India after the Trump tariff

If anything testifies to the truth that might is right in today’s world, it is the ostensible reason underlying Donald Trump’s imposition of a 50 per cent tariff on Indian exports to his country. The level of tariff is matched only by the rate slapped on Brazil. This, even though Prime Minister Narendra Modi has wooed Trump assiduously ever since his first term in office. The hugs and the hand-holding have meant nothing when it came to the United States pursuing its interests, no matter the malevolence of denying over a billion people access to oil, on which their livelihood depends. The US has been complicit in the devastation unleashed on Gaza by Israel. If India is “fuelling Russia’s war machine” by buying its oil, the United States is Israel’s war machine itself. Almost all the weapons of mass destruction used by Israel are sourced from the United States. Historically, the US has not only bank-rolled Israel with aid but also rescued it from censure in international fora for the genocide in Palestine. Given that the world knows this record, it hardly needs to be pointed out that in the case of Russian oil, it singles out India when its NATO partners have purchased more of that oil than India has since 2022.

Trump’s actions have upended the premise on which Indian economic policy has been based since 1991. Economists imbued with the American ideology, who have driven that policy, purveyed the idea of a global free market for goods with which India must integrate for its own sake by dismantling all trade barriers. India has gone a great distance in that direction since then without reaping the reward promised. The share of industry, the sector of the economy most exposed to world trade, has hardly grown. Now India has discovered something far deeper – that there is no free market for goods globally.

India needs to do three things in response to Trump’s action. First, in a version of Trump’s own “reciprocal tariff”, it should impose a 50 per cent tariff rate on US goods. This will convey the message to the world that India has gumption. In any given situation, standing up to a bully has costs as well as benefits. The obvious cost in this case will be that Trump will not be pleased. The benefit of standing up to the bully would be the support that will come from countries who view Trump's actions as unacceptable. Some of them also happen to possess an export item that is particularly valuable to India – oil. Prominent among them would be Russia and Iran, major global suppliers of oil. While India has maintained its historic relationship with Russia, which has held it in good stead, it has shortsightedly eased up on its much older, civilisational association with Iran. In response to US sanctions, it has reduced its purchases of oil from that country. India should now pivot towards Iran, buying from it instead  the oil currently purchased from the United States under pressure. In fact, India should scour the world for every possible source of assured oil supply. Securing its supply chain, therefore, is the second thing India needs to do.

The third imperative for India following the Trump tariff would be to hunker down and focus on the heavy-lifting of building global competitiveness for its goods and services. In principle, India can find other markets for its goods now facing higher tariffs in the United States. But this is not assured. The reformers of 1991 have shown themselves to have assumed innocently that India need only adorn itself with the policy regime of Western economies to reap rich rewards on the global stage. This episode has revealed that integrating with the world economy can have positive results only if you have products to export that are competitive, in  that they offer the same value at a lower price. There is very little in economic theory or global experience which assures that competitiveness will simply follow the rescinding of trade barriers. It would require infrastructure, enabling laws, a skilled workforce and marketing. As may be gathered by anyone schooled in economic history, the role of a strong and nimble government in coordinating  such a transition would be  indispensable. Markets left to their own devices cannot deliver competitiveness to a country’s products.

Prime Minister Modi has had his  American Dream punctured by Trump, who has led him up the garden path, only to pull the rug from under his feet. Given America’s record of involvement in Asia, from Hiroshima in the last century to Iran in this one, his advisers should have cautioned him against reposing full trust in Trump. Now, he has some hard work to do. He must steel himself to fulfil the first two of the three imperatives I have outlined. For the third, he would need more than just atmanirbharta; he needs to craft a far more imaginative economic policy than he has produced thus far.

Despite the naivete he has displayed in his dealings with Trump, Prime Minister Modi is not responsible for  his perfidy. In dealing with the national emergency that we now face, he needs to be supported politically. Every section of India depends on oil, almost all of which is imported. It is  indisputably in India’s interest to assure its supply even as we reduce our dependence on it.