US President Donald Trump has not relented on his imposition of an additional 25% tariffs on India’s exports to the USA which Trump calls a “penalty” for buying Russian oil, hitting one of US’ largest trading partners with a whopping 50% tariff on goods arriving from the country- a move that has come into effect today.
According to the Indian think tank Global Trade Research Initiative (GTRI), India ships about $86.5 billion worth of goods to the US each year.
Of this, about $60.2 billion (66%) will now face the 50% tariff in what could strike a 70%-80% blow to exports of labour-intensive products like textiles, diamonds, leather etc.
While the tariffs are likely to impact livelihoods, GTRI maintains that India’s limited reliance on exports (20% Exports-to-GDP ratio) could cushion the blow to some extent.
Invezz spoke to Ajay Srivastava, founder of GTRI to delve deeper into the impact, assess whether India’s large domestic market could absorb the tariff shock, and how the government can tackle the tariff onslaught.
Excerpts:
Ajay Srivastava, founder, GTRI
Exports of labour intensive products to the US will come down by as much as 80% in a year
Invezz: You have detailed the sectors that will be impacted the most because of the 50% import tariff imposed by the US on India, like shrimp industry, textiles and diamond exports. What kind of an impact do you foresee, considering also that these are labour intensive sectors?
So, about $60 billion, or two-thirds of India’s product exports to the US will face 50% tariff.
And most of these products are labour-intensive products, like textiles, garments, leather products, handicrafts, diamonds.
The share of the US in India’s global exports is just 20%. But for most of these labor-intensive products, the share of the US is higher than 30%.
For example, for diamonds and jewellery, the share of US in India’s global export is 40%. For carpets, it’s 50 to 55%. For garments and textiles, it’s about 35%.
So, firstly because of the higher share, and then secondly a tariff as high as 50%, and thirdly, due to less tariff on the countries with which you are competing in US- all these three things together, will hurt the labor-intensive industries significantly, and we believe that the exports of most of the labour-intensive products will come down by 70% to 80% in one year.
How should the Indian government tackle the tariffs?
Invezz: What should the government’s next step be now to tackle this disruption?
So, there are a few things to consider. Firstly, we are not an export-driven economy.
Exports are just 20% of our GDP and our domestic market is growing at the rate of 6% to 7%, and that should absorb most of the shocks.
Secondly, we are at the final stages of negotiating free trade agreements with the European Union.
We already signed an agreement with the UK. It is pending implementation.
We are at advanced stages of negotiation with, say, Peru, Oman. So, another step is to complete these free trade agreement negotiations and start exporting to those countries, under favourable tariffs.
Also, our exports face many types of non-tariff barriers in many big markets. So, we’ll be looking at those non-tariff barriers on a case-by-case basis and try to solve them on a priority basis.
And then there is our Indian market. So, these three are immediate steps, and coupled with some government support- like the government is considering simplifying the GST scheme to restart the MSME economy in many sectors.
Then there is a talk that the government will be announcing an interest concession scheme so that capital can be obtained by MSMEs at cheaper rates.
So, all these things we believe will help the exporters.
Of course, exports to the US will be down heavily, but our services are growing at a higher rate of 10% and general exports of goods and services next year also will be in the positive domain.
Job losses to be limited to pockets; domestic market likely to absorb tariff-led shock
Invezz: Experts from Morgan Stanley and Citigroup have projected about a 1 percentage point drop in India’s GDP growth from the tariff hit. But at the ground level, there will be a massive loss of livelihood and the steps that you mentioned may have more of a staggered impact than an immediate one…
My sense is that job losses will be there but they will be in specific pockets. There are very few sectors- for example, the diamond sector where 40% exports are going to America, but it also has a huge domestic market.
Similarly, for ttextiles and garments also there is a huge domestic market. For the leather sector, say, our exports are $1.2 billion to the US, that’s 20% of our global exports.
But domestic market is at least 20 times bigger.
So, I hope domestic market absorbs some of the pains and we succeed in exporting more to the countries other than the US.
So, I think I employment loss will be there in certain sectors which are export-driven sectors. But, most of the firms make for both the domestic and export markets.
Export market is just 20% of the domestic market size. So, the pain will not be very acute. I mean, it will be dispersed across pockets and will bounce back very fast.
US, EU biggest protectionist powers now, India fairly liberal
Invezz: Some experts also say that India has had a fairly protectionist trade policy structure. So, is there a need to reconsider the way it carries out its trade with other countries to open up perhaps more and not be as protectionist as it is right now?
No, I don’t believe this. Now, the biggest protectionists are US and the European Union.
US has a new tariff structure now. European Union will be shutting down from the next year, January. That’s another worry.
They will be starting their carbon border adjustment measures, and will start taking taxes from January next year.
And for the past two years, they are merely collecting data and our exports of steel, aluminum are already down by 24% to them compared to last year.
So, all the big blocs are turning protectionist. India was called a protectionist country, but I think compared to these blocs, India is very liberal.
On PM Modi’s China visit and the need for India to have a relook at reforms
Invezz: PM Narendra Modi will be visiting China later this month for the Shanghai Cooperation Organisation (SCO) summit for the first time since 2018. While it is a significant geopolitical move, do you also believe we could gain additional trade from China to offset losses from the US?
Firstly, we are a big economy- the fourth largest economy in the world. Therefore, we have to conduct our relationships with different nations on a very long-term view.
Just because we have some problems with Trump, we should not be seen as getting closer to some other country. We have to think long-term and then act.
With China, we have seen how both China and US were aiding Pakistan two months back in war against India.
Nobody is an enemy. Everybody is a friend. But we have to think long-term.
Just because we are not happy with the US, we should not go very near to another country. We should only do those things that help us in the long run.
I want to add- the need of the hour with this ‘Trump shock’, is that we have to go for internal renewal.
We have become a high-cost country. Deep manufacturing is almost impossible in India. For that, we have to do reforms at the basic level.
And only then can we make better things, and we can think about exporting more to all other countries.
By reforms I mean, land, labour, power, everything- we don’t have those reforms which is why we have to go for schemes like PLI.
So, once we are fundamentally strong, then we don’t need external schemes.
The post Interview: India’s domestic market can cushion tariff shock, but need reforms to lift global exports, says GTRI’s Ajay Srivastava appeared first on Invezz
