Trump tariffs may force India to review Viksit Bharat playbook

US President Donald Trump’s additional 26% tariff on Indian imports into the US hits at the protection the Union government offers to domestic products from competing imports—one of two key elements of the country’s manufacturing strategy; the other is incentives linked to production.

The two elements are key to Prime Minister Narendra Modi’s vision for making India a developed nation—or Viksit Bharat—by 2047, a century since Independence.

On Friday (Thursday in the US), Trump’s administration recalibrated its reciprocal tariff on India to an additional 26% levy across a range of commodities starting 9 April, down from the 27% hike announced on 2 April, as it corrected its trade deficit computations.

Also read | Trump’s reciprocal tariffs: India braces for economic ripples

“We are of the view that the reciprocal tariffs on India and other Asian countries could create an opportunity for India to scale up its manufacturing capabilities," said a government official who spoke on condition of not being named.

There is a strong possibility that manufacturing firms in countries like Vietnam and Thailand may consider relocating to India to take advantage of lower tariff and incentive benefits, the official said. The US has imposed additional 46% tariffs on Vietnamese imports into the US, and 36% on products shipped in from Thailand.

“Our focus is on increasing domestic manufacturing, which will lead to employment generation. If required, we are open to introducing new schemes or modifying existing ones to incentivise manufacturing further," the official said.

Arvind Virmani, NITI Aayog member and former chief economic advisor, said India’s efforts to achieve self-reliance and its production-linked incentive scheme, which aids with value addition in the domestic manufacturing sector, will continue to evolve.

“The Atma Nirbhar (self-reliance) policy is sensitive, both to changes in the external environment and to lessons arising from domestic performance," Virmani said in response to an emailed query from Mint. “It has been gradually adjusted to address new issues and opportunities and will continue to evolve."

Global distress opportunities

A key element of India’s manufacturing game plan is free trade agreements, which have been an important part of the Union government’s strategy for promoting domestic manufacturing, Virmani said. Over the last decade, the focus has shifted from FTAs with countries that are India’s actual or potential competitors to nations whose economies are complementary, he added.

“Reduction of tariffs on manufactured goods is a key element of these FTAs with a view to developing competitive, trusted supply chains. The FTAs under negotiation with the UK and the EU, and the bilateral trade agreement being negotiated with the US, will help further this goal," said Virmani.

Pronab Sen, former chief statistician of India, said “India should analyse evolving trading patterns, other countries’ response to US’ tariff increases, identify opportunities, and fill the gaps."

US exports may face increased duties in countries retaliating against Trump‘s reciprocal tariffs, providing an opportunity for India to tap those markets, explained Sen.

On Friday, China hit back at the US with an additional 34% tariff on American imports into the country, matching Washington’s imposition of 34% additional tariffs on Chinese goods, escalating the tariff war.

Sen, however, added that the emerging protectionism in world trade may be a transitory phase and that India should strategically ride out of this.

Also read | US tariffs on China, Thailand may open door for India’s toy exports

As for India’s PLI scheme, Virmani pointed to the Union government’s responses “to global challenges, emerging opportunities, and expanding base of mobile exports, to incentivise electronics components and other inputs and intermediates".

The PLI scheme “will continue to evolve to promote supply chains for complex, network products like electronics, semiconductors, instruments, machinery and equipment", he said.

Sen added that targets set under India’s production linked incentive scheme may be reviewed in light of the absorption capacity of the domestic market and the global demand conditions.

The ministries of finance and commerce did not reply to queries emailed on Thursday.

Eyes on India-US trade pact

The direct impact of the US’ reciprocal tariffs on most market economies would be minimal in the immediate short-term, said Virmani.

“Every country is, however, feeling the effect of increased trade policy uncertainty during the last few months. World trade, FDI (foreign direct investment), and GDP growth will all be affected," the economist said. “This will have a small indirect effect on India given our low trade dependence."

In the short-medium term, the impact of differential US tariffs would depend on the commodity and the relative tariffs on competitors, he added.

Goods exempt from reciprocal tariff, for example, pharmaceuticals, will have little or no effect. And for products in which India’s closest competitors are from South, East and South East Asia, demand for Indian goods would increase, Virmani said.

Also read | India eyes swift trade pact with US amid higher tariff pressures on Asian rivals

“In the medium-term, the negative factors would be minimised through the first phase of the US-India BTA, by fall of 2025. In the long-term, the final BTA with the US will aim to enhance the potential gains during the next 5-10 years," said Virmani.

That said, the US Trade Representative’s 2025 National Trade Estimate latest report flagged several Indian policies, including ‘Make in India’, as trade barriers, even as India and the US were engaged in discussions for the bilateral trade agreement, a proxy for a free trade agreement.