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Before the meeting of PM Modi with Trump in February, India reduced prices on certain American products
India has generally turned to economic reforms during distress, the most famous example in 1991, when the country adopted liberalization in the face of a deep financial crisis.
Now, with the pricing wars of American president Donald Trump and the upheavals of world trade that have followed, many think that India is found at another crossroads.
Could this be a major opportunity for the fifth world economy to lose its protectionism and further open its economy? Will India take the moment, just as it did more than three decades ago, or will it withdraw further?
Trump repeatedly marked India a “Roi Price” and a “great attacker” of commercial ties. The problem is that the importing rights weighted according to the trade in India – the rate of average rights by imported product – are among the highest in the world. The average American rate is 2.2%, China is 3%and that of Japan is 1.7%. India is a huge 12%, according to data from the World Trade Organization.
High prices increase costs for companies depending on global value chains, which hinders their ability to compete in international markets. They also mean that Indians pay more on imported goods than foreign consumers. Despite growing exports – mainly motivated by services – India manages a significant trade deficit. However, with the part of India world exports at only 1.5%, the challenge becomes even more urgent.
The jury is determined to know if Trump’s pricing war will help India to free itself or double protectionism. The government of Narendra Modi, often criticized for its protectionist position, seems to have changed speed in recent years.
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Despite growing exports, India manages a significant trade deficit
Last month, before Prime Minister Modi’s meeting with Trump in Washington, India unilaterally lowered prices on Bourbon whiskey, motorcycles and some other American products.
The Minister of Commerce, Piyush Goyal, made two trips to the United States to discuss a potential trade agreement, following the threatened reprisal rates of Trump, who was looming on April 2. (Citi research analysts estimate that India could lose up to $ 7 billion a year from reciprocal rates, mainly affecting sectors such as metals, chemicals and jewelry, with pharmaceuticals, cars and food products also at risk.)
Last week, Goyal urged Indian exporters to “get out of their protectionist state of mind and encouraged them to be daring and ready to deal with the world of a position of strength and self -confidence”, according to a statement from his ministry.
India is also actively pursuing free trade agreements with several countries, including the United Kingdom and New Zealand, and the European Union.
In an interesting turn of events, local telecommunications giants Reliance Jio and Bharti Airtel joined forces with Trump Ally Elon Musk SpaceX to launch satellite internet services via Starlink in India. This decision surprised the analysts, in particular after the recent clashes of Musk with the two companies, and came while the US and Indian officials negotiate the trade agreement.
The rapid growth of India from the end of the 1990s to the 2000s – 8.1% between 2004-2009 and 7.46% from 2009 to 2014 – was largely motivated by its progressive integration into global markets, in particular in pharmaceuticals, software, cars, textiles and clothing, in parallel with a regular reduction in prices. Since then, India has turned inward.
Many economists believe that protectionist policies in the last decade have undermined the Make In India initiative of Modi, which has prioritized the high -intensity of capital and technology sectors on sectors with high work intensity such as textiles. As a result, he had trouble stimulating manufacturing and exports.
High prices have also favored protectionism in several Indian industries, discouraging investments in efficiency, according to Viral Echarya, professor of economics at New York University Stern School of Business.
This allowed the “comfortable holders” to obtain market power by consolidating their positions without dealing with a lot of competition. Like Mr. ACHARYA, a former central banker, noted it in a newspaper of the Brookings Institution, the restoration of industrial balance in India requires “a reduction in prices to increase the part of the country of the global trade in goods and reduce protectionism”.
The prices of India already higher than those of most countries, other increases could be particularly damaging.
“We have to stimulate exports and a tariff war for Tit-For-Tat will not help us. China can afford this strategy because of its massive export base, but we cannot, because we only have a small part of the global market, Rajeshwari Sengupta, associate professor of economics with us, said more than the others,” added.
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High prices mean that Indians pay more on imported goods than foreign consumers
In light of this, India is found at a crossroads. While the world undergoes a major change, India has “a unique opportunity to shape a new vision” for world trade, explains Aseema Sinha, a commercial expert in Claremont McKenna College.
By lowering the protectionist barriers to Southern Asia and strengthening links with Southeast Asia and the Middle East, India has the possibility of leading to shape a new commercial vision, positioning itself as a key actor in a “re-globated” world, MS Sinha, author of Globalizing India.
“By reducing prices, India could become the regional and interregional magnet for trade and economic activity, drawing various powers on its orbit,” she adds.
This could help India create the jobs he desperately needs home. Agriculture, which represents 15% of its GDP, represents a huge 40% of employment, reflecting extremely low productivity. Construction remains the second largest employer, absorbing occasional daily workers.
The challenge of India is not to extend its flourishing service sector, which already constitutes almost half of total exports, but in the treatment of the large pool of unskilled workers who do not have the basic skills necessary for service jobs.
“While the high-end services are flourishing, the majority of the workforce remain without instruction and underemployed, often relegated to construction or informal jobs. To provide significant employment to millions of people entering the labor market each year, India must increase its manufacturing exports, because Ms. Sengupta.
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Agriculture, which represents only 15% of the GDP in India, represents 40% of employment
One of the concerns is that the reduction in prices could lead to dumping, where foreign companies flood the cheap product market, potentially affecting the national industries.
According to Ms. Sengupta, the ideal approach to trade in India would imply a “universal reduction” of import prices, because it currently has some of the highest rates among its business partners.
However, there is a warning: the commercial difficulties of China, in particular with the United States due to the current trade war, could lead to a Chinese spill in India in the short term.
“To protect itself against this, India can use non -pricing obstacles against China but only against this country and only in the event of proven spill.
There is also an increasing concern that India could overcompens its efforts to flatter these United States.
Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), believes that India’s tendency to soften trade policies “based on rhetoric rather than economic pressure” shows a lack of assertion in global trade negotiations.
If this trend continues, he says, India could end up making even more compromise in its trade agreement with the United States, “eroding its negotiation power” more.
“In comparison with other major economies, India’s preventive surrender on several commercial fronts – without the United States imposing a single specific price in the country – makes it exceptionally vulnerable to pressure tactics.”
The broader consensus seems to be that India should capitalize on what could be the involuntary consequences of Trump’s tariff wars. Pranjul Bhandari, chief economist from India to HSBC, believes that “potential American rates may have become a catalyst for reforms”.
“If the supply chains are again happy at the second Trump presidency due to higher prices on major exporters, and the world is looking for new producers, India could have a second chance,” she wrote.
Creating jobs that make products for the world will not be easy. India has largely missed the bus on low -end and unskilled factory work – Jobs China has dominated for decades. Automation takes over. Without deeper reforms, India may be left.
