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Donald Trump’s punitive 50 per cent tariffs on India are a wake-up call for the nation of nearly 1.5bn. The high import duties, which the US president imposed on August 27 as punishment for the country’s purchases of Russian oil, have severely restricted India’s access to its largest export market. Economists estimate that the tariffs could reduce the country’s annual economic growth rate by up to 0.8 percentage points. Though India is still expected to be the fastest-growing major economy this year, its strained ties with Washington highlight its urgent need to build greater resilience against external shocks.
Prime Minister Narendra Modi wants India to reach high-income status by its independence centenary in 2047. That ambitious goal would require an average annual growth rate of around 7.8 per cent for the coming decades. But sustaining such momentum will be even harder if exporters are hobbled by rising tariffs or weakening global demand. Forecasters reckon India’s economy will grow between 6 and 7 per cent this year, assuming Trump’s duties stay in place.
Even if US tariffs are eventually diluted, or annulled by the courts, India would be wise to diversify its trade links. Recent efforts to repair economic relations with China and to accelerate talks with the EU on a free trade agreement will help. To strike meaningful deals, however, India will need to reduce its own protectionist barriers, which would also expose coddled industries to long-overdue competition.
But India’s greatest source of resilience will come from reforms at home. The world’s most populous nation boasts a rapidly growing middle class, a large pool of Stem-trained workers and states with diverse industrial specialisms, from information technology in Karnataka to automotive manufacturing in Tamil Nadu. Yet India’s private sector cannot take advantage of the country’s scale due to a plethora of onerous local regulations. High logistics costs are another impediment.
Easing these internal trade barriers would reduce Indian businesses’ costs and help them to expand, which will also make them more competitive in international markets, regardless of global trade conditions. A 2021 study estimated that domestic hurdles made up about 40 per cent of India’s total trade barriers.
The Modi government has made progress here. It introduced a goods and services tax in 2017 that unified regions’ value-added taxes. A recent reform to simplify the system will help further. A boom in infrastructure investment has boosted port, railway and digital connectivity. But there is still plenty of room for improvement. Land and labour laws restrict opportunities to scale up. In some areas road networks, public transport and power remain poor.
Encouraging greater competition among India’s states would help. Foreign companies have often favoured setting up in states with less onerous rules and better infrastructure, including Kerala, Andhra Pradesh and Gujarat. As other regions lose out on jobs and investment, it can nudge them towards reforms. Modi’s preference for centralisation, however, risks restricting the devolution of powers and funding needed to unshackle this so-called competitive federalism.
Unleashing the potential of India’s internal market will not be easy. It means challenging vested interests, fostering closer co-operation between New Delhi and the states, and drawing in private capital. If India can make further strides, it will not only fuel faster growth but also build the economic muscle to withstand external threats. India’s best answer to Trump’s tariffs will be reform — building strengths at home that no foreign power can bully away.
