Recent Developments on U.S. Tariff Hikes and Their Impact on India
TAX
The United States' recent decision to implement reciprocal tariffs has raised concerns among Indian businesses, particularly in sectors such as chemicals, metal products, jewelry, automobiles, pharmaceuticals, and food products. In 2024, India exported nearly $74 billion worth of merchandise to the U.S., with significant portions attributed to pearls, gems, pharmaceuticals, and petrochemicals. Historically, India has maintained an average tariff of 11%, considerably higher than U.S. tariffs on Indian exports. Conversely, U.S. manufacturing exports to India, valued at $42 billion in 2024, face high tariffs ranging from 7% to 68%. Agriculture could be severely impacted if broader tariffs are imposed, affecting India's farm and food exports. Textile, leather, and wood product sectors may face less impact due to lower tariff differentials. In a worst-case scenario with a 10% uniform tariff hike by the U.S., India's economy might see a 50 to 60 basis point hit. India is considering measures to mitigate trade tensions, including cutting certain tariffs and increasing energy imports.
Despite these concerns, a report by the State Bank of India (SBI) suggests that the impact of U.S. tariff hikes on Indian exports may be minimal. The report estimates that even with tariffs up to 20%, the decline in exports would be only around 3-3.5%. This potential impact can be offset by India's strategic export diversification, increased value addition, and exploration of new trade routes. The U.S. remains India's top export destination, accounting for 17.7% of total exports in the financial year 2023-24. However, India is evolving its export strategy to reduce dependence on a single market, with growing trade ties in Europe, the Middle East, and other regions.
In summary, while the U.S. tariff hikes present challenges for Indian businesses, particularly in specific sectors, the overall impact is expected to be limited. India's proactive measures, including export diversification and value addition, are likely to mitigate the adverse effects of these tariffs.
The solution to mitigate the impact of tariff hikes on Indian businesses, especially due to U.S. policies, involves a combination of strategic, policy-driven, and market-oriented measures. Here are some potential solutions:
1. Diversification of Export Markets:
India can reduce its dependence on the U.S. market by expanding its trade relations with other regions like the European Union, Africa, Southeast Asia, and the Middle East. This approach not only lowers the risk associated with tariff fluctuations but also opens up new growth opportunities. The U.S. is India's largest export partner, but diversifying markets can help buffer the negative effects of tariff hikes.
2. Improved Trade Agreements:
India could seek new trade agreements or revise existing ones to ensure better terms with its key trading partners. Engaging in regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) or through bilateral trade deals with countries like the European Union and Japan can help offset the burden of high tariffs imposed by the U.S.
FTA with the U.S.: India could push for a Free Trade Agreement (FTA) with the U.S., which could help reduce or eliminate tariffs on many goods and services.
Multilateral Talks: Participation in multilateral forums like the World Trade Organization (WTO) to negotiate fairer trade terms and reduce tariff wars globally.
3. Value Addition to Exports:
India can focus on improving the value-added content of its exports. For instance, rather than exporting raw materials or semi-processed goods, India could export finished or value-added products. This not only helps in commanding higher prices but also makes Indian products less sensitive to tariff hikes on basic commodities.
Technological Upgradation: Invest in technology, research, and innovation to improve the quality and uniqueness of Indian products. For example, the pharmaceutical industry in India can invest more in biotechnology and high-value drugs to increase competitiveness in global markets.
Skill Development: Developing a skilled workforce in sectors like manufacturing and services can enhance India's ability to add more value to its exports.
4. Tariff Management & Domestic Policy Adjustments:
Re-evaluating Domestic Tariffs: India can re-evaluate its own tariff structures to ensure competitiveness in international markets. Lower tariffs on critical imports like machinery, raw materials, and high-tech components can help Indian industries improve productivity and reduce costs.
Incentivizing Export-Oriented Industries: The Indian government could offer subsidies, tax exemptions, and other incentives to industries most affected by tariff hikes, such as steel and automotive manufacturing.
Investing in Infrastructure: Improved infrastructure, such as better logistics and transportation networks, can help reduce the cost of exports and make Indian products more competitive globally.
5. Strengthening the Indian Manufacturing Sector (Make in India):
The "Make in India" initiative aims to promote domestic manufacturing and reduce reliance on imports. Strengthening domestic manufacturing would not only help India address tariff-induced price hikes on imports but also allow for more exportable goods that can meet global demand.
Boosting Domestic Production: Supporting small and medium-sized enterprises (SMEs) in scaling their operations can create more robust manufacturing industries that can survive tariff fluctuations.
Attracting FDI: India can encourage foreign direct investment (FDI) in key sectors to promote advanced manufacturing techniques and processes, which can improve the quality and competitiveness of Indian exports.
6. Developing Resilient Supply Chains:
Building resilient, flexible, and diversified supply chains can make Indian businesses less vulnerable to external shocks such as tariff hikes or geopolitical tensions. This could include:
Onboarding Multiple Suppliers: Instead of relying on a single source for critical inputs, businesses can source from multiple countries, reducing vulnerability to tariff hikes from one specific region.
Localization of Key Industries: Certain sectors, like electronics or pharmaceuticals, could look at localizing key parts of their supply chain to reduce dependency on imported materials that may become more expensive due to tariff hikes.
7. Advocating for WTO Dispute Resolution:
India could engage in the World Trade Organization (WTO) dispute settlement mechanism to challenge unfair tariff practices imposed by the U.S. This can help resolve disputes and bring about multilateral solutions that protect the interests of global trade.
8. Fostering Innovation in Trade & E-Commerce:
The e-commerce industry in India could be further leveraged to counter the challenges posed by traditional tariffs. By promoting exports via e-commerce platforms, especially for small businesses, India can bypass some traditional barriers associated with tariff hikes.
9. Negotiating with the U.S. for Exemptions:
India can directly engage with U.S. policymakers to negotiate exemptions or tariff reductions on certain critical items that are most affected by U.S. tariff hikes, such as gems and jewelry, chemicals, and textiles. Diplomatic dialogue can be a tool for arriving at a favorable resolution to tariff conflicts.
10. Government Support and Economic Stimulus:
The Indian government could provide fiscal stimulus packages to affected industries, including providing relief through tax rebates, interest subsidies, or direct cash support. This would give Indian businesses time to adjust to the new market realities caused by tariff increases.
Conclusion:
In the face of tariff hikes, India has multiple avenues to reduce the economic fallout and safeguard its export growth. By diversifying export markets, improving domestic competitiveness, focusing on value addition, and negotiating for favorable trade terms, Indian businesses can remain resilient despite U.S. tariff policies. Proactive government intervention and strategic investments in infrastructure and skill development are key to maintaining India's position in global trade.