US Tariffs: India’s opportunity to climb manufacturing value chain

US Tariffs: India’s opportunity to climb manufacturing value chain

First things first, the description is not Trump tariffs, the accurate description should be US tariffs. Many call it Trump tariffs to separate the US administration and President Trump. For starters, if one calls it Trump tariffs, one is missing the importance of the negative impact of tariffs. Second, one tends to link tariffs on India with Russia-Ukraine war. Either way, it may provide pseudo relief that the tariffs are temporary. Temporary, they may be but that’s the hope, and as wisdom would suggest, policies should not be devised on hope.

To arrive at policies, one question needs to be answered; what is the impact of tariffs? India’s goods trade with US, as per Trade Department of the US, stood at $212.3 billion in 2024 with a $45.8 billion trade surplus to India. Service trade was $83.4 billion with $102 million trade surplus to US. For a country with a GDP of approximately $4 trillion, that might not be much. However, some sectors depend on exports to US to a great extent, if not entirely. Concerns of such sectors must be addressed to stop financial losses, potentially leading to job losses. The sectors include apparel, gems and jewelry, see food, leather, pharmaceuticals, auto components, aluminum among others.     

As some reports suggest, after the US tariffs, India is preparing plans to export goods to a host of other countries. This is a good beginning as it not only reduces reliance on one country, in this case US, but also make Indian traders efficient as they need to tune their production to suit requirements of various countries. However, this initiative will bear fruit in the long run, while short-term damage will be inevitable. Government of India could provide relief to produces as it had, during Covid. During that period, government provided guaranties for existing debt as well as guarantying short- and long-term loans. Thus, ensuring liquidity without providing direct money to manufacturers. Such arrangement will keep some of the small and medium-sized enterprises afloat during troubled times.

 Along with trade diversification, government can also concentrate on product diversification of the affected companies. Helping them to produce high value products will ensure customer diversification as well. For instance, most of the leather exported by India is in raw form. Helping them to manufacture a variety of bags and belts, instead of selling raw leather, will improve their financial health as well as secure their long-term future. Similar is the case of automobile components, most of the exports are low value-added components. These units can be encouraged to manufacture complex parts such as gearboxes, powertrains etc. will help a great deal. Each affected sector can be rebooted to face the tariff troubles. Again, this will help these sectors in the long run and the short-term losses need to be addressed.     

These initiatives will also boost other sectors as well. From instance, producing leather products require treating the leather, which will provide impetus to chemical companies. India lacks a mature chemical industry and perhaps, this is the time to take steps in that direction. An efficient chemical industry will reduce dependency on imports of certain molecules, which may help Indian pharma companies also. Likewise, manufacturing gearboxes and powertrains will provide necessary demand to produce allied products such as precision equipment. Self-reliance in precision equipment will help manufacture a range of high value products in other sectors.

A vibrant manufacturing sector will target many birds at once: from solving unemployment problems to reducing labor migration to safeguarding from weaponization of trade. Time is ripe to cast the die. Dial 1991, the balance of payments crisis necessitated financial reforms. And the results are evident – a thriving economy on the way to become the third largest economy in few years. Covid crisis demanded easing supply side dynamics. And post Covid India registered lowest inflation rate among large economies. The US tariff crisis should hopefully result in a dynamic manufacturing sector. And, policies are not devised on hope.