We are still digesting the United States’ punitive 25% tariff slapped on India for continuing to purchase Russian crude oil. The new, additional tariff takes the impost to a ridiculous 50%.
The timing and ferocity of the second tranche of punitive tariffs has taken the government and its pundits by surprise. But, equally, the government’s push back to what it has dubbed “unfair, unjustified and unreasonable”, has been startlingly strong.
A Reuters report on Friday said New Delhi has put on hold its plans to procure new US weapons and aircraft; and Defense minister Rajnath Singh, who was to go to Washington to make these announcements on weapons purchase, has put off his trip. There is also no indication that Indian oil companies have been asked to go slow on Russian oil purchases.
This has effectively aborted the ongoing US-India trade negotiations. President Donald Trump has indicated on Thursday he is not interested in reopening talks. This has dashed hopes that there could be an interim deal before the punitive tariffs kick in on 27 August. How does India deal with what could be a catastrophic situation? Is there a way out?
A painful cut
The Indian economy is inextricably linked to the US markets. The U.S. is India’s largest trading partner to whom we export $87 billion of goods. The U.S. accounts for 20% of our exports, and contributes about 2.2% to our gross domestic product (GDP). An additional 25% tariff could cut GDP by 0.2–0.4%, risking growth slipping below 6% this year.
For large swathes of the industry, it is curtains. Effectively, we are facing a US trade embargo. The gems and jewelry industry, which exports 45% of its polished gems and other products to the U.S., has suspended further shipments. The textile and apparels industry too has stopped exports having been edged out by Bangladesh and Vietnam, who face a much lower tariff of 20%.
The tragedy is most of these export units are micro, small and medium enterprises (MSMEs) which are highly labour intensive. The new tariff regime will shut lakhs of small units and throw millions out of work. Diamond polishing hubs like Surat and Bhiwandi have already turning into ghost towns.
The deal breaker seems to be US’ insistence on access to India’s agricultural and dairy markets. And they want to flood us with genetically modified corn and wheat. It is a red line the Modi government has refused to cross fearing massive farmer backlash. And Trump has decided India needs to be made an example of. He wants to send a message to the rest of the world.
India is in a spot. How does it meet this new round of US bullying? As noted earlier, the government has registered its discontent by suspending its purchases of U.S. armaments.
However, there are indications that India’s foreign policy might see a more permanent shift away from the ‘soft’ middle-of-the-road line with a pro-US tilt. Prime Minister Modi is now hoping to heal relations with President Xi Jinping and has scheduled a visit to Tianjin, China, to attend the Shanghai Cooperation Organization (SCO) summit at the end to August. National Security Advisor Ajit Doval has simultaneously made an ‘air dash’ to Moscow and is working on a Vladimir Putin visit to New Delhi is in the near future.
It is also significant that South Block chose to widely publicize Prime Minister Modi and Brazilian President Luiz Inacio Lula da Silva long, one-hour phone talk on ‘developing multilateralism’ and how to deal with the 50% tariff both countries face.
Alternative partners
There are a few other steps India can take to return fire like imposing retaliatory tariffs on US goods entering India. However, in the long-term it is ‘multilateralism’ and building alternative trade partnerships that India must now pursue. Over time, India has given up its leadership position in the region and the developing world region. The South Asian Association for Regional Cooperation (SAARC) is in tatters. We have friction with all our local neighbours -- Bangladesh, Nepal, Sri Lanka, Pakistan and even the Maldives.
On the international stage, India has taken an ambivalent stand on significant issues like the Ukraine war and the Gaza conflict. This has considerably dented our standing and credibility in the comity of nations.
This is a far cry from the Non-Aligned Movement (NAM) founded at the Bandung Conference in 1955. Seeking to unite the newly independent, developing countries as a ‘third force’ in a bi-polar world, Jawaharlal Nehru, Gamal Abdel Nasser of Egypt and Marshal Josip Tito of Yugoslavia and others advocated economic cooperation among the Global South to beat the domination of the Super Powers.
Perhaps it is high time that the NAM spirit is revived. The BRICS alliance is one such counter magnet that can take on US’ domination. It originally comprised of Brazil, Russia, India, China, and South Africa, but now includes many others. Its objects are to create a more multi-polar, inclusive global order through economic cooperation.
It is no wonder Donald Trump has been singling out BRICs for attack, especially its initiative to create an alternative currency to the dollar. At its recent convention in Brazil, the US president threatened the alliance with 10% enhanced tariffs if the group did not disband.
The future thus lies not in disbandment but in vigorous revival and generation of a bloc that will rival the U.S. - dominated world order. India is currently negotiating free trade agreements (FTA) with 6 countries including the US. An important one which is pending is with the Association of South East Nations (ASEAN). Another infrastructure alliance under Chinese leadership that can be considered is the Belt and Road Initiative (BRI).
This does not mean we should not pursue negotiations with the US for a fair trade deal. Whether it will happen will depend on how much the US and India are willing to dilute their positions. Meanwhile, the creation of multilateral economic partnerships as an alternative to U.S. domination must be seen not as short-term posturing but a long term foreign policy.