US tariffs could knock 50 bps off India's growth, deepen jobless recovery: Former RBI Governor Subbarao

Indian Express

21 hours ago

Former Reserve Bank of India Governor DUVVURI SUBBARAO says high tariffs proposed by US President Donald Trump on labour-intensive exports such as textiles and gems will deepen the jobless growth problem since a 50 per cent US tariff threatens exports worth around 2 per cent of GDP. In a conversation with The Indian Express, he says the potential growth hit could be 20-50 basis points in a year, after the extent of diversion and adjustment.
Subbarao, who also served as the Finance Secretary of India, warns that for India, 'being labelled a 'dead' economy by a US president carries reputational costs.' Subbarao says Donald Trump may yet find his tariff strategy politically and economically costly, adding that rising geopolitical tension and protectionism increase risk premia, tighten global liquidity and raise the cost of foreign borrowing. Excerpts:
Expert estimates suggest that tens of billions of dollars' worth of Indian exports to the US are at risk, so the immediate impact will be sharp. Labour-intensive sectors where we compete on price and scale such as textiles, footwear, gems & jewellery will see margins eroded, orders diverted, jobs lost, and plants downsized. The distributional impact will be regressive, widening income inequality. We must also reckon with China's industrial overcapacity and the possibility of their dumping in our markets to compensate for their own loss of US market share.
Further, tariff escalation will impair our China+1 ambition; we were already struggling to break into global value chains because of domestic trade barriers and high costs. Facing higher US tariffs than ASEAN or South Asian competitors will make that integration even harder.
What should be the strategy of Indian exporters, especially in the fields of textiles, gems & jewellery, electronics, pharma, etc, if the US continues with the 50 per cent import duty?
There are no easy fixes. In the short run, exporters must absorb part of the shock through price renegotiation, market diversification to other markets and make full use of duty-drawback and export credit schemes. In some areas such as solar modules, shrimp, and linen, where the US is the sole or dominant market, such diversion will be much harder.
Over the medium to long term, exporters must move up the value chain, produce branded and design-rich goods, tighten compliance and traceability, cut lead times, and deepen domestic linkages to reduce input costs. Investments in automation, skills, and productivity will be critical. On the policy side, we need to accelerate FTAs and market access deals to secure preferential entry into major economies. It's difficult but possible to turn Trump tariffs into an opportunity to make our exports more competitive and robust.
Donald Trump recently said that the Indian economy is heading towards being 'dead like Russia's.' What do such comments mean for global investor confidence and how might they impact emerging markets like India?
The world has learnt to discount Trump's impulsive, off-the-cuff comments. Even so, for India, being labelled a 'dead' economy by a US president carries reputational costs. It can be read as a signal of our eroding geopolitical and economic leverage. The US remains the pre-eminent economic power and issuer of the reserve currency; its political tone influences global capital flows. Such comments can raise India's risk premium, dent investor sentiment, and prompt portfolio reallocation even absent accompanying policy actions.
Do you think India has the flexibility and necessity to open up agriculture and dairy segments to imports from the US and other countries?
Agriculture and dairy are protected for compelling reasons: rural livelihoods and food security. A blanket opening is politically untenable and economically risky, and America recognises our red lines here. That said, some selective, calibrated openings could help break deadlocks in trade talks — through targeted tariff cuts, sanitary-phytosanitary alignment, and mutually beneficial supply agreements. Any liberalisation should be phased, product-specific, and paired with farmer safety nets, productivity enhancement, and investments in storage and cold-chain infrastructure.
While many economists warned of US inflation due to tariffs, Trump is seen as winning with deals from the EU, Japan, Korea, and Vietnam. Your view?
We are far from the endgame. The stated aim of Trump's tariffs — reshoring manufacturing and creating jobs — is difficult to achieve given the US' loss of competitiveness in labour-intensive industries. Higher import costs will feed into domestic prices; costlier goods will depress consumption, and with weaker demand, job creation will falter. The trade deals mask these tensions. The strain is likely to become visible during the Christmas shopping season, potentially shaping voter sentiment ahead of the mid-terms. Trump may yet find his tariff strategy politically and economically costly.
India's GDP growth remains among the fastest globally, but critics argue the growth is uneven and jobless. How do you see the quality of India's current economic growth? Will GDP growth come down due to trade issues?
India's headline GDP growth is robust, but employment growth, especially in the formal sector, lags behind. Job creation barely matches labour-force expansion, and informal work remains dominant. Independent economists argue that official unemployment data understate reality. Low employment elasticity means GDP growth is not translating proportionately into jobs.
High tariffs on labour-intensive exports like textiles and gems will deepen the jobless growth problem. A 50 per cent US tariff threatens exports worth around 2 per cent of GDP; depending on the extent of diversion and adjustment, the growth hit could be 20-50 basis points in a year.
Global risks and uncertainties have increased of late. Will it impact capital flows and funding plans of corporates?
Yes. Rising geopolitical tension and protectionism increase risk premia, tighten global liquidity, and raise the cost of foreign borrowing. Corporates dependent on external finance or dollar-linked supply chains will face delayed projects, repriced deals, and higher hurdles for capex. India's deep domestic financial system and growing rupee-denominated bond markets can cushion some of this impact, especially if banks actively finance strategic investments.
India is targeting to become a $5 trillion economy. In your view, what are the three biggest obstacles standing in the way — and how can they realistically be tackled?
(The) First (obstacle) is education & health deficits: Weak human capital undermines productivity; we need sustained, outcome-driven investment in early education, nutrition, and healthcare.
Second is productivity stagnation: Slow reforms, skill gaps, and fragmented supply chains hold back growth; the remedy lies in building industrial clusters, integrating MSMEs, improving logistics, and boosting research and development.
The third (obstacle) is rising inequality and weak mass demand: Growth skewed to the top limits consumption. Strengthening lower-income households via formal jobs and social protection can trigger a virtuous cycle of demand, production, and employment.
Do you think the trade tariff issues will impact the fiscal and monetary policies? Where are interest rates headed?
Likely yes. India's credible path of fiscal consolidation could be disrupted if tariff-hit sectors require short-term support.
After last week's policy review, the governor acknowledged that the RBI is watching the impact of tariffs on growth, inflation, and the rupee. If tariffs fuel inflation and pressure the currency, rates may stay high; if growth weakens sharply, there is room to ease. Policy will remain data-dependent and cautious.
With global capital becoming more expensive and foreign investors turning cautious, how vulnerable is India's growth story to a potential global slowdown?
India's past growth surges have coincided with strong export performance suggesting that exports matter more to our GDP than often acknowledged. A global slowdown and tighter financing will hit exports, FDI, and portfolio flows. Domestic consumption, public capex, and resilience in some sectors offer partial buffers, but export-heavy states and firms reliant on foreign borrowing will be more vulnerable.