India Needs Rs 1 Trillion to Dilute Trump Tariff Hit on Exporters, Workers

US President Donald Trump’s import tariffs are expected to earn additional revenues of US $500 billion–an increase of 10 percent. But what of the loss to the global economy and to the US $29 trillion American economy? Junking the World Trade Organisation's (WTO) tariff principles and setting a specific (and arbitrary) tariff for each importing country makes for an inefficient, market distorting, high-cost, revenue-raising mechanism. The full cost of the additional tariff will not be borne solely by exporters. Nor can substitutes be produced at lower cost in the US. In India’s case, the 25 percent “reciprocal” import tariff imposed from 7 August was enhanced on 27 August by adding another 25 percent penal tariff for buying discounted oil from Russia. The decrease in domestic tax revenues is Rs 0.68 trillion, assuming tax to GDP ratio at 18 percent and a one percentage point decrease in budgeted growth of 10 percent to reach the targeted nominal GDP of Rs 356 trillion in 2025-26. Add enhanced government expenditure to counter business dislocation amongst impacted exporters and manufacturers - particularly relatively low-priced goods in textiles, carpets and apparel and the gems and jewellery trade - and temporary income support for the affected 2.2 million workers. The total cost of diluting the near-term impact of Trump tariffs is Rs 1.08 trillion. India could have avoided this penalty by falling in line immediately and ending the purchase of discounted oil from Russia before the Alaska meet on 15 August.It is unlikely though that this might have strengthened Trump’s hand, given that Russia earns more revenues from oil and other products exported to Europe, China and even the US itself. Nevertheless, India might have escaped the additional 25 percent penalty. But the reciprocal tariff of 25 percent applicable since 7 August would still have induced a loss of 0.5 percent of GDP, albeit with significantly smaller consequences. The difference in tariff between India and competing exporters would have been 5 to 10 percent rather than an unbridgeable 30 to 35 percent as of today. It is likely that much of the additional cost of exported goods might have been absorbed by Indian suppliers and overseas buyers, preserving both existing export and import businesses and employment. Trump Tariffs: ‘My Artisans Depend on Me—How Do I Tell Them There’s No Work?’Trump’s team did their sums well to hurt India. But they failed to understand the Indian psyche. They mistook Indian rhetoric about being a transactional buyer of oil for reality. In fact, our global relationships have often been based on sentiment. Consider that our strategic strike capacity has been weakened over the past three decades as India agonises about changing its geopolitical alignment. Unlike Indian businesspeople who are – and should be – ruthlessly transactional, the Indian government and voters, respond to the luxury of sentiment. Had Trump asked nicely and privately, India’s savvy interlocutors, might have worked out a middle path. But asking India publicly to respond to a red flag is doomed to fail.So, is a 1 percent loss of GDP ruinous for India? Growth would still be 6 percent rather than the expected 7 percent this year (Q1 growth is 7.8 percent) retaining the tag of the fastest growing large economy.Two key initiatives become necessary. First, a targeted producer and worker support scheme to give affected export companies a financial wedge–a mixture of cheap credit (five percent below normal rates)–to give them breathing room to find alternative buyers and retain skilled employees over a six-month-period. Alongside, all layoffs to receive an ex-gratia from the government for a six-month period using the covid pandemic playbook. Whilst this will not ease the mental agony of disrupted employment it can allay the financial difficulties of getting gainfully employed again. Second, retain the budgeted fiscal deficit target of 4.4 percent of GDP (the norm is 4 percent) for this fiscal to reinforce our commitment to fiscal discipline. The recent S&P rating upgrade, the first in 18 years, must be supported.India’s budget on the capital account for 2025-26 is Rs 15.48 trillion including transfer for state projects. The required financing of Rs 1 trillion is 9 percent of the Union government capital budget of Rs 11.21.Capital expenditure outturns by end July 2025 were running ahead of last years with a 31 percent utilisation versus 26 percent last year. Reducing the flow of funds for Union projects is disappointing. But it is better to spend upfront to preserve existing employment and exports than wait for new capital investment to be cycled back into the economy as additional employment and output. Overawed by Trump? No, India’s Got Its Own Success to Build OnThe Trumpian trade disruption could reduce global demand, including in America. After all higher import tariffs simply recycle money from American consumers to the US government, cutting back retail demand, including for imports. Global growth could be lower than the expected 3 percent in 2025 with the US economy growing slower, at 2.2 percent versus 2.4 percent earlier. This fiscal will test the competitiveness of Indian manufacturers and traders, as exporters jostle globally for a new equilibrium – including the nascent erosion of the US dollar as a currency of choice, initially, for international trade and eventually even for investment. (Sanjeev Ahluwalia is a distinguished fellow at the Chintan Research Foundation and was previously in the IAS and World Bank. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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India Needs Rs 1 Trillion to Dilute Trump Tariff Hit on Exporters, Workers

Trump’s team did their sums well to hurt India, writes Sanjeev Ahluwalia.

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