India's economic history suggests Trump tariffs won't lead to reforms

Last week, United States (US) President Donald Trump imposed a 25 per cent tariff on select Indian exports, and soon escalated it to a threat of 50 per cent, primarily over our continued import of Russian oil. This amounts to punitive sanctions reserved for enemies. Unless reversed quickly, it will deal a hard blow to a few traditional exporters to the US such as garments, leather, and gems and jewellery. The Indian political response has been a predictable mix of defiance and chauvinism, claiming to “safeguard the welfare of farmers, labourers, entrepreneurs, industrialists, exporters, and small businesses.” But a more revealing set of reactions came from business leaders and officials. Amitabh Kant, former chief executive officer of the NITI Aayog, called the tariffs a “once-in-a-generation” moment — or, in Bollywood terms — an Agneepath turning point. Anand Mahindra, chairman of the Mahindra group, called it “global Manthan”, conjuring the churning of mythical amrit (nectar) from the trade turmoil. Are such expectations realistic?

 

1. Serious reforms, anyone? Mr Kant is suggesting simplifying bureaucracy and tax structures (eg reducing the number of slabs of goods and services tax, or GST, to just two) and “reviving” the tourism sector. He suggests that no form should exceed half a page and no law should be longer than two pages in order to foster entrepreneurship. Mr Mahindra advocates a functional, single-window clearance for investment. He also calls for boosting tourism through faster visa processing and better infrastructure. He wanted production-linked incentive (PLI) schemes to be expanded, and import duties on manufacturing inputs to be rationalised to boost competitiveness. All sensible, all familiar. India has heard them before.

 

With every such suggestion, business leaders are merely highlighting long-standing structural inefficiencies that have continued under every regime, and through every so-called crisis. India’s outstanding tourism potential is destroyed by filth, lack of individual safety, frequent deadly stampedes, creaking infrastructure, criminal negligence of historical monuments, rampant illegal construction, in which local politicians have vested interests, and high costs for small businesses living off tourism. None of these can be fixed, given the pervasive poor governance — from panchayats to the Centre. If leaders like Mr Mahindra have a real say in making changes on the ground, the outcome would be different. But the government does not even want to draft them in fixing creaking urban transport, causing misery for the commuting millions every day.

 

2. False belief about crisis and reforms: Businessmen are comparing the current situation to the 1991 forex crisis, which spurred India’s liberalisation. There is a widespread belief that reforms in India are possible only during a crisis. Manmohan Singh, who, as finance minister, had spearheaded the 1991 reforms, used to say this. Hence, reforms are the default expectation of business leaders for every hiccup India suffers. But we hear hardly any instance of economic crises followed by reforms, to draw such a pat conclusion. Quite the opposite. Over the past 30 years India has had a series of reforms in infrastructure, telecom, capital markets, pension, law, taxation (such as GST), and other areas without any crisis.

 

Indeed, the 2008 financial crisis led to no reforms, only mindless copycat pump-priming, which led to inflation and eventually bad loans. Most importantly, have Mr Trump’s unhinged tariffs created a crisis for India? Not quite. Moody’s, the rating agency, says that the steep new US tariffs on Indian exports would trim India’s growth in gross domestic product (GDP) by only around 30 basis points in the near term. It will lead to pain for small exporters and some job losses, but it is not enough to spook investors, rattle markets, or pressure the government to “do something”.

 

The baseline of Indian reform is a series of slow and half-hearted measures, all the while ensuring that bureaucratic control and the wheels of corruption remain undisturbed. Accountability is low and so is the impact on competitiveness. But there has been one notable change. The Modi regime has been an aggressive revenue collector. The ratio of gross tax revenue (GTR) to GDP at 11.7 per cent, when GDP growth is 6.5 per cent, is near the historic high of 11.9 per cent of 2007-08, a gangbuster year of 9 per cent GDP growth. You may bemoan the lack of reforms, but the government’s intent is clear; it has very adeptly pursued its own priorities: Imposing and collecting tax, cess, and levies. Highway toll collection will hit ₹80,000 crore in FY26, an 18 per cent compounded increase from 2018-19. Securities transaction tax is expected to rise from ₹25,085 crore in FY23 to ₹69,000 crore (budgeted) in FY26, a compound annual growth rate of 40 per cent. Such huge inflows buy social schemes and capital spending for the government, but have not led to increased productivity or competitiveness.

 

India doesn’t lack ideas that the country’s business captains are so eager to proffer. It lacks intent and the will to implement them. There is no political urgency to ease the frictional cost of doing business, reduce the cost of logistics, train a vast army of factory workers, and slash red tape. To be sure, the government can easily reel off a series of schemes for each of these areas. But the undeniable outcome is that manufacturing is stuck at 14 per cent of GDP, India’s export competitiveness remains pathetic, and businessmen are routinely complaining about lack of skilled labour and petty bribes and harassment. And not having done any of this earlier, when it had a parliamentary majority, why and how would the coalition government leap at these fixes now since there is much milder economic pressure than in 1991?

 

 

The author is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers