The latest reports suggest that India and the US are about to sit down to negotiate the final stretch of a bilateral trade agreement that should be announced by the first week of October. Emollient exchanges between Mr Trump and Prime Minister Narendra Modi over the last weekend notwithstanding, it is clear that New Delhi will need to make significant concessions in order to protect an estimated US$60 billion (S$77 billion) of the US$87 billion it exports to the US.
In likely winkling a lowered tariff regime from New Delhi, Mr Trump may unwittingly be doing India a big favour. On trade, he could likely prise open a market which has seen tariffs actually rise since 2015, and one that failed to prepare for competition by using the time it bought for itself by withdrawing from trade deals like the RCEP to introduce meaningful market reform.
His moves have already prompted a rethink in India, which could eventually work to its advantage.
Strategically, by placing roughly the same amount of tariff upon it as it has on China, which the US has dubbed a strategic rival, Mr Trump has primed New Delhi to proceed more cautiously with its steady embrace of Washington and hew closer to its traditional non-aligned line, now refashioned as multi-alignment. Mr Modi’s diplomatic outreach to Beijing suggests awareness that geography is not easily transcended. Renewed efforts to clinch a swift trade deal with the European Union – first considered in 2007 – will widen India’s trading options once accomplished.
Revelling in crises
India is generally regarded as a reactive state and its post-independence history suggests that once pressured, it has a history of riding out its setbacks and emerging more resilient.
Time and again, prime ministers from the late Mr P.V. Narasimha Rao, Mr Atal Bihari Vajpayee and Dr Manmohan Singh to now, Mr Narendra Modi, have found opportunities to turn a crisis into significant advantage, often citing external compulsions to force through difficult internal reforms.
The latest example is the recent simplification of GST rules and slashing of rates that take effect from Sept 22, leading to a surge of confidence among Indian manufacturers as they prepare for the Deepavali festival season. Even as it turned India into a single common market, the complex GST system had badly needed fixing.
Now, as New Delhi seeks to pump up the domestic market to compensate for the expected drop in exports, the GST has been slashed to just two slabs – one of 5 per cent, and another of 18 per cent – for most goods and services. The earlier four-tier structure ranged from 5 per cent to 28 per cent.
While the tariffs may eventually be rolled back by Mr Trump himself, or even declared illegal by the US Supreme Court, these reforms will endure. That raises expectations that the 7.8 per cent GDP expansion recorded in the April to June quarter may resume after a widely expected tariff-induced slowdown in the second half of 2025.
The reset of China ties also could presage a surge in Chinese capital investments through the joint venture route, as firms like BYD seek to tap into the expanding Indian market.
All that has helped India maintain much of its swagger amid the Trump difficulties. The benchmark Sensex ticked up on news that the US and India are poised to earnestly conclude trade talks, and is up nearly 10 per cent for the past six months.
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Mr Christoph Schweizer, CEO of Boston Consulting Group, said he recently returned from a trip to tariff-struck India that was “brimming with optimism and ambition” as it heads towards being a US$7 trillion economy by 2030, from just over US$4 trillion now.
While some 14 per cent of India’s overall trade is indeed affected by the tariffs, it has been improving access to other markets through agreements, for example, with Australia and the UK, he noted. And it also will trade more with Asean, West Asia and Africa.
As for long-term challenges, such as AI and automation, he believes India is well-positioned for those as well.
“In my conversations with CEOs, I noticed that Indian companies have two other strengths that matter for AI. These are a healthy scepticism that ensures AI investments will achieve a healthy return on investments, and secondly, once they decide to invest, they have the ability to move fast and change how employees deliver their work.”
Not just the recent Trump-induced measures, a look at some key events would suggest that it has generally performed well when under pressure.
Take food, for instance.
The great famines India suffered may have ended with the exit of British colonialists but food shortages persisted. In 1954, India signed a long-term agreement with the US called PL-480 (short for Public Law 480) under which it got food aid after it agreed to allow private players to operate in its nascent industrial and agricultural sectors. Some of the food sent was unfit for human consumption and successive prime ministers found the deal humiliating.
In the 1960s, India launched what came to be recognised later as the “Green Revolution” which introduced high-yielding varieties of seeds and expanded irrigation systems. Its success led to India cancelling the PL-480 agreement and the country eventually became a net exporter of grain. Today, it is the world’s No. 1 seller of rice on global markets.
Opening up further
In 2020, the Modi government did introduce measures to deregulate the agricultural sector, but they were sought to be rammed through without preparing the ground. Eventually, the government backed off because of the sustained political backlash. The negotiations with the US offer India a second window of opportunity to push farm reforms in a more thoughtful way.
Farm products may be a politically sensitive sector, but there are other sectors that should comfortably withstand competition. For instance, given the rising popularity of Indian spirits worldwide – single malt whisky and craft gin, particularly – New Delhi can afford to be more confident about opening up its alcohol market.
Likewise, the 1991 economic reforms initiated by the Narasimha Rao government, and helmed by then Finance Minister Manmohan Singh, came on the back of a severe economic crisis which saw the pledging of Indian gold reserves and a perilous drop in foreign exchange reserves to just two weeks of imports.
Once the reforms mandated by the International Monetary Fund (IMF) kicked in, the economy sprang to life. Exposed to competition, and riding the telecom boom at home, companies with names such as TCS and Infosys began grabbing global markets. Foreign exchange reserves began to climb. Today, India has forex reserves of US$694 billion – enough to cover about a year’s imports.
A similar ability to bounce back has shown up elsewhere too, including in technology.
After it first tested a nuclear weapon in 1974, the country faced technology sanctions from the US and Canada, particularly in the nuclear field. That speeded up the indigenous nuclear and space programmes. Likewise, after the US cancelled plans to sell India the Cray X-MP supercomputer in the late 1980s citing worries that India may use it for its nuclear and satellite programmes rather than the claimed purpose of weather forecasting, India swiftly built its own supercomputer, the Param 8000, at a fraction of the cost.
More sanctions followed after the series of nuclear tests ordered by the Vajpayee government in 1998, and each time the indigenous effort – alongside efforts to reach out to friendly countries willing to assist – gathered momentum. In the recent military clash with Pakistan, several of the home-developed weapons seemed to have performed well whereas some of the notable losses were of French and Russian manufacture.
India also found satisfaction that after the 1998 tests, the US itself began to roll back some of the sanctions as it slowly swung towards India out of geopolitical considerations. Indeed, the Clinton administration initiated a strategic dialogue with India that led to a dramatic improvement in bilateral ties during his second term, and the first presidential visit to the country in more than two decades.
Every US president, including Mr Trump in his first term, has built on that foundation. Given Mr Trump’s mercurial ways, it is not inconceivable, therefore, that ties with India may eventually be even tighter by the time he leaves office.
To be sure, the Trump tariffs are not to be treated lightly. And India indeed is assiduously taking steps to influence Washington’s thinking, including using back channels and spending millions on multiple lobbyists with known connections to influential figures around Mr Trump and his family.
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And while it may have proven to be resilient in the past, New Delhi simply cannot afford a full-blown tariff war with the US – for instance, one that would risk tariffs on exports of services or pharmaceuticals which the Trump tariffs have exempted thus far.
Technology services exports are powerful employment drivers in India, and fuel its consumer-led expansion.
Mr Vivek Pandit, co-leader of McKinsey’s private equity and principal investment group, put that in perspective in a recent conversation with the Financial Times. While he projected India’s contribution to global GDP rising to 8 per cent in 2040, from 3.5 per cent in 2023, he also noted that exports will play a key role in that expansion.
“To put it simply, if you look at the last 30 to 40 years, there are only 10 to 12 economies in the world which have grown at 7 per cent for 20 to 25 years, and none of them has done it without export markets being a significant part of that growth,” he told the FT.
By putting pressure on India, Mr Trump has jolted it out of its complacency.
In other words, never underestimate the capacity of Americans to blunder – who knows, it might even eventually turn out to your benefit.
Ravi Velloor is senior columnist at The Straits Times.
