India’s Golden Opportunity

THE TAKE 

Now Is India’s Golden Opportunity To Further Open Up Its Economy 

For several years, India’s IT industry discussed and debated how they should gear up for a VUCA world. VUCA stands for volatile, uncertain, complex, and ambiguous. If there was ever a time this word was applicable, it seems to be right now, except maybe one-off events like the 2008 Lehman Crisis or the 2020 Covid pandemic.

Just when you thought US president Donald Trump’s tariff plans were focussed on nations comes a fresh salvo, this time promising to slap 25% tariffs on steel and aluminium imports into America.

There is an additional threat of reciprocal tariffs on all countries. This means if you have import duties on goods I export to you, then I will put duties on goods you export to me. 

India could take a knock if it is forced to reduce tariffs further as it has already done, for instance, Harley Davidson motorcycles, ahead of a flying visit by Prime Minister Narendra Modi to meet Trump later this week.

The term VUCA can be attributed to management professors Warren Bennis and Burt Nanus and their 1985 book Leaders: Strategies for Taking Charge. 

They wrote, “The contexts of apathy, escalating change and uncertainty make leadership seem like manoeuvring over ever faster.” 

The globalising world and businesses adopted VUCA and it became a prominent theme in the last decade in India, though more in the case of IT services. But if VUCA was used for a globalising world, now it is most apt for a deglobalising world.

China Isn’t Worried

A Bloomberg report pointed out the US relies on aluminium imports from countries including Canada, the United Arab Emirates and Mexico, to meet the vast majority of demand — net imports added up to more than 80% in 2023, according to Morgan Stanley. 

Steel imports account for a smaller portion of overall consumption, but are vital for sectors leaning on speciality grades, including aerospace, auto manufacturing and energy, from wind developers to oil drillers.

Interestingly, steel and aluminium exports from India, as per the Bloomberg report, added up to around $2.2 billion compared to Canada’s $20 billion and Mexico’s $7.2 billion.

Traders in China’s major export hub of Yiwu are already shrugging off Trump’s latest moves, reports Reuters, quoting one exporter, among others, who buys products in Yiwu on behalf of other customers in markets such as the United States, Australia and the Middle East.

"We can respond by slightly reducing our profit margins or adjusting costs. In the end, the additional costs will be passed on to the end consumers in their country, meaning they will ultimately bear the consequences of their own economic policies,” the exporter was quoted by Reuters as saying. The trader highlighted that it was for the US to ponder over whether they could find a suitable country to replace China as a trade partner.

Elsewhere, the administration-friendly Wall Street Journal reported that it has taken less than a month for the second Trump administration to cool the enthusiasm of chief executives and dealmakers.

Consumer sentiment is down and inflation expectations are rising, driven in part by worries about the impact of a threatened trade war. The deals market just ended its quietest January in a decade. 

A Justice Department that was expected to wave through acquisitions instead sued to block a big technology merger.

Corporate bigwigs are now using phrases like “fragility,” “volatility” and “wait and see” to describe their outlooks. 

That sounds like VUCA to me.

Signalling Is Critical

The good news is that India has taken the position that it will not be protectionist and contemplate retaliatory tariffs and the like.  

There could be over 30 items coming from the US that could see lower tariffs, apart from the high-end bikes and could include high-end cars and solar cells. And maybe California almonds. 

Did you know that India is the biggest export market for California almonds as of 2023 as per the Almond Board of California? And that was for three consecutive years despite being at a tariff disadvantage to countries like Australia.

Now, while Trump’s daily tariff threats are creating havoc with trade and businesses, it does appear that all India has to do is reduce tariffs and everyone will be happy.

Some history will help.

India’s average tariffs which were 125% in 1990-91, declined to 13% in 2014-15, according to a study reported in The Indian Express.

However since 2014 there have been around 3,200 tariff increases, with the largest increases occurring in 2018, according to a paper by economist Shoumitro Chatterjee and the former chief economic adviser to the Government of India, Arvind Subramanian. 

These large tariff increases, linked to the government’s call for atmanirbharta or self-reliance, have led the average tariff rate to rise to around 18%, affecting a sizable segment of the country’s trade basket.  

India’s tariffs are amongst the highest in the world. They are not only higher than those of China (7.5%), but also countries like Vietnam (9.6%) and Bangladesh (14.1%). 

With high tariffs, as the government’s own economists like Dr Arvind Panagariya have argued, India cannot be an export powerhouse without being open on the import side. 

He also has argued several times in the past that signalling this is very critical.

Perhaps this is the golden opportunity to heed Panagariya’s advice, among others, and open up further, Trump or no Trump. 

The downsides seem very low if at all because revenue lost on customs duties will be made up elsewhere as exports rise. 

This is a good time as any to move with speed and determination. 

Else we will be left munching almonds once again, at lower duties of course.

👥 THE TEAM

✍️ Zinal Dedhia, Salman SH | ✂️ Rohini Chatterji | 🎧 Joshua Thomas