Is MAGA turning into MIKA (Make India Kneel Again)? Just when you thought it couldn’t get worse, Donald Trump has gone and tightened the screws on India, yet again.
As the first gentleman of the United States gets more and more ungentlemanly to India via Truth Social, there are some real-world implications for India.
“(This) now threatens India’s already modest footprint on the global trade map,” said Dr Vishal Sarin, dean & economist at Lovely Professional University.
India’s trade with the US adds around 2.1 per cent of value to India’s GDP. With Wednesday’s announcement of 25 per cent tariffs—in addition to a ‘plus penalty’ for buying oil (and arms) from Russia—Indian exports have suddenly become a lot less competitive.
As if that wasn’t bad enough, Trump even lashed out at India and Russia, quipping that “they can take their dead economies down together, for all I care".
Impact on India's neighbours
Rubbing salt into New Delhi’s wound, Trump announced a deal with India’s bete noire Pakistan to develop its supposedly immense oil and gas reserves, before bringing down the tariff rate on Islamabad’s exports to America from its Liberation Day high of 29 per cent down to 19 per cent.
It’s the kind of bad gift keeps on giving: Pakistan’s new rate will go into effect in a week’s time, along with Bangladesh’s at 20 per cent.
While the Pakistan move, per se, is more a psychological blow to India than any competitor of significance on the export stage (except for a petty rivalry over who’s the rightful claimant to basmati rice), the tariffs on Bangladesh will rudely hit one of India’s more labour intensive sectors—textiles and garments.
It’s easterly neighbour had grown into not just a competitor, but in recent times, had even raced ahead as a textile industry powerhouse, churning out clothes for some of the world’s major brands like H&M.
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For India, there is no escaping the bad news, whichever way you look at it. Initially, after the Liberation Day tariff announcement of April 2, there was still cheer in some quarters due to two reasons.
The first was the strategic relationship both nations enjoyed, as well as the Modi-Trump cameraderie, with their joint declaration of aiming for a Bilateral Trade Agreement (BTA) by fall 2025. The ideal scenario then was for Modi to sign the agreement along with Trump when he visited the US for the annual UN session, roughly around September 30.
Second, and more significant perhaps, was the fact that India’s tariff (then) of 26 per cent seemed to be much better off than most of its competitiors: China was slapped with rates starting 35 per cent—which even rose to 145 per cent as Trump played a numbers game—while rivals like Indonesia got 32 per cent.
In fact, Vietnam was shocked with a 46 per cent figure. In Indian commerce chambers, there was actually jubilation, as the impression then was that this would make Indian exports to America (mobile phones or otherwise) more attractive.
Tariffs on India versus other Asian nations
However, as India continued to play hardball at the negotiations, its Asian rivals stole a march.
Philippines moved from 32 per cent down to 19 per cent, at par with rival electronics manufacturing countries like Philippines and Malaysia—all getting more competitive as things stand.
In fact, Vietnam’s the case study of sorts here. The South East Asian nation was slapped with a heavy 46 per cent duty which they nimbly managed to bring down to 20 per cent.
The point to note here is that Vietnam was the runaway winner in the battle to garner the manufacturing biggies moving out of China, or looking for an alternative to the mainland after Covid-19.
India tried to save face with Apple manufacturing, while a plethora of other global biggies (Samsung included), went to countries like Vietnam.
Presently, as much as 75 per cent of Samsung’s phone manufacturing now takes place in countries outside of China like Vietnam. India boasts the world’s largest phone manufacturing plant of Samsung, but it is a pre-Covid phenomenon, and caters primarily to the domestic market.
How will this shape India's strategy going forward?
The writing on the wall for India is ominous.
The next round of negotiations between India and the US is only scheduled for the last week of this month, which means these tariffs will impact India’s exports to the US for at least a month.
The longer the impasse between the two countries continue, the more the pressure will be on India’s trade fortunes: with a direct impact on its GDP.
The doldrums in the stock markets and the fall in the value of the rupee are but initial warnings. The bigger whammy will be when investments—particularly in production and manufacturing in India—takes flight to countries with better tariffs (which in turn reduces their last mile cost in the US consumer market).
“The aggressive US stance is expected to dent the Indian rupee and deplete foreign exchange reserves,” said Sarin.
“Regardless of the outcome, India must seize this moment to rethink and diversify its trade strategy. Programmes like Act East, Africa Outreach and European engagement may not just stay on paper, but should be actively pursued,” she added.
