Trump tariffs and India's options: Shield exports, clean up domestic act

American shoppers may soon feel the pinch of Donald Trump’s tariffs. High tariffs on consumer goods imported into the United States (US) will lead to inflation. Over time, this will affect most US citizens, and economic growth may stagnate if demand declines. Also, as the prices of intermediate goods increase, the cost of domestic manufacturing — and ultimately the prices of domestically produced goods — will rise. 

Even so, domestic producers in the US are content to give Donald Trump political mileage, as this is largely a consumers’ problem. They may benefit from reduced competition. 

Although higher prices of imported intermediates may incentivise domestic production, it is unclear how long this will take. During the Second World War, Olivetti reconfigured its typewriter plants to produce machine guns for the Italian army in just three months. But that was under wartime patriotic fervour and Mussolini’s dictates. Can Mr Trump inspire the same response among US manufacturers? 

The additional 25 per cent tariff on all our exports to the US due to our import of Russian crude oil puts a huge burden on India. We import around 600 million barrels of oil per year from Russia. If we stop doing this and other countries don’t step in to absorb Russian oil, the demand for other oil suppliers in the international oil markets will increase, and prices of crude oil will shoot up since India is the third-largest oil importer. Shifting imports from Russia to the international market will increase demand in the global market by 4 to 5 per cent. Say it goes up by $20/barrel. India’s total crude oil imports are around 1,680 million barrels per year. Our annual oil import bill will go up by $34 billion per year. Currently, the price advantage of Russian crude is $2/barrel. If we lose that, the additional burden on India could be $1.2 billion. Apart from not giving in to a bully, there is thus an economic argument for resisting Mr Trump’s arm-twisting over importing Russian oil. 

How will the US benefit from this? Its net exports of petroleum products in 2023 were 1.64 million barrels per day, or around 600 million barrels per year. With a $20/barrel increase in price, it would gain an additional $12 billion in annual revenues. From the US perspective, Mr Trump’s tariffs may therefore make some sense. 

Policy choices  

India should take steps to protect its exports. For example, the wholesale price of Basmati is around ₹50/kg, while the landed price in the US is about ₹100/kg. With a 50 per cent tariff, the landed price would rise to around ₹150/kg. In comparison, Basmati from Pakistan, facing only a 19 per cent tariff, would cost about ₹120/kg. The current retail price at Walmart in the US is around ₹400/kg. 

A subsidy of around ₹20/kg to Indian exporters would make our Basmati competitive against Pakistan in the US market. We are exporting around 235 million kg of rice. A subsidy of ₹20-25 per kg will cost the government around $50 million. The subsidy can be given in a variety of ways, such as cash transfer on actual export shipment, rolling over debt, and tax rebate against earning from exports to the US. Unfortunately, subsidies once given are often difficult to withdraw. So, it should be in the form that is self-liquidating. One option is to link the subsidy amount to the additional tariff imposed on India for the product, compared with other major exporters to the US. 

A similar subsidy could be provided for shrimp exports to protect farmers and fishermen. Such subsidies could be financed using the savings from importing oil from Russia rather than the international market. At the same time, import tariffs should be selectively lowered for large-scale manufacturing sectors. Tariffs and import restrictions were initially introduced to protect infant industries. However, as pointed out, once introduced, they were difficult to remove. As a result, we found ourselves with many senile infants!  

The cost of logistics for industries has been reduced but much still needs to be done. While the government is collecting more taxes, it almost harasses honest taxpayers to the point of discouraging them. I had got a goods and services tax  (GST) number when my consulting income exceeded ₹20 lakh. However, I kept receiving reminders about filing GST returns. Feeling harassed, I decided to forego consulting assignments in excess of ₹20 lakh a year, and gave up my GST number.  

A report by TeamLease RegTech points out that a standalone solar energy producing plant must comply with 2,735 total annual tasks, with 83 carrying prison sentences. No wonder, many industrialists prefer to invest abroad rather than in India. We should take  Trump Tariffs as an opportunity to clean up our act. 

 

The author is chairman, Integrated Research and Action for Development (IRADe)