. With India’s share of global exports at just 1.5%, the urgency to boost trade has never been greater.
A Shift in Policy?
The big question is whether Trump’s tariff war will push India toward greater openness or deepen its protectionist stance. Prime Minister Narendra Modi’s government has often been criticized for its inward-looking trade policies. However, recent developments suggest a shift.
Last month, just ahead of Modi’s meeting with Trump in Washington, India unilaterally slashed tariffs on select American goods, including Bourbon whiskey and motorcycles. This move, though symbolic, signaled a willingness to engage in trade diplomacy. Commerce Minister Piyush Goyal has since made multiple trips to the US, discussing a potential trade agreement amid Trump’s threats of retaliatory tariffs.
Analysts at Citi Research estimate that India could lose up to $7 billion annually if the US imposes reciprocal tariffs, hitting key sectors like metals, chemicals, and jewelry. Pharmaceuticals, automobiles, and food products could also be affected. Amid these threats, Goyal has urged Indian exporters to shed their “protectionist mindset” and embrace global competition.
Beyond US-India relations, India is actively pursuing free trade deals with countries such as the UK, New Zealand, and the European Union. These moves suggest that India may be preparing for a more liberalized trade approach, albeit cautiously.
A Surprising Partnership
In an unexpected twist, Indian telecom giants Reliance Jio and Bharti Airtel have partnered with SpaceX’s Starlink to launch satellite internet services in India. Given Musk’s previous clashes with both companies, this alliance raised eyebrows. It also emerged as US and Indian officials were negotiating trade agreements, hinting at a possible softening of regulatory barriers.
Past Successes and Recent Struggles
India’s economic boom from the late 1990s to the early 2000s was largely driven by gradual integration into global markets. Industries like pharmaceuticals, software, automobiles, and textiles thrived alongside tariff reductions. However, over the past decade, India has leaned back into protectionism, affecting its ability to scale up manufacturing and exports.
Economists argue that high tariffs have shielded domestic industries from competition, fostering inefficiency rather than innovation. Viral Acharya, an economics professor at NYU and former deputy governor of India’s central bank, suggests that lowering tariffs could stimulate competition and drive economic efficiency.
The Road Ahead: Reform or Retreat?
India’s challenge lies in balancing trade liberalization with domestic economic priorities. Many believe that lowering tariffs could boost exports, attract foreign investment, and create jobs. But there are also concerns about potential risks, particularly from Chinese dumping—where Chinese manufacturers flood the Indian market with cheap goods, undercutting local businesses.
Rajeswari Sengupta, an associate professor at the Indira Gandhi Institute of Development Research, warns that an all-out tariff war could harm India more than its competitors. “China can afford to retaliate in a trade war because of its massive export base. But India, with its small global market share, stands to lose more than others,” she explains.
To mitigate risks, some experts advocate for a phased tariff reduction, coupled with strategic non-tariff barriers against specific countries like China. By doing so, India could protect domestic industries while still opening its economy to the world.
A Global Role for India?
Trade expert Aseema Sinha believes India has a unique opportunity to shape the future of global trade. “By reducing protectionist barriers and strengthening ties with Southeast Asia and the Middle East, India can position itself as a leader in the re-globalized world,” she says. Lowering tariffs could also make India a trade hub, attracting economic activity from multiple regions.
This shift could help India address its employment crisis. Agriculture, which accounts for 15% of GDP, still employs 40% of the workforce, highlighting the country’s productivity gap. While India’s service sector is thriving, it remains out of reach for millions of low-skilled workers who struggle to find meaningful employment. Manufacturing, if boosted through exports, could bridge this gap.
Final Thoughts: Will India Rise to the Challenge?
The big question remains: will India use Trump’s trade war as a catalyst for reform? Or will it fall back into economic protectionism?
Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), warns that India may be conceding too much ground in negotiations. If India continues making preemptive concessions without securing reciprocal benefits, it risks eroding its influence in global trade.
Ultimately, India’s response to Trump’s tariffs could shape its economic trajectory for decades. If the country takes bold steps toward integration and competitiveness, it may well replicate the success of 1991. If not, it risks stagnation in a world that is rapidly moving forward.