Donald Trump’s tariff threats could be good for India, says ex-RBI deputy

Viral Acharya, former deputy governor of Reserve Bank of India said that US President Donald Trump’s threats to hike tariffs could strengthen India’s economy. 

Acharya said these tariffs will drive the government to lower trade barriers, spurring competition and growth. Greater competition means Indian firms will be forced to raise their standards to take on global rivals. That, in turn, means higher quality jobs and a larger manufacturing base, he said.

How India benefits

Acharya said large Indian firms that had benefitted from the protectionist measures will initially lose some value, but the economy will benefit overall. 

“In a competitive market, companies should not be making fat margins unless they are the most efficient provider of that service or good,” he said.

“Indian businesses, not just the big firms, are capable of competing with the best globally but that will require investments in efficiency and productivity. Unless we subject them to this competition, we will never see their best,” he added.

Trump’s tariffs

Trump has threatened to impose reciprocal tariffs on countries from April 2, effectively raising taxes on imports to the US to the same level that a trading partner imposes on American goods. Economists estimate that India would be one of the worst hit by the reciprocal tariffs given the wide differential of about 10 percentage points in average import duties between the two countries.

India has already taken steps to ease tariffs, making significant cuts in February, and discussing reducing import taxes on US goods ranging from cars to chemicals and electronics.

Commerce Minister Piyush Goyal was in the US last week to hold talks with his US counterpart Howard Lutnick and other Trump officials on a multi-sector trade deal. The US president said Friday India was ready to make deeper tariff cuts.

Competition from foreign firms

Opening the economy to foreign firms may not just result in direct competition, but “it may lead to substantial knowledge transfer as strategic partnerships are formed with foreign players,” he said. “Eventually, some global giants will emerge from that process.”

Indian firms are “smart enough to innovate if they are put under pressure. And they will regain some of their mojo thereafter,” Acharya said.

To minimise the impact on Indian industries, Acharya suggested lowering tariffs in phases with clear communication about the end goal. If the policy path is predictable, businesses will invest in efficiency, innovation, and focus on upskilling their workers, he said.

Although governments use protectionist measures to support their domestic industries and workers, Acharya said concerns about job losses if trade barriers are taken down are not backed by evidence.

“There is no evidence that when we opened up in the 1990s, we killed jobs,” he said. “It was not true in the nineties, it was not true in the 2000s.”

Instead, greater competition will boost private capital spending and productivity, and spur growth. It will also result in more higher-skilled jobs and raise domestic consumption.

“And that is the transformational change India needs at the moment,” he said. “It is just a version of what worked for us in the 1990s and 2000s.”

(With inputs from Bloomberg)