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While growth in India is largely domestic and hence the overall GDP effect may not be more than 0.15-0.2% but overall trade will be impacted due to every country going back to the drawing board, points out Madan Sabnavis.
Three things need to be kept in mind when analysing the impact of the new tariff order imposed by the US.
The first is whether higher tariffs will lead to more domestic production in the US.
If the price factor kept local production down, then this will help. But the consequence will be higher inflation for sure.
Second, the relative tariffs now imposed across countries matter. Hence, India has to look at competition from countries which attract lower tariff rates in the new regime.
The third is whether the relatively smaller countries can scale up to substitute for others.
This begs the question as to whether countries have the ability to scale up substantially to substitute other exporters.
What has the US done?
There are new tariff rates announced for 180 countries with the base level being 10 per cent.
The tariffs have been fixed at broadly 50 per cent of the rate countries are charging US imports.
Therefore, there is a concession reciprocal tariffs structure announced.
China has a higher rate of 54 per cent because the 34 per cent half-tariff will be on 20 per cent imposed earlier.
The US has calculated the effective tariff rates on US goods in these 180 countries based on both nominal rates as well as indirect protection provided through different measures.
Should India be worried? The answer is yes.
While growth in India is largely domestic and hence the overall gross domestic product (GDP) effect may not be more than 0.15 to 0.2 per cent, assuming exports to US falls by 10 per cent, overall trade will be impacted due to every country going back to the drawing board.
But the problem will be at the micro level where industries like pharma, electronics, precious stones, readymade garments, engineering, leather goods are concerned.
At the industry level, there will be a hit as other competing exporters to US would rework their models.
Indian companies may have to cut on price to retain advantage or hope the rupee depreciates.
The latter is possible because high tariffs in US means higher inflation for sure, which will keep rates up and the dollar stronger.
But profitability will be under pressure. Also in the present state of intense competition, it will be hard to substitute other markets as all competitors will be working on the same lines.
MSMEs under pressure
In particular, the MSMEs will be pressurised again. They have a major share in exports and are concentrated in the sectors that are going to face higher tariffs.
So clearly, the woes of the MSMEs will not end and the government may have to work out a strategy here to protect them.
More production linked incentive (PLI)-like schemes is a way out besides the usual channel of credit flows.
The entire export strategy needs some serious and fast rethinking.
The financial markets are the ones which will be unequivocally affected.
We can be prepared for a more volatile exchange regime as the dollar will keep swinging in both directions during the year.
This will mean more Reserve Bank of India intervention for sure, with the proclivity to allow for depreciation to support exports.
Such a measure be done by probably all other countries as well, which can lead to an exchange rate war besides trade war reminiscent of the Depression time.
While this is an extreme situation, it cannot be ruled out.
Further, the US Fed will have to be more gradual on rates as US inflation will rise for sure, as these high tariffs are transmitted.
Even if domestic production picks up, it will be at a higher cost as the reason for high imports was to save on costs.
At the global level, slower trade will also mean slower growth, especially for export-oriented economies.
There are two possibilities on how the world will react. The first is to also raise tariffs, which can lead to a full-fledged trade war.
This could be in pockets but unless countries collaborate, which is unlikely, this may not quite work out.
The other is to get into a dialogue with the US, which can be through bilateral talks or country-groups getting together.
As a corollary, countries may start talking to one another to further trade relations keeping US out.
This looks more likely. But for sure, this year will be tumultuous on economic grounds.
Madan Sabnavis is the Chief Economist, Bank of Baroda and author of: Corporate Quirks: The darker side of the sun. Views are personal.
Feature Presentation: Aslam Hunani/Rediff.com
