On Wednesday (30 July), US President Donald Trump announced the US would impose 25% tariffs on Indian imports as well as “an unspecified penalty” for purchasing Russian weapons and energy. He said this would go into effect starting today (1 August), the deadline for countries to reach trade deals with the US before the ‘reciprocal’ rates announced in April came into effect.
India, which has been in talks with the US over the tariff rate for months, had been an early contender for a favourable deal. US Vice-President JD Vance’s visit to the country in April and Trump’s amicable relationship with Indian Prime Minister Narendra Modi had seeded optimism that India would be spared the 27% tariff rate it was initially assigned.
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Shumita Sharma Deveshwar, chief India economist at GlobalData.TSLombard, spoke to Investment Monitor about the potential fallout of the high tariff rate on a country with a gross domestic product of nearly $4trn (Rs349.09trn).
uncertain environment in which investors are less likely to take risks. Credit: GlobalData.TSLombard.
Eugenia Perozo (EP): India has benefitted from redirected investments due to US-China decoupling, like Vietnam and Mexico. If the 25% tariff rate remains, how will it affect the country’s appeal as an investment destination?
Shumita Sharma Deveshwar (SSD): The private investment cycle in India has been sluggish. We have been waiting for a recovery for a while now, and if you look at the foreign direct investment (FDI) inflows, they have been disappointing compared to the kind of growth that we are seeing and the headlines saying that India’s the fastest-growing economy in the world.
So, this is a puzzle that has been foxing observers and investors. Why is more investment not happening in India if it is such a strong, growing economy? A fifth of our merchandise exports go to the US, it is our largest export destination. Given the fact that there is so much global uncertainty over the changing supply chains, I think that India is going to be hit.
EP: What sectors will be the most affected by this tariff rate?
SSD: The tariff is basically for merchandise exports. Trump has also said that there will be a penalty because of the oil and arms purchases that India gets from Russia. We don’t know the quantity of that yet. This just introduces a sense of uncertainty into what was already an uneven economic revival, where there were already concerns about private investment picking up. Now this extra level of uncertainty has been introduced because we don’t know what the final outcome is going to be.
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By GlobalDataThe talks are still ongoing. It’s not that this is the final deal. India is still hoping it will get some kind of a deal by September-October this year, and the US trade delegation is visiting India later in August. There are so many questions that I feel that the real issue is that all this uncertainty will just deter investors from taking the risk at a time when no one knows what the final outcome is going to be.
We don’t know how the trade equations would play out because tariffs are also being slapped on our competitors […] I think that the private investment cycle is going to find it difficult to pick up.
EP: You mentioned that even before the tariffs, the private investment ecosystem in India was sluggish. Why was that?
SSD: To a certain extent, there has been a bit of complacency on the reform front. There has been a lot of tweaking of rules and regulations, but not to the extent that would really make India a substitute for China, as such. At the margin, we are seeing some companies come in and those that hit the headlines, such as Apple producing iPhones in India – but then you don’t see the kind of investment that we should see coming.
For one, there’s policy complacency. This is the third term of basically the same government. The pace of reform has been going down over the years, and over the last one year there has hardly been any. I think India remains a country where the rules and regulations are not that easy, where there needs to be a lot of streamlining, which doesn’t happen because there are tough wars between various constituents of the policy-making world.
The other thing, I think that a long-standing problem in India has been infrastructure. Even though the government is focused on building out infrastructure – in roads and railways, for example – you just don’t have the supply keeping up with the demand. Urban areas in cities are just bursting at the seams. We were just not seeing that kind of infrastructure keeping up with the need that there is in the country.
One issue that comes up repeatedly when you talk to companies is the availability of skilled labour. Even though we have a young growing population, we don’t have enough. Companies are always short on that. Even though we have the potential, we are not meeting that potential because of these hindrances.
The government’s intention is correct, but it is not happening fast enough. Tweaks are happening but not fast enough that it gets investors excited. Things are changing at the margin, so you are seeing investment trickling in, but you are not really seeing investment coming in the large numbers we require.
EP: India’s agricultural sector, which the US wants more access to, has been a red line in negotiations. Why is India so protective of its domestic agricultural sector?
SSD: Because of the number of people it employs. The agricultural sector domestically has really been the last bastion of reforms. Modi’s government, when it had a majority in parliament, which was in its second term, tried to push through agricultural reforms, which would have ostensibly drawn in more private corporate sector investment into the agriculture sector. There were protracted farmer protests around the national capital for almost a year, and finally, before one of the key state elections, Prime Minister Modi announced that he was withdrawing those reforms.
Even domestically, it has been hard to push through agricultural reforms because of the fact that two thirds of our population reside in rural areas. Around half the workforce is employed directly in agriculture there. It is a very labour-intensive sector; we don’t have that much mechanisation, it is relatively inefficient. There is a historical legacy of protection.
If you allow agricultural imports from a highly mechanised country, the impact that is going to have on farmers here is potentially huge and damaging to their livelihoods. There is no way that the government can think about allowing that to happen. What they can do is allow it in certain sectors.
India is the largest importer of edible oils, also of lentils and some dry fruits. There are certain subsectors within the agriculture where you can get imports, but you can’t open up the sector to things like wheat or dairy, where we have so many farmers depending on their livelihoods for domestic production of that. My basic point is that when it is difficult to reform the sector domestically, you cannot open it to external competition.
EP: The US ‘trade deals’ with Japan, the EU and South Korea have all included investment pledges from these countries into the US. Experts have highlighted that these are nonbinding, but they seem to have helped get deals over the line. Do you think a deal with India would be likely to include a foreign investment pledge?
SSD: It comes down to the fact that we need a lot of investment domestically. This is not to say that Indian companies aren’t investing abroad, but I think that it makes a difference. As far as the headlines go, if you are saying we will invest a certain amount of money in your country, what is the signal that it sends domestically? India needs more investment in manufacturing to pull in more FDI and create more jobs at home.
How much can you really commit to investing in another country and creating jobs for them when you are already not creating jobs for your growing working-age population? So, whether it is binding or not, I think at the headline level, it doesn’t send the right signal at home, politically.
