India often turns to economic reforms in times of adversity, with the most prominent example being 1991 when the country embraced liberalization in the face of a severe financial crisis. Now, with U.S. President Donald Trump's tit-for-tat tariff war and the ensuing global trade turbulence, many believe India is at another crossroads.
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03-20, 2025Will this become a major opportunity for the world's fifth-largest economy to move away from protectionism and further open up its economy? Will India seize the opportunity as it did more than three decades ago, or will it retreat further? Trump has repeatedly referred to India as the "tariff king" and a "big abuser" of trade relations.
The problem is that India's trade-weighted import tariffs—the average tariff rate for each imported product—are among the highest in the world. World Trade Organization data shows that the average tariff is 2.2% for the United States, 3% for China, 1.7% for Japan, and a staggering 12% for India. High tariffs increase costs for companies that rely on global value chains, thereby hindering their ability to compete in international markets. It also means that Indians pay more for imported goods than foreign consumers.
Despite growing exports—mainly driven by the service sector—India still has a significant trade deficit. However, the challenge becomes more pressing given that India's share of global exports is only 1.5%. Whether Trump's tariff war will help India break free or double down on protectionist measures remains to be seen. The Narendra Modi government has often been criticized for its protectionist stance but seems to have shifted direction in recent years.
Last month, ahead of Prime Minister Modi's meeting with Trump in Washington, India unilaterally reduced tariffs on bourbon whiskey, motorcycles, and some other American products. Commerce Minister Piyush Goyal has visited the United States twice to discuss potential trade deals, after Trump threatened to impose retaliatory tariffs on India on April 2. Goyal urged Indian exporters last week to "get out of the protectionist mindset and encourage them to boldly and confidently engage with the world."
India is also actively seeking free trade agreements with several countries, including the UK, New Zealand, and the European Union. It is noteworthy that domestic telecom giants Reliance Jio and Bharti Airtel have partnered with Trump ally Elon Musk's SpaceX to launch satellite internet services in India through Starlink. This move surprised analysts, especially after Musk's recent clashes with the two companies, and comes as U.S. and Indian officials are negotiating a trade deal.
From the late 1990s to the 2000s, India's economy grew rapidly—8.1% between 2004 and 2009 and 7.46% between 2009 and 2014—largely due to its gradual integration into the global market, particularly in pharmaceuticals, software, automobiles, textiles, and apparel, as well as a steady reduction in tariffs. Since then, India has shifted towards inward-looking development. Many economists believe that protectionist policies over the past decade have undermined Modi's "Make in India" initiative, which prioritizes capital- and technology-intensive industries over labor-intensive industries such as textiles. As a result, the initiative has struggled to promote manufacturing and exports.
Viral Acharya, professor of economics at NYU Stern School of Business, said that high tariffs have also fostered protectionism in some Indian industries, thereby stifling investment in efficiency. This allows "comfortable incumbents" to gain market power by consolidating their positions without facing much competition. As former central bank governor Acharya pointed out in a paper published by the Brookings Institution, restoring India's industrial balance requires "lowering tariffs to increase the country's share of global trade in goods and reduce protectionism."
Rajeshwari Sengupta, associate professor of economics at the Indira Gandhi Institute of Development Research in Mumbai, said: "We need to promote exports, and tit-for-tat tariff wars don't help us. China can afford this strategy because it has a huge export base, but we can't because we only account for a small portion of the global market. Trade conflicts may hurt us more than others."
Given this, India is at a crossroads. Aseema Sinha, a trade expert at Claremont McKenna College, said that as the world undergoes a major transformation, India has a "unique opportunity to shape a new vision for global trade." Sinha argues that by lowering protectionist barriers in South Asia and strengthening ties with Southeast Asia and the Middle East, India has the opportunity to play a leading role in shaping a new trade vision, positioning itself as a key player in a "re-globalizing" world. She added: "By lowering tariffs, India can become a magnet for regional and trans-regional trade and economic activity, attracting different forces in its orbit."
This could help India create much-needed jobs domestically. Agriculture accounts for 15% of India's GDP but 40% of employment, reflecting extremely low productivity. The construction industry remains the second-largest employer, absorbing temporary day laborers. India's challenge lies not in expanding its booming service sector (which already accounts for nearly half of total exports), but in addressing the large number of unskilled workers who lack the basic skills required for the service sector.
One concern is that lowering tariffs could lead to dumping, where foreign companies flood the market with cheap goods, potentially harming domestic industries. Ms. Sengupta believes that India's ideal trade approach is to "universally lower" import tariffs, as India's current tariffs are among the highest among its trading partners. However, there is a caveat: China's trade woes, particularly due to the ongoing trade war with the United States, could lead to China dumping in India in the "short term."
Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), believes that India tends to soften its trade policies "based on rhetoric rather than economic pressure," suggesting a lack of confidence in global trade negotiations. If this trend continues, he said, India may end up making more compromises in a trade deal with the United States, further "weakening its bargaining power."
The broader consensus seems to be that India should capitalize on the unintended consequences that Trump's tariff war may create. Pranjul Bhandari, chief India economist at HSBC, believes that "potential U.S. tariffs may have become a catalyst for reform." She wrote: "If supply chains are reorganized again in Trump's second presidential term due to higher tariffs on large exporters, and the world looks for new producers, India may get a second chance."
Creating jobs to manufacture goods for the world is not easy. India has largely missed out on the low-end, unskilled factory jobs—which China has dominated for decades. Automation is taking over everything. Without deeper reforms, India may be left behind.
