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President Trump’s 50 percent tariffs on India kicked in yesterday. The timing could not be worse: in May, India overtook Britain, Germany and Japan to become the fourth largest economy in the world. According to a report by EY only this week, it was already set to become the second largest globally by 2038, behind only China. After a decade of liberalization and rapid industrialization, it has witnessed exceptionally strong growth. And now, it looks like Donald Trump may kill off the Indian economic miracle.
Over the last 20 years, India’s growth has averaged 6.9 percent, a rate that puts almost every other country in the world firmly in second place. A generation of Indian multinationals has emerged, and over the last five years alone, the benchmark BSE Sensex equity index has more than doubled. With a healthy demographic – the median age is just 28 – there was a strong argument that it was only a matter of time before it overtook China as the main rival to the US.
American tariffs look likely to kill Indian economic growth stone dead
And yet that could be about to end. The US has imposed tariffs of 50 percent on everything India sells to them. The reason? It already faced 25 percent levies, like most other countries, but President Trump has imposed an extra 25 percent to punish it for importing oil and other commodities from Russia.
This will hurt. India exports goods worth $86 billion a year to the US, and while some sectors such as pharmaceuticals will be exempt from the full 50 percent rate, around two-thirds will be subject to the full tariff. Exports to the US are about to fall off a cliff. That will be bad enough. But the knock-on impact will be just as serious. With what effectively amounts to a trade embargo in place, business ties with the US will start to wither away, investment will be hammered and Indian companies and entrepreneurs will be frozen out of the world’s most important market.
Of course, India can start to mitigate that. It has long-standing links with Russia that stretch back to independence, but it can gradually sever those. It has been buying up cheap Russian energy that was sanctioned elsewhere in the world, and while that was an attractive deal – so long as you don’t mind funding the war in Ukraine that is – there is plenty of oil and gas available on the global market. But given that Russia supplies 40 percent of its oil, that will take time, and it will lose an ally in the process.
American tariffs look likely to kill Indian economic growth stone dead. It could take many years to recover from that – and until then China will extend its lead over its main emerging rival.
