Finally Trump Tariff At 26% Falls On India

The differentiated tariff hikes for each country are on top of the 10 per cent across-the-board tariff which the US charges on all imports now.

While the Indian exports to the US will be hit, New Delhi has a week to negotiate with its US counterparts.

Everyone Hit (If That's A Consolation)

Washington also hiked tariffs on most other countries. China has been slapped with a 34 per cent reciprocal tariff. For Taiwan and Vietnam, it is 32 per cent and 46 per cent, respectively.

The 26 per cent tariff slapped on India is lower than that imposed on other South Asian countries. As part of the new US tariff policy, Bangladesh will be charged 37 per cent on its exports (mostly garments), Pakistan 29 per cent and Sri Lanka 44 per cent.

Allies too have not been spared. The European Union will face a 20 per cent tariff wall, the UK 10 per cent, Japan 24 per cent, and South Korea 25 per cent. 

Several countries, including Canada and the EU, are already gearing up for retaliatory measures. India, sources said, is likely to adopt a more “friendly” approach and deal with the situation in “a diplomatic manner through dialogues.”

Will It Help India?

If India is forced to drop tariff rates through an India-US mini trade deal, which seems more than likely, the Americans will, of course, be able sell us some more California wine and Harley-Davidsons in the sub-continent.

However, that loss of foreign exchange in buying a few "rich men's goodies" from the USA should be made up in productivity gains. 

There are many in the corridors of power who believe it is in India’s interest to slash tariffs.

Tariffs mean protection from competition. And high tariffs mean extreme competition which disincentivises productivity gains or innovations to improve quality.

India’s producers, unlike Japan’s or Taiwan’s (which too had high tariffs while those nations were growing), make mostly for India and not for the world.

Which means that with protected markets, they are not incentivised to produce the best or produce in the most productive manner or to come up with high-quality innovations.

The net result is poor quality output with low productivity, compared to the world. India’s South East Asian competitors have far better labour productivity.

According to ILO’s 2023 labour productivity rankings, India scored low at US$ 8 per hour, compared to Brazil’s US$ 17, Russia’s US$ 30, China’s US$ 15 and Vietnam’s US$ 10. Developed countries, like Sweden and the USA, scored US$ 70 per hour. Countries such as South Korea and the UAE had US$ 42 as their labour productivity per hour.  

According to the Federation of Indian Export Organisations (FIEO), despite the tariffs, certain sectors in India, including apparel, gems and jewellery, leather, electronics, chemicals, plastics, and furniture, may experience a diversion of exports, potentially offsetting some adverse effects.

"Assessing the impact of the recently imposed 26 per cent reciprocal tariffs by the United States on Indian exports reveals a nuanced scenario," S C Ralhan, President, FIEO, said, adding that New Delhi's position remains comparatively favourable compared to other economies.  

FIEO emphasized that the timely conclusion of BTA between India and the US is crucial to mitigate these tariffs and provide relief to Indian exporters. "Such an agreement could establish a structured framework for resolving tariff challenges, thereby reducing the likelihood of unilateral trade measures or retaliatory tariffs," Ralhan said. 

Officials said India is also now looking at cutting import tariffs on multiple product lines, the number of which could vary between a dozen to a score, and include electronics, medical equipment, chemicals and luxury cars. India may also do away with a levy — the Agriculture Infrastructure Development Cess — imposed on some imports, including material building blocs for semiconductors, heavy machinery, solar cells and luxury cars and motorcycles.

The Indo-US goods and services trade totalled around US$ 190.1 billion in 2023, with the U.S. suffering a US$ 45.6 billion trade deficit in 2023-24. India exported manufactured goods worth nearly US$ 78 billion (or 18 per cent of its exports). The Americans have long been complaining of high tariffs charged by the Indians.

All Eyes On Farm Sector

For Indian negotiators, the most loaded item of the tariff deal will be taxes and support for agriculture. Till 2023, there was a 100 per cent import duty on these, before it was brought down to 30 per cent. Indians are believed to be willing to lower duties to up to zero on fruits, nuts and other farm produce, which India, in any case, buys from the US.

With the farmer lobby being politically one of the most vocal, any cuts in farm tariff rates will be watched and debated, giving rise to heated passions which are likely to be translated into political gains and losses.

The bottom line: this is a wake-up call to the rest of Indian Inc. to improve quality and learn to produce goods more frugally, boosting exports and India's GDP surge.

This leads to the question - Will India manage to turn this challenge into a second 1991 liberalisation moment, as some believe it could?