The Give and Take Needed to Bring the India–US Trade Deal Back on Track
Insights on how India can leverage its strengths to become a leading global economic power
In this episode, Puja Mehra speaks with economist Dr. Rajat Kathuria about the evolving landscape of India-US trade relations and the broader challenges of global economic engagement. Kathuria explains how India must balance political sensitivities in sectors like agriculture while ensuring competitive access to the US market. He highlights the importance of tariff reductions, strategic concessions, and diversification in trade and energy imports to attract investment and strengthen economic resilience. The discussion also delves into the role of media in shaping economic narratives and the lessons India can learn from China’s measured rise. Kathuria emphasizes India’s intrinsic entrepreneurial talent, frugal innovation, and the need to engage in global trade frameworks like CPTPP and RCEP. Tune in for insights on how India can leverage its strengths to become a leading global economic power.
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TRANSCRIPT
Puja Mehra: Dr. Kathuria, thank you so much for coming back to the show.
Rajat Kathuria: Always a pleasure Puja.
Puja Mehra: Today I want to talk to you about the sort of thaw that has happened between President Donald Trump in India and he's back to praising Prime Minister Narendra Modi. We've also had one round of talks between the US trade negotiators and their Indian counterparts in Delhi. But at the same time, we still do see a few of the Trump tantrums from time to time.
For instance, what he has said in the UK yesterday about the India-Pakistan war. So I wanted to understand if we can trust President Donald Trump now again, how has what happened in the last few weeks changed our approach?
Rajat Kathuria: On the first question Puja, on what has happened to trust between the two countries, I'm afraid my reading is not very positive. I think trust has been eroded. I wouldn't say completely eroded, but what's happened between India-US trade and the larger sort of relations, geopolitical relations.
I think trust has been one of the big victims of this episode. And I think it's not just Trump. I think some of this will survive beyond Trump because there's a structural change in the environment that we do trade.
And what that means really is that the supplier of the global public liberal order or the supplier of the global public goods, i.e. the United States has withdrawn from provisioning of that. And I don't think the US will ever get back to doing that in the manner it was doing it in the post-World War scenario where the Bretton Woods institutions were really something that guided trade and the larger relationships between countries. And it was to the advantage I think of developing countries, which is that the developing countries got an opportunity through the multilateral system to be able to voice their concerns in a GATT and then subsequently in a WTO with a dispute settlement body.
I don't think we'll ever come back to that situation. And given the volatility of the policies that the United States has followed ever since 2016 during Trump's first regime, that doesn't inspire confidence or doesn't provide any sort of opportunity for India or any other country to say that there will be certainty in policy. So trust has been eroded to a significant extent and to get back to trust will require a lot of hard work.
For instance, what do you want of institutions to do, be it Bretton Woods type of institutions or be it domestic institutions? What do you want them to do? You want them to be stable, you want them to be predictable, you want them to be credible, you want them to be legitimate.
These are attributes of institutions. These are attributes even of individuals and countries. And I think there is nothing in the past that the United States has done that inspires credibility.
You know, what prevents the United States or Mr. Trump from reversing policy and imposing tariffs? I mean, for example, the 50% tariff, the 25% reciprocal tariffs and the 25% penal tariffs were imposed without so much as a buy or leave, please. We didn't go to any institution.
We didn't go through any process. And I think that's something that has been eroded significantly. And I think it would be foolhardy or naive for any country, including India, to believe that it will not come back.
So I think trust has been eroded, legitimacy of institutions, credibility of institutions has been affected, and they can only be restored by a long period of predictability, a long period of certainty, and a long period of trust building or confidence building measures between countries. And I think that will take a long time. So that's the answer to the first question, which is what has happened, trust between countries, and trust in the India-US relationship.
So I think that has been eroded. So what do we do from here? I mean, given that that has happened, can we sort of move away from this relationship and condemn this relationship or try and restore the relationship?
I think India has to, much more than bravado, I think India has to take certain pragmatic steps, given that the United States is India's largest trading partner today, including if you include services as well, then it's by far the largest trading partner, we are doing trade worth over 200 billion dollars with the United States. So I don't think there is an easy substitute for various reasons. Also, other reasons, given that we've had a very good relationship on a person-to-person, people-to-people, given their education institutions, given their Silicon Valley, and given the diaspora, India's largest diaspora, and the United States, and so on, given all of that, and given our values of democracy, I think we will continue to enjoy a good relationship with the United States at a people-to-people level. But at the level of institutions that I've been saying, it will be a good policy for us, it will behove us to try and sort of create alternative markets for ourselves, and this includes obviously markets, the obvious markets are United Kingdom and the EU, but we should also explore other markets like East Asia, we should explore, certainly RCEP, we should explore these markets so that we are able to insure ourselves against volatility of policy that could happen in the future, at least in the next three years. Maybe post-Trump there will be more stability, but I don't think, as I was saying, we will ever go away from the new regime, which is source, multilateral institution with the provision of, let's say, global public goods.
I don't think we'll ever get back to that regime, so it'll be much more of a bilateral relationship between countries, or a plurilateral relationship between countries, and I think we should insure by creating more such relationships, so that if one relationship is on its way down, or one relationship is affected, we have the insurance of, or a buffer of other markets. And I must add, Puja, in this scenario, an important point which a lot of people are talking about, and which, you know, we should guard against that sort of narrative, which is, you know, so what, if India is unable to sign trade relationships or trade deals with countries, you know, we have a large domestic market, we're growing at 8%, or expected to grow at 8%. If you look at Niti Aayog's latest report on technology and AI, if we grow at 8%, we'll have a large market, we'll add $506 billion to our GDP by 2035.
I think we have to guard against that narrative. Niti Aayog is not saying this, but a lot of others are saying this, we have a large domestic market, and that can be used as insurance. And I think that's a false narrative in the sense that to become competitive, to establish ourselves on the global stage, there is no country in the world that has become competitive, that has seen increased standards of living, or that has seen increased productivity without engaging with the global market.
So exports are a very good way to instilling competitiveness and productivity within local economies. So the domestic market cannot be a substitute for global markets. And we've learned that the hard way, you know, pre-1991 and post-91, the evidence is clear.
The domestic market, yes, there is a domestic market, but that cannot be a reason why we should not get into trade relationships with other countries.
Puja Mehra: Dr. Kathuria, that raises two questions. One, what will be the give and take that will have to be done now between the Indian and the US trade negotiators to get the deal back on track? The meeting took place between the USTR negotiators and their Indian counterparts in Delhi last week, or this week actually.
So they're talking again, but how can they ensure that these talks, there is some substance to them? And secondly, the larger question that you raised that policies on trade are changing, institutions are crumbling, and some of this, or probably a lot of this will survive President Trump. So how would in the medium to long term, India have to deal in this world?
Rajat Kathuria: So I think the answer to your first question is what is on the table for the United States and India. And I think there's a lot at stake for India, much more than there is for the United States. In other words, I think we have a lot more to lose from a crumbling relationship, economic relationship between India and the United States than US has to lose.
And just to use a very quick example of China, the elephant in the room, probably the reason for a lot of what is happening in the world today, is that China has a lot of lever on the United States, including exports of critical inputs for technology, and I'm referring here to rare earth. So China has that lever, and we don't have any such lever that we can use with the United States or against the United States. So we have to be, I think, pragmatic in dealing with the United States.
We've drawn some red lines for ourselves, especially in terms of agriculture. And I think it might be sort of advisable for us and our negotiators to go back and look whether they are really red lines. And I'm speaking economically only.
Of course, it would be foolhardy or naive for anybody to suggest in the current environment of weaponization, of tariffs or trade, to say that trade doesn't have any political or geopolitical fallout. I think this is the day that we're seeing the maximum fallout on geopolitics from trade policies. And just for your viewers to be able to appreciate this, let me just narrate a little bit of history, which is when we did trade negotiations in the early days of the WTO, it was only the economic relationship that was important.
It was only a discussion on tariffs. You reduce tariffs, you give me more market access, what are the reciprocal benefits that I'm going to get, and so on and so forth. So it was a matter of trade.
I think what has happened over time, not only have standards become an integral part of trade negotiations, and what I mean by standards is how is your product produced, what are the services that are involved, are you respecting your labour laws, are you respecting human rights, are you state-owned enterprises, are they being competitive, what are the environmental policies, what are the competition safeguards, etc.
So trade has now been linked inextricably and I think irreversibly to standards, what economists call standards. So that has happened, but one can still argue that is still within the production process, that is still economics, but not just tariffs, but trade policy now encompasses standards as well. But unfortunately, it's not limited to that.
So for example, the TPP that the United States was negotiating was all about standards and not about tariff reductions. It was all about standards. But the United States withdrew from the TPP and now it is being spearheaded by Japan and there are more members that have joined and other countries are going to join and it is still all about standards.
But what the United States has done is that it has taken trade beyond tariffs and beyond standards, it has taken trade to meet its foreign policy and geopolitical objectives. And the political theatre. Of course, the political theatre, of course, absolutely.
And I think that is an unfortunate development, but I think that is here to stay, given that the WTO will never regain the ascendancy of the time of hyper globalisation that it did. I think that is here to stay. Some presidents or some countries will do it more, some countries will do it less, but that's really a matter of degree.
So the political theatre of trade policy is here to stay. And I think that is one of the reasons why India is so hesitant to sort of its own red line on agriculture, to tamper with its own red line on agriculture with the United States. For example, the United States wants more market access for its dairy products.
It wants more access for corn, for soybean, etc. We hear stories that there's a huge pileup of inventory in the United States of corn and that needs to find a market. And I think India is willing now, given what has happened in the last few months, India is willing to encroach it on agriculture and therefore push back on its own red lines that it has drawn.
But I think the pushback is not coming from the economic fallout of our agriculture sort of concessions that we offer the United States. Agriculture is politically a very sensitive sector in India politically. And so if we provide concessions on agriculture, let's say on high value added cheese, for example, or corn that is used for ethanol blending, etc.
I don't think it will affect economically, it will affect the agricultural sector so much. Who do you want to protect? You really want to protect your small farmers, your cooperative farmers.
And if you offer such concessions on high value products, it is not going to affect them. It is not going to affect the people that you want to protect, or it's not going to affect the employment in India that the agricultural sector provides. If at all, there'll be a very marginal impact in the short term and none in the long term, because people will figure out ways of adapting to these.
But I think what is dangerous for India, and I say this with a little bit of understanding of the political fallout in trade policy, is that how a narrative could be created within the country that the ruling regime or the current government has compromised the interest of our farmers, and also hurt the sentiments of our people by allowing, let's say, dairy products or livestock that is fed with blood mean, even if it is certified, this is a narrative that can easily be spread within the country. So the political fallout for any ruling regime would be quite dangerous if we provide too many concessions on agriculture. And given the fact that it is the government's policy to increase agricultural incomes or incomes of farmers employed in agriculture, one of the policies of the government hand was doubling farmers' income, and that has obviously not happened.
But in that scenario, and with the United States pushing for liberalisation of agriculture, I think in that situation, India has to tread a very thin line, create a very sort of a balance between what it can offer and what it can offer without having damaging political consequences of providing ammunition to an opposition party to use against the ruling regime. So I think the government is conscious of a lever that it can provide the opposition if it provides too many concessions on agriculture. So what I'm saying, Puja, this long-winded way of saying that while the economic consequences of agricultural concessions to the United States may not be so damaging, and those can be prevented through clever designing of those concessions, it is much more difficult for trade negotiators to limit the political consequences or the damaging political consequences of agriculture, given that agriculture continues to employ more than 40% of our workforce. In that scenario, I don't think the government would want to stick its neck out too much.
It might be willing to do a little bit of tinkering, but it won't be willing to stick its neck out too much. And I think that's the fear. And I think we have to be conscious of that when India and the United States go back on the table.
And I think the United States recognises this. I mean, the United States negotiators are extremely smart. They recognise this, but they will push for it because they will try and put India back foot in Ghana as many concessions as possible.
The other things that will be negotiated, I think, would be greater market access, reduction of tariffs on products that are of interest to the United States. And we've already done some of those. If you recall, Puja, we already reduced tariffs on Harley Davidson, you know, the high popular items.
We've already got rid of the Google tax that affected the equalisation levy, so to say. We've been much more willing to negotiate on that and provide concessions, even in the run-up to negotiations on the mini deal that were happening. So we've provided some of those concessions, and I think we'll be able to provide more concessions in the service sectors that are of interest to the United States.
But on agriculture, I think it will be difficult to do. Your next question is, what should India do to guard itself? And as I said in the beginning, that something might happen with the United States, given that we are back on the table with them, although there are no timelines set for this set of negotiations.
But we are back talking, and that's always a good sign that when you're talking, when there's a dialogue, the chances of your arriving at some settlement are much larger than when you are not negotiating at all. So I think a mini deal is better than no deal, because a mini deal will at least ensure for us that our competitors don't get better market access or better access to the United States market. And by competitors, I mean countries we didn't think of as competitors about a decade ago.
And these are countries like Vietnam, Indonesia, even Bangladesh. These were not countries that we thought of as our competitors. We thought that China was our competitor.
But I think that ship has sailed now. Our competitors are a different set of countries, and they've got better market access to the United States. So I think to be able to regain our at least tariff balance with these countries, we need to get back to our liberation day tariffs or pre-liberation day tariffs, which is about 15 percent, to access the United States market rather than 50 percent that we have on certain sectors, while the other countries enjoy concessions about 20 percent, 19 percent, 15 percent.
So we are competing against those countries. I think we need to get back to at least 15 percent levels. And I believe some reports coming out, we might get there by November.
Puja Mehra: How do we do that when agriculture is, like you've explained, for domestic political reasons, off the table, off the menu? What else can we offer to the U.S. for them to go down from 50 percent to 15 percent? Will they have to stop buying Russian oil or what will it take?
Rajat Kathuria: We will need to at least signal for the United States to be able to say that they've gained something from all of this. We need to provide some sort of concessions to the United States. It could be, if not, getting away from Russian oil, reducing our purchase of Russian oil, diversifying our oil purchase to other countries as well.
And I think that's being discussed. It's not that that's not being discussed. That is being discussed.
So I think we'll have to do that. But agriculture, I think it will be difficult for India to sort of go the whole hog with agriculture. There will be limits on what we can do in agriculture for the reasons I've explained.
So we'll have to provide tariff concessions, reduce our tariff levels. And I think it's in our interest to reduce tariff levels and provide more market access to the United States product. So I think getting away from Russian oil, at least diversifying from the purchase of Russian oil, providing more market access to the United States in areas of their interest.
Because remember, it's not only, let me complete the argument that I was making, it's not only that our competitors are gaining an edge in terms of market access to the United States, our own ambition of being able to create a hub for global value chains of the kind that China created for itself in the manufacturing sector will only be fulfilled if we become a home for foreign direct investment. And I think if we are unable to get this deal with the United States or if other countries are getting better access with the United States, it means that a lot of foreign investment will find it advantageous to locate outside of India rather than in India. So market access to the United States for India is important not only for becoming more competitive vis-a-vis other countries, but also for attracting more FDI into the country so that we can, I mean, we'll never be a substitute for China, but so that we can do what China did when it was growing at these very rapid rates through exports to the United States of its products that were produced in China on the back of huge foreign direct investment into the country. So for both those reasons, it's advantageous for India. And remember that one of our largest exports of services is to the United States and they have a lot of lever there and these sort of tariffs, these penal tariffs, et cetera, that have been imposed on India have stayed away from services for the moment.
So our services sector hasn't been targeted yet. What I'm saying is that there is a lot more for us to lose, obviously, given the disparity in the per capita levels between India and the United States. Just for your listeners' information, the United States is 30 times higher in terms of per capita income than India, which means that if India is $3,000 per capita income and market expense rate, the United States is $90,000.
So obviously, even by that yardstick, they obviously have a lot more resilience and therefore a lot more of leverage. And if countries are going to negotiate as equals, because remember in the multilateral system, which I was so fond of, which I continue to be very fond of, countries didn't negotiate as equals. One country, one vote in a sense, which was also damaging for the survival of the institutions.
But developing countries, emerging markets got a lot more leverage through a multilateral system. In a bilateral regime, when you're negotiating with big countries, it's the law of the jungle. Its might is right.
And it's basically how much leverage you have on each other. And unfortunately, given the disparities of our income and development levels, we don't have much leverage and we have a lot to lose. This is a good point for me to bring up development within the Indian situation, which hasn't served India well.
This fourth estate that we keep talking about, I'm not a political scientist and neither a close observer of domestic politics. I'm really an economist, but what I've observed in the recent past is that the criticism or the critique that media offers to government decisions, economic decisions, that critique has not come out often enough. And that narrative hasn't been viewed often enough for the government to be able to examine and scrutinise its own policies in great detail.
So the role of popular media in economic policymaking has largely been absent in the mainstream, has largely been absent, not providing the push or the motivation for the government to examine its policies in greater detail. And that, I think, is not a good development for any country, for any democracy. We need the media to be able to, at least the popular media, to be able to take the government to task as far as economic policies are concerned.
Always backing the government and saying whatever the government is doing is great for our interests, great for the country, is not a good vindication, is not good evidence for the media. And I think the popular media, to that extent, has failed us. I'm using strong words, but I think it is true that they have failed us or not provided the government the motivation to examine its economic policies in detail.
And one could say that as a counter to that, one could say that if there are so many advisors to the government on economic policy, then why do you single out the media? I single out the media because their reach is so much. And popular pressure from people could put pressure on the government.
And I think that has been largely absent in the last few years.
Puja Mehra: What you've said is so sobering, Dr. Kahturia, but in this jungle Raj that is now inevitable, where might is going to be right, and India is still not as economically powerful as we sometimes tend to think we are, or we tend to think that we are going to become, because it's destined to be so, without us doing the hard work to become that. How are we going to negotiate this world? What are we going to have to do?
And how hopeful are you?
Rajat Kathuria: Well, I'm hopeful. I'm an eternal optimist, always been an optimist. But you've said a very interesting and a remarkable thing, Puja.
And let me sort of re-emphasise that, although we've already mentioned this in our conversation. But let me re-emphasise that. And it's again, going back to the fall guy in our conversation, which is the popular media or the mainstream media in India.
So if you keep drumming up a narrative that India is the fastest growing economy in the world, we are going to become $10 trillion, $20 trillion, etc. If you keep drumming up that narrative, and people have been doing that, so what happens is then you become a victim of that in international sort of arenas. And I think that has happened.
I mean, if the United States negotiators or any negotiator will say that you're the fourth largest economy going to become the third largest economy, you're the fastest growing emerging market in the world, why do you need these concessions from us? What that does then is that it sort of pushes under the carpet a lot of the problems that we have as a country, which is in terms of employment, in terms of inequality, in terms of trying to upgrade our workforce to be able to work in the manufacturing servicing centres, the skill level, it brushes sort of those real issues under the carpet, or at least for the moment momentarily, we tend to sort of put them on the back burner.
So, you know, by continuously saying this, of course, it's good, you want to signal your arrival to the rest of the world, and you say these things, but I think saying them too much, then harms and you become a victim of your own success in inverted commas. And contrast this with China, for example, contrast for a moment, think about China. China's sort of muscling on the world stage or assertion on the world stage did not happen until they had become an economic power.
They waited for their turn. So China grew at 10% for 25-30 years, if you believe some reports that are coming out, that have come out from China, including Arvind Subramaniam's book, Eclipse, in which he claimed that China's currency could become the vehicle currency and replace the dollar at some point. I think that was sort of an overstretch.
But that wasn't the sort of intention. The intention was to demonstrate the arrival of China on the global stage. But China waited for its opportunity, and they didn't do what they are doing until they had achieved some sort of economic success and become the factory to the world.
They say India is the back office to the world, but it doesn't compare with the kind of factory to the world scenario that China had. So I think there's a lesson in that for us, is that until we are able to address to a large extent our economic issues, our economic problems, we should, in a sense, be pragmatic of the role that we can play on the global stage. Economic, of course, as I said, politically, geopolitically, we have leverage, and I'm not an expert on that.
But this is China's lesson. And I think we should imbibe that lesson. We should internalise that lesson and double down on what is it that we need to do to make our economy strong.
And as I said, to summarise this entire conversation that we've had, which is that no country has grown and become competitive on the global stage without accessing global markets. So we can't do it through the domestic market alone, and we have to engage with outsiders. And we have to engage with countries like the United States, EU, UK, CPTPP, RCEP, and these are all arenas for engagement for us, and we should as much as possible engage there.
So that's how we can become an economic superpower, is more engagement with the rest of the world. Does that mean that we'll have to give some concessions in this general Raj? Yes, we have to give some concessions that in the past, we have not been used to because of the multilateral system, we'll have to come back, in a sense, we'll have to redefine our own red lines.
And we should be willing to do that. I think India and to sort of your second question, which follows from what I'm saying, is that, am I optimistic about India? I am.
And the reason I'm optimistic about India is because, you know, there's a nice phrase in the English language, which says that necessity is the mother of invention. And I think that has been observed time and time again, in India, especially in the small and medium enterprise sector, which is that, you know, poverty levels in India are fairly high, although they've been reduced in recent times. But necessity has inspired people to do lots of things, you know, become entrepreneurs.
And sometimes, it is, I think, disparagingly called jugaad. And I don't like the word jugaad, I much like the word frugal innovation. So Indians, by definition, by their existence have been sort of entrepreneurs, they have provided themselves with survival skills.
So I think that intrinsic ability to be entrepreneurs, to be resilient is there. What we've lacked is, I think, opportunities. And one manifestation of that is that Indians abroad tend to do really well.
And, you know, now CEOs of all technology companies, every other CEO seems to be an Indian. And it's no surprise, because, you know, the kind of competitive pressure that Indians are put through during their school days, during their college days, that pressure cooker. I mean, they learn to cope with various kinds of situations, including what I've described livelihood concerns.
So that talent in India is there, we need to simply bring that out, leverage that talent. And I think, therefore, I remain optimistic that we will emerge. And we will emerge with a leading economic power, not because of our 1.4 billion people, but what our 1.4 billion people can actually do, which is that what is the talents that they have? And what is the talent that they can demonstrate on the market? By virtue of being a 1.4 billion strong population, we anyway are going to be one of the largest countries in the world economically, because of sheer size or numbers. But beyond that, I think it's the talent of that 1.4 billion people that can be leveraged for us to even become, not in my lifetime, or in your lifetime, Puja, but I think much later, we can become sort of the largest country in the world economically, given all that I've said.
Puja Mehra: Thank you so much for helping us understand the nuances of everything that's been going on trade and how it is intersected politics, etc. Thanks a lot.
Rajat Kathuria: Thank you, Puja. Thank you.
