India should convert the Trump threat to an India opportunity, re-embracing a more liberal trade regime as a way of reviving manufacturing output and exports.
President Donald Trump's threat to impose reciprocal tariffs on India is both ominous and obnoxious. But it cannot be wished away.
So, the country needs to consider: What type of response is in national interest?
Answering this question requires realising that India's trade regime is a sitting duck for the likes of President Trump. The problems are multiple: Magnitudes, uncertainty, and complexity.
First, India's tariffs are higher than anywhere else. Manufacturing tariffs average 13.4 per cent, more than three times as high as in the US or Europe (see table).
Agricultural tariffs are even higher than those for manufacturing, with an even greater wedge relative to other countries.
And many more goods than in other countries are subject to very high tariffs, as measured by the number of HS 4-digit categories subject to tariffs above 50 per cent.
Second, even these high rates are not guaranteed to importers, because India's "bindings" to the World Trade Organisation (WTO) are greater than its actual tariffs, giving the government the freedom -- which it often utilises -- to raise rates without violating international obligations.
Accordingly, India's trade regime is subject to considerable uncertainty.
Third, the tariff system is highly complex. In 2024, before the rationalisation in the recent Budget, India had no less than 65 different ad valorem applied rates and 145 unique specific tariffs, according to official data the government submitted to the WTO.
This is because India imposes a web of cesses on top of its standard Most Favoured Nation (MFN) rates.
Adding to this, significant non-tariff barriers like the newly imposed Quality Control Orders (QCOs) further complicate trade.
Consider one example highlighting the endemic costs of complexity.
Volkswagen was recently asked to pay $1.4 billion because the company imported auto parts in 'separate' shipments, with a 5 to 15 per cent tariff, rather than in a single shipment, with a 30 to 35 per cent rate.
From the company's perspective, this was probably sound business sense. From the authorities' perspective, this was tariff evasion.
In short, India does indeed have one of the most restrictive trade regimes in the world. So, it's not hard to imagine the US imposing some harsh 'reciprocal tariffs'.
Indeed, it is not inconceivable that the US might announce some 100 per cent tariffs on the grounds that they are equivalent to the cost of the QCOs, such as those on polyester and viscose.
If this occurred, India would soon be facing steep export barriers, with attendant damage to investor confidence and the country's trade reputation.
In these circumstances, India could respond in two main ways.
One approach would be transactional, to negotiate a deal with the US, lowering some tariffs, making selective promises, and offering some side arrangements. But this would be risky.
A deal would inevitably take time to reach, with claims and counter-claims about magnitudes, creating deep uncertainty in the meantime, and causing firms to delay decisions or even reconsider India as a favourable investment destination.
This could severely weaken India's China-plus-one opportunity.
Moreover, even after a deal is reached, there should be no illusions about the consequences.
President Trump is determined to avoid the experience of his first term, when, in his perception, India made promises but did not deliver.
That means monitoring by the US will be close and the timing demanding.
So, it's important to consider an alternative, principled approach of rationalising trade policies unilaterally, as was initiated in the 2025 Budget.
There is an important domestic economic reason to do so, namely that the protectionism of the past decade has undermined 'Make in India'.
An explicit goal was to raise manufacturing's share of GDP and boost exports. But in the event this ratio has continued to decline, along with India's share of those global manufacturing exports that create the maximum jobs (see figure).
Many factors have contributed to this failure: The risks of doing business in India, which have increased in recent years; an overvalued exchange rate since 2022, because of misguided Reserve Bank of India policies; and a production-linked incentive (PLI) regime that favoured capital- and technology-intensive rather than labour-intensive exports.
For example, the textile and apparel sectors, which account for 16.5 per cent of formal sector employment, were allocated 5.4 per cent of PLI outlays, and actually received only 0.3 per cent of the cumulative disbursements.
But an undeniable part of the failure owes to protectionist trade policies, now severely intensified by QCOs.
Economic nationalists fail to understand that in the modern world, exporting requires importing.
In other words, if India wants to produce garments competitively, it needs to offer firms access to competitively priced inputs, which often come from outside the country.
So, when the government makes importing man-made fibres difficult, it kills garment export activity.
It is true that the global export market is not as buoyant as it used to be.
But it remains a ripe prospect, because there is tremendous scope for India to gain market share: there is not only a China-plus-one opportunity, but a Vietnam-plus-one and lately, even a Bangladesh-plus-one opportunity.
If India could grab some of the space vacated by declining low-skilled exports from these countries, a huge local manufacturing boom could be ignited.
Relying instead on the 'large domestic market' offers fewer rewards, as the global market is many times larger.
To take advantage of this opportunity, the government could announce a uniform tariff (inclusive of cesses) of somewhere between 5 and 10 per cent, or a two-tiered structure with, say, a 5 per cent tariff on inputs and 10 per cent on final goods (anything more complicated would lead to the GST trap).
All the announced QCOs must be eliminated. Such a strategy would have several intrinsic advantages.
Low and uniform tariffs would reduce inefficiency, delays and corruption in customs administration.
Access to inexpensive imported inputs would improve competitiveness.
And critically, these actions would reduce the risk and magnitude of Trumpian retaliation.
Admittedly, reducing tariffs could create problems for some firms.
But the government has ways to address any issues that arise.
In manufacturing, it would still be able to use safeguard, anti-dumping, and countervailing duty actions in specific cases.
And in agriculture, India would still be able to use procurement, cash transfers, and other policies to ensure that farmers' interests are protected.
One big question remains - of whether the tariff reduction should apply to all countries (MFN basis) or, preferentially, only to the US.
We favour the former for manufacturing, because India will only be able to revive the sector when firms are free to source low-cost inputs from wherever they might find them (aside from a small number of sectors where there are serious security concerns).
In the case of agriculture, however, it might be worth considering extending tariff reductions only to the US, since America's major exports of soyabean, meats, maize and nuts -- unlike those from other countries -- do not pose a threat to farming livelihoods.
A broader overhaul of the agricultural trade regime can await further discussion within India.
In sum, the government should think as big and bold as Dr Manmohan Singh did in 1991.
It should convert the Trump threat to an India opportunity, re-embracing a more liberal trade regime as a way of reviving manufacturing output and exports.
After all, India has undertaken three experiments on trade policy: A near closed economy during the planning era, opening in 1991, and protectionism since 2018.
The sample may be small. But is there any doubt about the outcome?
The authors are, respectively, with the Madras Institute for Development Studies, Johns Hopkins University, JH Consulting, and Peterson Institute for International Economics.
Feature Presentation: Aslam Hunani/Rediff.com
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