India Must Strive For Reform Not Better Trade Bargains
The US tariff reprieve offers India relief, but hollow gains persist as domestic protectionism continues undermining global competitiveness and trade potential.
The Gist
India's trade challenges persist despite tariff changes.
- Historical trade agreements have failed to boost exports, leading to public backlash.
- Structural weaknesses in manufacturing hinder competitiveness against Asian rivals.
- India must reform its tariff structures to benefit from future free-trade agreements.
The US Supreme Court’s recent ruling striking down President Donald Trump’s tariffs as illegal—rejecting the administration’s expansive reading of the 1977 International Emergency Economic Powers Act—has granted New Delhi an unexpected, albeit temporary, reprieve.
Although Trump quickly bypassed the ruling by invoking Section 122 of the Trade Act of 1974 to reinstate a 10% global tariff, which he subsequently hiked to 15%, the playing field has fundamentally shifted.
Whether the US tariff settles at 10% or 15%, India now finds itself on equal footing with the rest of the exporting world. In many ways, the global trade environment has reverted to the status quo ante of early 2025.
What happens next is, as always, unclear and thus makes speculation about Trump's next move a futile exercise.
Yet, this judicial intervention provides a crucial window of opportunity. Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), told me over the weekend.
According to him, India is under no obligation to honor the tentative framework of the previously negotiated—and largely one-sided—US trade deal.
Crucially, nothing has been signed till date.
Protectionism Holds Back
Tellingly, an Indian trade delegation bound for Washington to formalise an interim agreement literally turned back on its way to the airport on Sunday.
According to Reuters, the decision to defer the visit was mutual, driven by the tariff uncertainty following Friday’s judgment.
Navigating this diplomatic and economic maze will require considerable tact.
India must avoid needlessly antagonizing the US president while seizing the chance to reset a deal that would have forced zero-percent import duties on American goods—a concession fraught with severe political and economic domestic blowback down the line.
However, the spotlight on Washington’s volatility obscures a more uncomfortable truth at home: India’s own protectionist reflexes are the primary anchor weighing down its export potential.
India’s Trade Missteps
As Singapore-based economist Priyanka Kishore highlighted in Nikkei Asia last week, India’s historical tryst with free-trade agreements (FTAs) has been deeply troubled.
By 2011, New Delhi had inked 15 FTAs, predominantly within Asia, which deepened regional trade integration. However, these pacts also triggered a surge in imports and widened trade deficits, particularly with Southeast Asia.
The resulting public backlash soured the domestic appetite for trade liberalisation.
Consequently, India opted out of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 and abruptly abandoned the Regional Comprehensive Economic Partnership (RCEP) talks in 2019.
Why did these early FTAs fail to lift exports commensurately with imports?
Kishore argues that the agreements were inherently shallow, driven more by foreign policy optics than hard-nosed trade economics.
They focused narrowly on goods and tariffs while excluding substantial portions of bilateral trade from elimination—often hiding behind long phase-out periods to shield sensitive domestic sectors.
Partner nations like Japan, South Korea, and the ASEAN bloc capitalised on the access, but Indian exporters were largely left behind.
Not surprisingly perhaps, India’s share in global manufacturing exports has stubbornly stagnated at around 2%.
While empirical research demonstrates that liberalising input trade generally boosts domestic production and export competitiveness, this dividend has evidently eluded India.
The Culprit
One culprit is punitive duties on intermediate imports from non-FTA partners and a fundamentally weak domestic manufacturing base.
Despite commendable infrastructure upgrades over the past decade and the 2020 rollout of the production-linked incentive (PLI) scheme, India’s competitiveness gap with its Asian rivals remains glaring.
Consider the textile sector. Here, high operational expenses and poor labor productivity easily erase the advantage of cheap labor.
Coupled with elevated logistics costs, these inefficiencies have steadily eroded India's global export share, even though the country's annual wages are 74% lower than China’s and 58% lower than Vietnam’s.
Kishore concludes that India's manufacturing push has been fragmented, lacking urgency, and overly protective of domestic firms from foreign competition.
This defensive posture must change if India is to reap the benefits of its growing FTA portfolio.
The impending free-trade agreements with the European Union and the United Kingdom offer a lifeline to lower barriers and sharpen industrial competitiveness.
Self Imposed BurdenTo return to the India-US deal, a blunt reality emerges: regardless of the tariff rate India secures for its exports, it must drastically slash its own import duties across the board.
Indian industry has long been shielded by an inverted tariff structure that actively harms its own producers.
As Swaminathan A Aiyar noted in The Times of India on Sunday, cotton is no longer the undisputed king of textiles.
Global industries in China, Vietnam, and Bangladesh have pivoted aggressively to man-made fibers like polyester and viscose, which now command nearly 70% of global fiber consumption.
Yet, India is structurally cotton-heavy because its tariff structure in inputs and outputs of textiles has long been inverted. Duties on polyester’s raw materials such as PTA and MEG have typically been much higher than on polyester itself, Aiyar says.
Consequently, Indian spinners and weavers face artificially inflated input costs compared to their global peers.
In an industry defined by razor-thin margins, a mere 3% to 5% cost disadvantage is fatal.
Even if FTAs eliminate tariffs on finished Indian garments entering Western markets, exorbitant raw material costs will continue to render exporters uncompetitive.
As both Kishore and Aiyar point out separately, Indian garment exports have flatlined, specifically around the $16 billion to $18 billion mark for years. Over the same period, Bangladesh's exports have gone past $40 billion.
Trump’s tariff tantrums may be unreasonable, but they have inadvertently laid bare India’s structural frailties.
Fixing these self-inflicted wounds is not a matter of striking a better diplomatic bargain in Washington.
It requires India to roll up its sleeves, dismantle its protectionist tariff structures, and finally get down to the hard business of reform.
