How Trump’s tariffs can be opportunity in crisis for India

The Donald Trump administration’s recent imposition of tariffs on Indian goods could have a silver lining if India can seize the opportunity. In conditions reminiscent of the 1991 crisis that opened up India’s economy, India could use this opportunity for its long-overdue economic transformation by fostering a more export-oriented economy. This is an opportunity to shift the domestic Overton window on protectionism, albeit under pressure.

India’s Historical Inward Focus

India has a robust domestic market, which accounts for approximately 60 per cent of its GDP. This inward focus dilutes the rigorous pressure of international competition. The result has been a persistent trade deficit of about $100 billion and a global export share of just 1.7 per cent despite being the world’s fifth-largest economy.

The electronics manufacturing sector illustrates this problem perfectly. For decades, India’s import tariffs on electronics components have been high, ranging up to 20 per cent in some cases and averaging 7.5 per cent compared to 3.5 per cent in Malaysia and 2.7 per cent in Mexico.

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By 2024, electronics imports from China alone exceeded $12 billion annually, with critical components like semiconductors and PCBAs accounting for 64 per cent of automotive electronics demand. The result was a 10-18 per cent cost disability in assembly and manufacturing compared to Southeast Asian rivals, leaving India’s $500 billion electronics production target by 2030 at risk. According to McKinsey, the cost of logistics in India is about 13-14 per cent of GDP, which is significantly higher than the 8-10 per cent seen in developed countries, and manufacturing productivity lags behind global benchmarks.

This tariff policy had noble intentions. It was intended to support local industry. However, the unintended consequences are there for all to see. The incentive structure discouraged innovation and efficiency among domestic manufacturers because it made them concentrate on the domestic markets in which they had price advantages due to protections in the form of tariffs. Consequently, India’s electronics exports were a modest $20 billion in 2023-24, compared to Vietnam’s $55 billion in 2022, despite India being a significantly larger economy.

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Low R&D: A Side Effect of Protectionism

One of the biggest problems with protectionism is the resultant markedly low research and development (R&D) investment in the sector under consideration. At just 0.64 per cent of GDP spent on overall R&D, India anyway lags far behind China’s 2.41 per cent and Israel’s 5.71 per cent. The result is a lack of breakthrough innovations in advanced technologies like semiconductors, which reduces the value-addition opportunities.

This R&D underinvestment, coupled with complex tariff structures, makes sure that the parts of the supply chain that provide the most value-add are not located in India. For instance, while Apple and Samsung expanded assembly operations in India, high-value components remain imported. This has relegated India to low-margin assembly roles. The US’ push for reciprocal tariffs, including threats of 16.5 per cent duties on Indian smartphones, has now made industry bodies afraid that retaliatory tariffs could erase India’s cost advantages, severely hampering its $50 billion smartphone export target.

Some Encouraging Signs and Way Forward

This pressure did have some effect. The 2025 Union Budget slashed import duties on critical inputs like Printed Circuit Board Assembly (PCBAs) and camera modules, taking India closer towards countries like Vietnam and Malaysia, with whom India is now competing for global manufacturing opportunities. However, there is still a long way to go. For instance, PLI schemes remain underutilised due to high capital costs for complex components.

If India is to sustain this momentum, it needs to double down on R&D, support public-private partnerships, and integrate more with global tech supply chains. As global firms like Tesla eye India for battery manufacturing, the causal effect is clear: competitive tariffs attract foreign direct investment (FDI), which fuels scale, which funds innovation.

India should now explore free trade agreements with an open mind. Increased market access for Indian goods is an important objective. A potential India-US trade deal should work on tariff-related issues and improve market access for both countries. In an encouraging sign, India has already begun to reduce tariffs on certain products like motorcycles and alcoholic beverages as part of its efforts to ease trade tensions.

India has also undertaken initiatives like the Export Promotion Mission and BharatTradeNet to integrate Indian businesses into global supply chains and diversify export markets. This can help India reduce its reliance on traditional trade partners and enhance its global competitiveness. India has strengths in sectors like IT and pharmaceuticals, which it can leverage towards this end.

Trump’s tariffs, particularly those targeting pharmaceuticals and jewellery—sectors where India has established export capabilities—create precisely the kind of pressure that could catalyse change. When coupled with India’s recent announcement of potential tariff relaxations, this may be the beginning of a strategic pivot in India’s economic policy.

Evidence in Favour of Export Orientation

Historical evidence suggests that export-oriented economies typically outperform their more closed counterparts. South Korea’s transformation from having a per capita GDP similar to India’s in the 1960s to becoming an economic powerhouse by aggressively pursuing export markets is very revelatory in this regard. Similarly, Vietnam has achieved remarkable growth by positioning itself as a manufacturing hub deeply integrated into global supply chains, increasing its exports from $72 billion in 2010 to over $371 billion in 2022.

India’s services sector has already demonstrated what happens when Indian companies compete globally without protective barriers. Indian IT services exports reached $194 billion in 2022-23, capturing approximately 55 per cent of the global outsourcing market. This success emerged not because of protection but because the sector was forced to meet international standards of quality and efficiency from its inception.

Policy Coordination Required

Of course, navigating this transition will require thoughtful policy coordination. Instead of viewing Trump’s tariffs defensively as a diplomatic affront, Indian policymakers would do well to use this moment to accelerate structural reforms that enhance competitiveness. The reforms needed in this regard are pretty clear. India needs to address logistical bottlenecks, streamline regulations, invest in quality infrastructure, and create a predictable policy environment that attracts global manufacturers. This is all the more important in today’s geopolitical climate, where countries are looking for China-plus-one strategies.

While Trump’s tariffs aren’t designed to help India, they may inadvertently provide the external catalyst needed for India’s economic transformation. Sometimes, the most valuable gifts come in the most unexpected packages—even those wrapped in tariff measures from an ally.

The author is a research scholar at Takshashila Institution, Bangalore. The views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.