THE RECENT TALK of US tariffs on India has focused on how they are a threat to this country. However, this moment in time can be turned into an opportunity for our consumers, farmers and industry if we play our cards right. The prime minister and the finance minister both have talked about the importance of deregulation to drive economic growth. Tariffs not only keep prices high for Indian consumers, but also hide the ‘regulatory cholesterol’ that keeps our economy unhealthy.
For instance, US automobile imports to India face an average tariff of 110 per cent, while Indian automobile exports to the US encounter tariffs of 2.5 per cent, a differential of more than 100 percentage points (pp). Indian consumers pay more for cars while Indian producers make cars that are more expensive and of lower quality, reflecting the higher cost of doing business in India, thus succeeding only in India and not globally. Nobody tries to tackle the root of the problem.
Similar significant differentials exist in food and food products (35 pp), alcohol/wine (120 pp), footwear (15 pp), diamond and gold products (15 pp), pharma products (10 pp), chemicals, machinery and aircraft (5-10 pp). The upside of agreeing on a strategic reduction in tariffs would be significantly enhanced consumer choice, lower prices and elevated quality standards in many of these sectors, along with access to the large US market for Indian producers. However, to fully leverage this opportunity, India must address deeper structural challenges that impede market efficiency and competitiveness.
Chief among these are long overdue reforms in agriculture, labour and land markets. Agricultural reforms, for instance, must focus on liberalising markets while protecting farmers via DBT and insurance as a replacement for the current toxic cocktail of MSP, mandis, essential commodity controls, free fertiliser and free electricity. Indian farmers will be able to focus on higher value added segments like horticulture, which suit our labour-intensive farming practices, rather than three annual crops of water and fertiliser intensive crops like wheat and paddy, which destroy our ecological balance.
Similarly, India's regulatory landscape is needlessly burdensome and inefficient across every category―labour, land, customs, financial and environment regulations. These are keeping Indians from being global champions by deterring businesses―especially small and medium enterprises―from scaling operations and creating employment. Simplifying these regulations and ensuring flexibility will attract both domestic and international investors, enhancing employment generation and raising productivity.
All of these along with economic growth, stimulated by such comprehensive reforms, will generate the necessary fiscal resources enabling the government to effectively provide targeted social protections. By shifting the approach from market-distorting subsidies or over-reaching regulatory interventions to direct transfers, India can ensure efficient allocation of resources, protect vulnerable populations effectively, and simultaneously encourage economic dynamism.
The potential US tariff actions thus serve as a golden opportunity for India at a moment when the government is already moving on a path of deregulation. The US will definitely place tariffs on China, and their producers and consumers will suffer from the resulting trade war. If we can take advantage of this moment to rationalise our tariffs, initiate critical structural reforms, and significantly improve ease of doing business, Indian consumers and producers can both collectively benefit.