Mint Explainer: Could Trump's tariff trigger India's next ‘1991 moment'?
Several economists have called this India's next '1991 moment' and suggested the government seize this opportunity to unleash the next round of far-reaching domestic economic reforms.
Mint looks at the options the Indian government has to offset this impact. Can it diversify its exports to other markets or boost domestic consumption? Should it see this as the '1991 moment' to unleash reforms and take the economy to the next level?
How badly will the US tariffs hurt India?
In 2024-25, India exported $86.5 billion worth of merchandise to the US, its largest trading partner. The imposition of a 50% tariff will hit 67% of the total exports, with only pharmaceuticals and electronics exempted for now.
That puts $58 billion worth of exports—about 1.5% of the gross domestic product (GDP)—in peril. Both Goldman Sachs and Morgan Stanley have predicted a 60 basis point hit to the 2025-26 growth if the tariffs remain. The chances of India's overall exports (both merchandise and services) exceeding $825 billion in 2024-25 now look remote.
Which sectors will be impacted?
Textiles, gems & jewellery, capital goods, fisheries, agricultural products, auto components, medical appliances and machinery sectors will be badly hit as they account for the bulk of the exports to the US. Some of these sectors are labour-intensive and they could see retrenchment soon.
For instance, players in the garment sector have said that buyers are moving orders from India to other markets such as Bangladesh, Vietnam, Cambodia and Pakistan for their spring-summer collections due to the confusion over tariffs.
Can India export more to other nations?
It can, but that is easier said than done. The export market is highly competitive, and some of our competitors enjoy a tariff advantage. To make Indian exports attractive, the government needs to conclude favourable bilateral trade deals like the ones it has done with Australia, the UAE and the European Free Trade Area.
The recently concluded India-UK economic and trade agreement needs to be operationalised soon to boost exports. The good news is that the government is already in talks with many nations such as Oman, Chile, Peru, New Zealand and the European Union to conclude trade agreements, and they should be inked quickly to open new avenues.
Should India kiss the US market goodbye?
Not really. The US is an important market that is too big to be ignored. India has said it will continue engaging with the US in good faith to arrive at a mutually beneficial bilateral trade agreement. At the same time, it has its limitations and red lines. It is not keen on opening up some sectors, especially agriculture.
Being a sovereign nation, it wants independence to choose its trading partners. Many feel a no-deal is better than a bad deal. But Indian negotiators have a hell of a task to strike a good deal. If they succeed, exports to the US will be impacted only temporarily.
What more can the Indian government do?
Experts suggest it is time to implement the long overdue rationalisation of goods and services tax (GST) rates. Considering that India's domestic market is huge, lower GST rates could trigger a revival in domestic consumption, which can, to a large extent, compensate for the lower exports to the US.
It will also unleash the economy's animal spirits and trigger private investments. To revive demand, a reduction in fuel prices is also being suggested. Some have even called for a pause in fiscal consolidation efforts to boost capex and accelerate domestic consumption.
Is it time to unleash the next round of reforms?
Yes. Many economists have called this India's next '1991 moment'. Rather than seeing Trump's tariffs as a problem, they want the government to seize this opportunity to unleash the next round of far-reaching domestic economic reforms that will make Indian businesses far more competitive.
The Economic Survey flagged deregulation as a priority. Ending red tape and implementing long-pending labour and land reforms could improve the ease of doing business and attract fresh capital flows into the country.
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