Pavan K. Varma | US-China trade war gives India shot in some sectors
China can perhaps afford a retaliatory war because its economy, although not without certain fault lines, is much stronger than ours
Donald Trump’s sweeping and irrational tariff war has triggered a global crisis. This poses a challenge to all nations, especially to major emerging economies like India. A crisis presents a setback but also an opportunity. Can we use this opportunity to strengthen our economy, and better prepare ourselves to face similar challenges in the future?
India must adopt a calibrated, strategic response that safeguards its economic interests, leverages opportunities, avoids the pitfalls of knee-jerk responses, and remain rooted in pragmatism rather than populism. Blind retaliation, as seen in 2019 when India imposed tariffs on US goods in response to steel and aluminium duties, achieved little. Instead, India should focus on strengthening its domestic economy, diversifying trade partnerships, and positioning itself as a stable alternative in a fragmenting global order.
China can perhaps afford a retaliatory war because its economy, although not without certain fault lines, is much stronger than ours. That said, it is not as if we have no options. A full-blown US-China trade war could depress global demand, disrupt supply chains, and force multinational firms to reconsider investments in Asia. This presents opportunities for us — but only if we play our cards right.
What are these opportunities? The most important priority is to make our economy stronger by radically improving cost competitiveness and substantially expediting the “ease of doing business” agenda. A noticeable complacency has crept into India’s corporate sector, where the existence of certain captive markets within the nation and internationally, have slowed down innovations and improvements in quality and quantity of production lines. The need for greater economic competition internally is often finessed by the growth of monopoly houses which see no real incentive in upgrading their economic performance.
Few realists will doubt that the government has not done as much as it should have to facilitate ease of doing business. There is still far too much red-tapism, too many redundant laws, too much of the infamous ‘inspector raj’, and too much corruption in our economy. According to the last 2020 Global Ease of Doing Business, we are ranked as low as 63 out of 190 countries. We may be the world’s fastest growing economy, but that is due more to the sheer size of our country and the entrepreneurial grit of our people. The unalterable fact is that there is still much work to do to put our own house right, rather than giving ourselves a pat on the back to avoid taking the hard steps for further economic reform. An annual growth rate of a little over six per cent is just not enough for comfort, or for the imperative of lifting the millions of the poor and deprived above the subsistence level. India needs to grow at rates far closer to nine or 10 per cent — which is possible — if a real dent is to be made in our overall economic situation.
Trump’s tariffs on China have created a short-term opportunity for Indian manufacturers to fill the gap in sectors like electronics, pharmaceuticals and textiles. In other areas too, the relatively lower tariffs that the US has imposed on India, and the exemptions it has granted to critical sectors, gives us the chance to use tariffs as an arbitrage in attracting global investments. However, India’s domestic industry must become more competitive to seize this advantage. The Production-Linked Incentive (PLI) schemes are a good start, but deeper reforms in labour laws, infrastructure, and ease of doing business are needed to attract global supply chains. Unfortunately, in the 2024 Global Competitiveness Index prepared by the International Institute of Management Development, we are only at the 39th position.
One of China’s key vulnerabilities was its heavy reliance on the US as an export destination. India must diversify its trade partnerships to reduce similar risks. While the US is a crucial market, New Delhi should aggressively expand trade with the EU, Africa, and Latin America. The recently concluded trade agreements with Australia and the UAE are steps in the right direction, but more such deals — particularly with the UK and EU — should be prioritised. Building trade coalitions with like-minded nations — such as Japan, Australia and EU members — can help India push back against unilateral tariff measures.
Washington’s efforts to counter China’s economic dominance is likely to continue, and could work in India’s favour. America has imposed 125 per cent tariffs on China, and is already seeking alternatives to Chinese supply chains. India — with its large workforce and democratic credentials — is a natural candidate to benefit from this development. The slogan “Atmanirbhar Bharat” means very little unless it is tested in adverse circumstances. We must attempt to move up the value chain, because our FDI flows have not only become stagnant but have actually fallen from over two per cent of GDP in recent times to one per cent now.
One of our strengths is that while we are integrated in the global economic order, we also have a huge domestic market to insulate us from external dislocations. Has ‘Atmanirbhar Bharat’ worked to maximise this? I doubt it, since there are still too many bureaucratic barriers to give our ‘economic tigers’ their head. Our well-intentioned finance minister, Nirmala Sitharaman, keeps egging on corporates to increase their investments, but whether she accepts this or not, there appears to be a fear psychosis among many corporate players to sit on their liquid funds rather than risk exposure to possible political pressures should they go public or borrow capital from banks. This fear is also one of the reasons why High Net-worth Individuals (HNIs) — especially among the young — are leaving in droves for the safer climes of foreign countries.
This is the time for fresh and innovative thinking, not short-term ad hoc measures. Can India rise to the challenge? A first step would be for the government to immediately set up a committee to identify roadblocks to enduring economic reforms, and set time-bound measures to implement them. After all, if a Prime Minister who has had an absolute majority for two terms, and a stable majority currently, cannot carry out reforms like that of 1991, then who else can?
