Cheese, Cars, Clothes: What Will Really Change With India's Tariff Cuts

Trump has already shown that he cares much more for his big business friends like Musk, writes Aunindyo Chakravarty.

Donald Trump has repeatedly stated that he wants us to bring down tariffs on automobiles. This is mostly meant to help his buddy Elon Musk sell Tesla vehicles in India.

(Photo: Aroop Mishra/The Quint)

About 10 years ago, I tried my hand at making a true New York-style baked cheesecake from scratch. The recipe, which I found on YouTube, required me to buy Philadelphia cream cheese. I had bought it from the US the previous year, and had been pleasantly surprised by how cheap it was. An 8-ounce pack, or roughly 230 grams, had cost me about $2.50 (Rs 130).

When I tried to get it at my local store in Delhi, for my dessert-making experiment, I had to pay more than double. Of course, cream cheese goes bad unless it is transported at very low temperatures. So, the cost of carting it across the world was likely to be high.

But the biggest reason for the difference in price was the very high tariff that India had imposed on dairy products like cream cheese.

In fact, unbeknownst to me, five years earlier, the US International Trade Commission had complained that not only did India levy very high tariffs on American farm produce but also had several ‘non-tariff measures’ (NTMs) in place to discourage agricultural imports.

So, even if an American exporter was willing to cross the tariff wall, they still faced NTMs like excessive red tape and extremely stringent quality norms.

This, the trade commission said, had to change, because India’s growing middle class was “expected to reach 500 million by 2025, which included many affluent urban consumers, interested in Western-style foods.” America’s farmers needed to have a go at this lucrative market.

Now, Donald Trump is trying to bully India – and the rest of the world – to open our gates to American products. Or else, he will mirror the tariffs we impose, by levying exactly the same rates on what we export to the US.

Why India Levies High Tariffs on Foreign Goods 

If reports are to be believed, India is already planning to reduce duties on American nuts – not Trump, but the edible kind – like almonds, walnuts, and pecans. Fruits like apples, blueberries, and cranberries might be allowed to enter duty-free. American cheese currently faces a 30-60 percent import duty. That too is likely to be cut.

So, after All Fool’s Day, when the Trump Tariffs come into play, I should be able to make a maple-walnut-topped cheesecake with ingredients sourced from the US, for less than I could a decade ago.

And American nut and dairy farmers would be very happy.

But India’s tariff policies are neither meant to please people like me, who want to eat pecans for breakfast, or farmers in the US. They are meant to protect Indian producers.

That is what tariffs are meant to do – to provide a level-playing field for producers with very different conditions of production.

An Indian farmer cannot compete with their counterpart in the US in terms of resources and yields. Neither can India compete with the hidden farm subsidies the US gives to its agriculture sector. Therefore, India has to impose much higher levies on American farm products.

That is why our trade weighted-average tariff on agricultural imports is 65 percent, while the US’ is just 4 percent. If India brings down tariffs to US levels, then our entire farm sector will be threatened by American agri-products. US farmers would have an incentive to increase output to export to a large market like India, the US would dump it here and force our farmers to sell at uncompetitively low prices.

But it is unlikely that Trump will push India hard on farm produce. His real target is our car market.

The Musk Connect

Trump has repeatedly stated that he wants us to bring down tariffs on automobiles. This is mostly meant to help his buddy Elon Musk sell Tesla vehicles in India. Reports say India is going to drastically cut import duty on EVs to just 15 percent from 115 percent. But, it seems, Musk and Trump are still not happy. They want import taxes on cars to be removed altogether.

That would help Musk a lot. At 115 percent duty, the cheapest Tesla would cost roughly Rs 65 lakh in India. At 15 percent, it would drop to Rs 35 lakh.

And, if there were no duties, an entry-level Tesla could be sold at just Rs 30 lakh.

It would still cost 30-50 percent more than Indian-made electric vehicles, like Mahindra XEV 9e, or Maruti’s forthcoming e-Vitara. But our automobile market is increasingly driven by affluent buyers, who are willing to shell out more moolah to buy premium cars. That is why, Indian auto companies are trying to reorient their production to meet the demand from this premium market. In such a situation, Tesla’s entry could pose a big challenge for Indian EV makers.

The question is whether our car makers deserve the same protection as our farmers do?

The answer to that might have been an unambiguous 'no' five years ago, given that India’s auto companies have had a long run at tapping a fast-growing market. But the picture is complicated now.

Auto sales have slowed down to a crawl over the past five years. The world is also at a moment in history when the global auto industry is making a momentous shift away from fossil fuels to batteries. Allowing US auto manufacturers to enter without tariff barriers at this crucial juncture could break our auto companies.

Blessing in Disguise for Some?

If Trump’s reciprocal tariffs are a threat to our farmers and car manufacturers, it is a mixed blessing for India’s textiles and garments industry.

Together, yarns and readymade garments account for roughly 12-13 percent of our exports to the US. In many cases, our tariffs on textiles and garments are lower than what the US currently levies on our products. For the logic of reciprocity to be consistent, the US would have to bring its tariffs down on our yarn and garment exports.

Garment exports were a big thing in the mid-1980s and early 1990s. It created many new small and medium entrepreneurs as India came out of its ‘socialist’ past.

From the early 2000s, India steadily lost out to Bangladesh, Sri Lanka, and Vietnam. Lower tariffs in the US could become a lightning rod for India’s SME-driven garment exports industry to revive.

Much will now depend on what kind of deal India’s trade negotiators work out with the Trump administration. Donald Trump has already shown that he cares much more for his big business friends than the average Joe in America. It is perhaps possible to work on a strategy that will please a few influential entrepreneurs in the US – Elon Musk, for instance – and, in return, still extract significant concessions for Indian industry and agriculture.

It is a tough ask, but not undoable. 

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)