(MENAFN- The Arabian Post)

By Dr. Nilanjan Banik

Before the August 1 deadline, the U.S. President Donald Trump decided to impose a 25% tariff on Indian exports. He also talked about an additional penalty on Indian exports, which could go up to100% as a surcharge, targeting countries that continue trading oil with Russia. Trump seems to care less about 'friend' India, as trade with India accounts for a much smaller share compared to U.S. trade with China. Because of U.S. interests, China is likely to get a better trade deal than India, for instance removal of restrictions of U.S. chip-design software exports to China.

This is not the first time Trump has taken a hard line on India. During his earlier stint at the President not only did Trump label India as the“tariff king”, but he also removed the country from the Generalized System of Preferences (GSP). Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries-primarily low-income nations-at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US. According to the World Bank, a“low-income” country is one with a per capita income of less than $1,045 per year in 2024.

As U.S. remains India's largest export destination, it is only natural to feel the pressure with increasingly restrictive trade measures in place. Around 18% of India's total exports are directed to the US, with a value of $77 billion in 2023, and $78 billion in 2024.

However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. A quick review of the items qualified under the GSP reveals that they primarily fall under categories such as textiles and apparel, watches, footwear, work gloves, automotive components, and leather apparel.

Among these key export categories, some items within textiles and apparel and automotive components were included in the GSP list. Additionally, exports of organic chemicals, steel, and certain engineering goods-such as nuclear boilers, machinery, and mechanical appliances-were also impacted by the withdrawal of GSP benefits. However, the value of these items as a proportion of total Indian exports to the US is relatively small. India's exports to the US are mainly comprised of diamonds (19%), packaged medicaments (14%), refined petroleum products (8.9%), automotive components (2.1%), and textiles and apparel (3.7%). The percentages in parentheses represent the share of India's exports to the U.S. as a percentage of India's total exports.

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The recent signing of the India-UK Free Trade Agreement (FTA) is expected to help offset some of the negative effects of excessive tariffs in the long run. Indian policymakers had anticipated a tariff around 20%, but Trump ultimately imposed a 25% rate. Thanks to the India-UK Free Trade Agreement, India stands to benefit from zero tariffs on 99% of its exports, particularly in sectors like textiles, jewellery, pharmaceuticals, automotive parts, and information technology services – areas that commentators fear could be negatively impacted by higher U.S. tariffs.

Indian exports to the U.S. are also likely to be less affected in relative terms, since Trump has unilaterally imposed tariffs on countries whose exports compete with India in the U.S. market. For example, Bangladesh (35%), Thailand (36%), Vietnam (20%), Indonesia (19%), Malaysia (25%), and the Philippines (19%) – some of India's competitors in leather, textiles, and machinery – are equally impacted, with the numbers in parentheses indicating their respective tariff levels.

To better withstand external shocks - whether from protectionist tariffs or even war - India should focus on making its manufacturing sector/exports more competitive and focus on its domestic economy. The Indian economy benefits from a strong domestic sector, with domestic consumption, government spending, and private investment together accounting for nearly 80% of the country's GDP.

However, the contribution of manufacturing value added to GDP remains stagnant at 17%, indicating no significant improvement in manufacturing competitiveness. Foreign Direct Investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining, with gross FDI flows dropping to just 1% and net FDI falling to 0.6% in the first half of the 2023-24 financial year-levels not seen since 2005-06. Rigidities in the business environment, the inverted duty structure (IDS), and India's decision to terminate bilateral treaties are to be blamed for discouraging flow of FDI.

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A study by CUTS International of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. For example, apparel items priced below $14 (Rs 1,000) are subject to a GST of 5%, while those exceeding $14 are taxed at 12%. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services, and other fulfilment costs.

However, these additional services are subject to a higher GST rate of 18%, making the products less competitive in the international market. The India budget 2025 has addressed the issue of IDS; for example, the government has increased tariffs on Interactive Flat Panel Displays from 10% to 20%, while reducing tariffs on Open Cells and related components to 5%. This trend needs to continue, and policymakers must implement further reforms to enhance the competitiveness of the manufacturing sector.

While tariff negotiations is an ongoing process, India could consider strengthening its position by increasing purchases of U.S. oil and defense equipment. During his last tenure, Trump positioned himself more as a major arms dealer, focusing on selling more weapons and oil. India has contracted for nearly $20 billion worth of US origin defense items since 2008. This trend is likely to continue in a potential Trump 2.0. India, for its part, should focus less on tariffs and more on addressing domestic distortions. (IPA Service )

(The author is Professor, Mahindra University).

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