Impact of Tariff Threats on India’s Economy: Insights from Ex-RBI Deputy
Viral Acharya, former RBI deputy governor, suggests that Donald Trump’s tariff threats could strengthen India’s economy by encouraging lower trade barriers and enhancing competition. He believes this will lead to higher-quality jobs and a more substantial manufacturing base. Despite initial setbacks for large firms, the overall economic benefit is anticipated. Acharya advocates for a gradual approach to tariff reductions and dismisses concerns regarding job losses due to trade liberalization.
Viral Acharya, the former deputy governor of the Reserve Bank of India, posits that U.S. President Donald Trump’s proposed tariff increases may prove beneficial for India’s economy. He contends that these protective measures will prompt the Indian government to reduce trade barriers, fostering competition and economic growth. As competition intensifies, domestic companies will be compelled to enhance their standards, leading to the creation of higher-quality jobs and a more robust manufacturing environment.
Acharya acknowledges that while large Indian firms currently benefiting from protectionism may experience initial losses, the broader economy will ultimately gain. He states, “In a competitive market, companies should not be making fat margins unless they are the most efficient provider of that service or good.” Acharya emphasizes the ability of Indian businesses to compete on a global scale, provided they invest in efficiency and productivity improvements.
The potential reciprocal tariffs proposed by Trump could have a significant impact on India, which currently faces an approximate 10 percentage point difference in average import duties compared to the U.S. In light of this, India has initiated measures to reduce tariffs, including significant cuts made earlier this year, and discussions concerning further reductions on various imports from the U.S.
During recent discussions, Commerce Minister Piyush Goyal met with his U.S. counterpart to negotiate a multi-sector trade agreement, with Trump indicating that India is poised for deeper tariff reductions. Acharya notes that opening the Indian economy may not only stimulate competition but also facilitate knowledge transfer through partnerships with foreign companies. He believes this could give rise to new global industry leaders from India.
Furthermore, Acharya asserts that Indian firms possess the ingenuity to innovate under competitive pressure, suggesting that they will ultimately regain their competitive edge. To mitigate potential adverse effects on local industries, he recommends a gradual approach to tariff reductions, accompanied by transparent communication regarding intended goals.
Acharya also addresses common apprehensions surrounding potential job losses linked to trade liberalization, asserting that historical evidence does not support such fears. He maintains that increased competition is likely to enhance private investment and productivity, yielding higher-skilled job opportunities and stimulating domestic demand. He concludes by stating, “And that is the transformational change India needs at the moment,” drawing parallels to the economic shifts seen during the 1990s and 2000s.
In summary, Viral Acharya argues that Donald Trump’s tariff threats may ultimately benefit India’s economy by prompting the government to lower trade barriers and enhance competition. Although larger firms may face initial setbacks, the anticipated rise in standards and innovation among Indian businesses could foster economic growth and job creation. With an emphasis on gradual tariff reductions and clear communication, Acharya believes that India can navigate these changes effectively, leading to a transformative economic landscape.
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