India’s way in the topsy-turvy world of Trump’s tariffs

The US-India relationship, called a geostrategic imperative for decades now, particularly in conjunction with the rise of China as a challenger to US hegemony, seems to have soured very suddenly.

What India now does about the situation will define not only the bilateral relationship going forward and the multilateral one in Quad but also India’s standing in the world. This, as it goes towards becoming the world’s third largest economy before 2030.

The answer lies in a combination of retaliatory tariff hikes and even brand-new impositions on American companies operating in India, for example, in the digital space, and diplomatic accommodation of American demands on trade wherever possible.

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Caving in abjectly to US dictation has been swiftly ruled out. Perhaps the policymakers in Washington have not properly assessed the determination and backbone of the Modi administration. In response to the near abusive tone adopted by Trump, unable to bully India into buckling under, India has said it will act only in its national interest.

But having said that, to take the relationship forward without a rupture, very skilful give and take will nevertheless have to take place. Even an adversary like China realises this in the midst of this tariff war with the US.

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The Indian stock market is not unduly perturbed because tariff impositions like this cannot make too much of an impact in a country driven by its domestic economy. This is the key difference between India and many other highly export-dependent countries.

Still, the US currently accounts for half of all Indian exports, and till lately, the bilateral trade was expected to treble to $500 billion by 2030. Unless repaired, the present figure of $150 billion, with the balance of trade in India’s favour, could largely evaporate.

Instead of it being thought of as the ‘plus one’ to China as the US seeks to create new supply chains, other countries in South and Southeast Asia could assume this mantle, albeit collectively. This would be bad for India as a historic opportunity missed.

At the same time, India’s stellar growth rate of about 6.5 per cent in GDP year-on-year, the highest amongst all major economies, could be impacted by up to 0.5 per cent by US tariffs at 25 per cent on Indian exports.

This is not counting as yet excluded sectors such as service exports, meaning software in the main. Pharmaceuticals are also not included, but tariffs on them have been threatened. Indian pharma companies have been brought under the US Food and Drug Administration (USFDA) scanner. These include Aurobindo Pharma, Reddy’s Laboratories, and Sun Pharma. Various inspections are being conducted. But generic drug exporters could face tariffs next.

Then there are as yet unspecified penalties for India’s membership of Brics, perceived as an anti-US organisation hostile to using the US dollar as a global currency for most trade. Does India need to really stay in Brics which leans towards China, or could it move away to a leadership of the Global South instead?

India wants to promote its UPI but not get rid of the US dollar in favour of the Chinese currency. It has made this clear on more than one occasion.

America is also annoyed, along with the Nato countries in Europe, at India’s neutrality on Ukraine and buying petroleum from war-sanctioned Russia.

The Trump administration also does not want India to buy armaments from Russia either despite the great success of the S-400 and Brahmos missiles in the recent Operation Sindoor against Pakistan.

We will know the extent of the blow only when the penalties are specified, but it could be well over 100 per cent.

For now, India has been subjected to one of the higher tariffs amongst its export competitors, Vietnam and Bangladesh, for example. These begin in the absence of its agreement to allow American dairy, Genetically Modified seeds, and agricultural products at nil tariff into the country. The sectors gravely affected are textiles and ready-made garments, plus gems and jewellery, which are all labour intensive.

India could consider redirecting these exports via the UK, with whom an FTA has just been concluded at nil duty. The UAE, with which country India also has an FTA, presents another route.

We do not have tariffs like Vietnam for conducting third-party exports either. India, like others, and China before it, could look for circumventions too.

Even after five rounds of face-to-face negotiations and a sixth meeting scheduled around August 20-21 in Delhi, dairy and agricultural products are sticking points. Will India be able to concede ground on some items within this sphere, particularly in the processed foods area, to allow the Trump administration to call it a win?

Of course, the dairy and agriculture sectors are politically sensitive in India, with rural India, its farmers, and others constituting a very powerful voting block and lobby, ever ready to march on Delhi in an instant. Still, certain items in the detail that don’t pose a threat to Indian agriculturists could be allowed in.

An interim trade deal could then result, and the punitive 25 per cent tariffs would be overtaken. A full agreement could come after at least a year when all issues have been scrutinised and negotiated. America wants access to the Indian market, and India would be churlish to miss the chance to achieve a good FTA with America. This is more so with China as our main economic and military competitor next door.

India could also further diversify its imports of oil and gas, looking farther afield to reduce its purchase of Russian products. This provided lucrative deals better than those on offer from Russia could be struck. Hopefully, the Trump administration will not take an absolutist position and live and let live.

As for armaments, can America supply what India needs quickly enough and at a reasonable price? The US track record on the supply of GE 404 and 414 engines for India’s hugely delayed Tejas 1A and 2A fighter programmes has been most discouraging. Likewise, the Apache AH-64E combat helicopters on order are vastly delayed for some years; the deal was signed in 2020. With only three out of the six just delivered, and the other three promised by the end of 2025.

America is also very expensive, slow on export permissions on its high-technology armaments, and reluctant to collaborate and transfer technology. It would have to change all this and be consistent going forward without using any of it for leverage against India.

While Russia is immersed in the war in Ukraine, it has continuously tried to support the Indian armed forces and has offered the best terms on its advanced equipment with technology transfer. France, Germany, the UK, and Israel have also become defence partners with India and provide alternatives to both Russia and America.

The commercial Boeing aircraft on order by the private sector are also much delayed, even as various Boeing aircraft in India and abroad are showing a lot of technical problems that even resulted in a major crash of a 787-8 Dreamliner at Ahmedabad recently.

Is the American aviation industry slipping? The $100 million F35 is showing problems, with one stranded for over a month in India before it was repaired and another crashed in America. Everything military equipment-wise, if it comes from the US, is most tardy. But still, yes, there is definitely room for give and take and revisions of stance between the two great democracies.

The writer is a Delhi-based political commentator. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.