India Must Turn Trump’s Tariff Crisis Into Opportunity To Push Local Industry

The world turns its attention to the meeting on Friday in Alaska between US president Donald Trump and Russian president Vladimir Putin on a possible end to the war in Ukraine. Much rides on the outcome of the talks for India as well: if the outcome of the talks paves the way for the removal of sanctions on Russian exports, India would see the additional layer of 25% tariffs that Trump has levied on India, on account of its oil purchases from Russia, melt into thin air.

That would bring down India’s tariff handicap vis-à-vis competitors significantly: the base tariff on India is 25%, while the rates on countries that compete with India are around 19-20%, so that Indian exporters have to lower their costs by just 5-6% to compete with exporters from the likes of Bangladesh and Pakistan.

Trumped By Ratings

India has received a major shot in the arm from rating agency S&P, which has raised India’s credit rating from negative to stable, even in the face of the 50% tariff threat from the US. This is a rebuff to the US president’s taunt that India’s is a dead economy. Weeks after the US suffered a rating downgrade, India has received a rating boost, even if India is at the lowest rating to qualify as investment grade.

President Trump has prolonged the period of uncertainty over whether to invest in the US or Mexico to service the US market. Mexico has been given 90 days within which to finalise a deal with the US on trade.

Now, the US President has given China that grace period as well. What this means is that an exporter from a third country, say, Japan, trying to figure out whether to invest in the US or in Mexico (or even in China) to create new capacity that escapes the tariff of 15% levied on its exports, would not have clarity for another three months. This holds back investment in general, crimping growth for the world at large.

The pressure the US administration is putting on Fed chairman Jerome Powell to slash the Federal funds rate is eroding public perceptions about the integrity of America’s macroeconomic management. Trump’s Big Beautiful Bill Act has paved the way for large and rising fiscal deficits that, along with tariffs, could trigger inflationary pressures.

At the same time, job creation is plummeting in the US, and could well force the Fed to cut rates at its September meeting. This has soured the sentiment on the dollar. The Indian rupee, as well as the British pound, has strengthened against the dollar.

Chip Politics

OpenAI has released ChatGPT 5, supposedly better at reasoning and more concise in its answers. It has disappointed some users, though, who find it more impersonal than its predecessor. However, such new releases keep the race going with China’s AI models.

China has made a show of warning its AI companies against using NVIDIA’s chip offerings, citing national security fears, although the Chinese authorities have not banned the offending chips, as it could very well have, if it meant business.

Meanwhile, Trump has asked the new CEO of Intel, Lip-Bu Tan, a Malaysia-born naturalised American of Chinese ancestry, to step down, after a senator complained that the new CEO has been a major investor in Chinese technology companies.

Lip-Bu Tan founded Walden Capital, which has invested fortunes and generated bigger fortunes from Chinese hard tech companies that plug into the chipmaking ecosystem that China has developed to produce chips of its own, although these do not quite measure up to the best designed by US tech giants like NVIDIA. Tan met Trump after the latter’s social media call for the Intel CEO to step down, and seems to have assuaged his concerns. Trump then called him a success, and Intel's stock went up.

Capital Cure

Small and medium Indian enterprises that stand to lose sales in the US, as a result of the Trump tariffs, have been lobbying the government for relief. There is a case for the government to address their distress, but government support should take forms that lower their costs and improve efficiency.

One sensible measure would be to set up a technology upgradation fund of the kind that had majorly boosted the productivity of the textile sector in the past. Productivity is not enhanced by workers slaving away for longer hours for lower wages, as some of our Industry leaders imagine.

The more capital that each employee works with, the greater the employee’s output. The kind of capital required to boost productivity would vary from sector to sector. The government should let industry choose how to upgrade technology in its own sector, while offering financial support for such upgradation.

Turn Crisis Into Opportunity?

Two other forms of support are possible. This is to help India’s SMEs expand sales abroad through large trading companies, on the lines of Japan’s Mitsui and Marubeni. Their scale and reach are immense, and smaller firms that make use of them get market access that they never could on their own.

Amazon and WalMart do help Indian small companies export abroad. The government could offer them reduced hindrance to their operations in India, in return for active promotion of Indian small industry exports. The government could encourage large Indian companies to create trading arms that would help in this effort as well.

But the biggest boost for MSMEs would be in the form of greater access to institutional credit and support in prompt payments. The government has set up an online factoring platform, TReDS, but big companies penalise small suppliers who sell their unpaid invoices to financial entities, who then collect from the big companies that have received goods from small suppliers.

Banks today struggle to find takers for their surplus liquidity, and do not have the expertise to identify eligible borrowers from the universe of small companies. The government and the banking regulator, the Reserve Bank of India, could encourage banks to lend to non-banking finance companies that have the expertise to lend to small enterprises.

A functional market for corporate bonds is the easiest and simplest way to funnel capital to NBFCs with a sound track record of lending to MSMEs. The government should work to make that a reality. Sometimes, crisis works to produce solutions that were thought impossible earlier. Let Trump tariffs be one such crisis.