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The prospect of reciprocal tariffs imposed by the United States under the Trump administration has evoked a cautiously optimistic response from large segments of Indian industry. Sectors perceived as vulnerable, including electronics, pharmaceuticals, auto parts, and gems & jewellery, are advocating for import duty reductions by New Delhi as a primary strategy to mitigate potential disruptions to their exports. This approach aims to narrow the tariff gap between the two nations, which currently stands at a substantive 5% on a country-wide basis and is significantly higher for numerous individual products. The belief is that even after the imposition of reciprocal levies by the US, India retains the leverage to lower its tariffs and subsequently encourage the US to readjust its levies in accordance with the principle of reciprocity. The concept of a "zero-for-zero" tariff policy is gaining traction among analysts, particularly in sectors like pharmaceuticals, gems & jewellery, and to a considerable extent, textiles & garments. Some trade experts suggest that India could withstand reciprocal tariffs without resorting to retaliatory measures, while others propose a blended approach that combines accommodation with selective retaliation. Despite the ambiguity surrounding the precise nature and scope of the US’s additional tariffs on merchandise shipments from India, the Indian government has adopted a circumspect and reserved stance. Commerce and industry minister Piyush Goyal has highlighted the industry's "excitement" regarding the accelerated negotiations for a bilateral trade agreement (BTA) with the US, while simultaneously cautioning against seeking excessive protectionist measures. Government circles and independent analysts also perceive Trump’s reciprocal tariffs as a potential catalyst for creating opportunities for India in several sectors. Niti Aayog has emphasized that India is "favourably placed" compared to countries like Mexico, China, and Canada, which collectively account for 50% of the US’s total imports and face tariff rates ranging from 20% to 25%. In many instances, an increase in the influx of imported inputs could enhance domestic value addition and improve efficiency. Domestic companies operating in export-intensive sectors could potentially capitalize on incremental gains in export markets as major competitors, such as China, confront relatively higher tariff barriers.
Economic assessments suggest that the impact of reciprocal tariffs on India's gross domestic product (GDP) might be limited to approximately 0.1% or thereabouts. A report by Motilal Oswal estimates that with a tariff differential of 9% and an assumed elasticity of India's exports to the US with respect to tariffs of minus 0.5 (implying a 1% increase in the tariff rate would reduce India's exports to the US by 0.5%), the resultant loss in exports to the US would amount to $3.6 billion, representing only 0.1% of India's GDP. Emkay Global Financial Services corroborates this assessment, projecting a similar impact of 0.1%–0.12% on India's GDP. However, the primary concern for India lies in the potential adverse consequences of the US's additional tariffs on all its trading partners on the global economy. Washington's apparent disregard for rules-based trade poses the risk of escalating costs and triggering retaliatory measures from numerous countries. Bloomberg Economics forecasts that a maximal approach could augment average US tariff rates by up to 28 percentage points, potentially resulting in a 4% contraction in US GDP and a nearly 2.5% increase in prices over a two-to-three-year period. Some analysts view the US's move as a strategic opportunity for India to attract electronics manufacturing from China. To effectively leverage this opportunity, India would need to eliminate import duties on US electronics, thereby matching the US's near-zero tariff on Indian imports. This would make India a more attractive destination for electronics manufacturers seeking to diversify their operations and mitigate the impact of US tariffs on Chinese goods.
Despite the potential benefits, certain sectors within India face vulnerabilities. The auto components sector, which exported $5.72 billion worth of goods to the US in FY24, accounting for 27% of the sector’s total exports, is particularly susceptible to the recently announced 25% tariffs. Unlike fully built vehicles, which India exports to the US in limited quantities, component exports are substantial, making them highly vulnerable to tariff hikes. India also faces vulnerabilities in its agriculture sector, both in terms of reduced access to US markets and the potential for tariff cuts by India to lead to an increase in imports. The US could potentially flood Indian urban markets with agricultural products such as chicken legs, skimmed milk powder, soybeans, and corn. India's exports of fish, meat, and processed seafood to the US could also suffer if US tariffs are substantially increased. Overall, the situation is complex and requires a multifaceted approach. The Indian government and industry must carefully navigate the challenges and opportunities presented by the US's trade policies to minimize potential disruptions and maximize the benefits for the Indian economy. This includes advocating for fair trade practices, reducing import duties strategically, and fostering a competitive environment that attracts foreign investment and promotes domestic manufacturing.