Global economic upheaval rattles Indian trade policies

The IMF’s recent Article IV assessment of the Indian economy has sparked a wide national debate about India’s protectionist trade policies. Among other things, the report attributed some of the country’s weak economic performance and slowing foreign direct investment (FDI) inflows to the country’s protectionist stance. While high tariffs shelter Indian industry and agriculture from foreign competition, they also inhibit technological advancement and integration with international production chains.

The current trade negotiations with the EU and the UK have yet to produce signs of India’s protectionism easing. Talks have stalled due to India’s unwillingness to compromise. Information on bilateral EU-India negotiations suggest that the parties hope to conclude an agreement this year with only a few free-trade concessions. Most of the measures announced by the Indian government in a budget document released in early February were cosmetic changes to current trade barriers. Tariff tables were simplified and tariffs for certain product groups were adjusted.

The radical unpredictability of the new US administration has forced India to reassess its policies. The Trump administration threat of a 28 % retaliatory tariff (current tariff level 10 %) has forced India into bilateral negotiations with the US. India can take modest consolation from the fact that the tariff threat they face is smaller than confronting for other Asian economies such as Vietnam and Thailand. Naturally, other countries affected by high tariffs are also pushing back and seeking alternative solutions. Vietnam has promised its American counterparts that it is willing to eliminate all tariffs on goods imported from the US. Unofficial sources claim that India would also be open to lowering its tariffs on goods coming from the US.

It remains to be seen whether aggressive US tactics and India’s internal pressures to step up the pace of economic growth are sufficient to break through its protectionist barriers. It is an opportune time for such a strategic shift as companies are reassessing their supply chains in the light of the trade war. India could potentially emerge as a winner from a shake-up in the global order. The Financial Times, for example, recently reported that American technology giant Apple is considering accelerating the schedule of its planned production shift from China to India. In addition, a number of traditionally Chinese firms such as the fast-fashion house Shein, home electronics maker Hisense and smartphone maker Vivo have entered into cooperation deals with Indian producers. A sweetener for Chinese firms beyond gaining greater access to India’s booming domestic market is the possibility of circumventing high US tariffs by moving production through India.

FDI outflows have recently outpaced inflows, resulting in a negative balance

Source: Reserve Bank of India, CEIC and BOFIT.