The general approach to tariff that the current US administration has adopted did not necessarily come as a surprise. The Biden administration kept many of the trade restrictions that the first Trump administration had put in place.
At first, the tariffs seemed to be Trump’s idea of getting a stranglehold over China but over the months, a deal with China looks more certain than the one with India.
I would still guess that the overall focus remains on the trade imbalance with China. There could be a tactical retreat. A recent piece by Richard McGregor, former FT bureau chief in China, said that for Japan and Australia, the United States is historically indispensable, but China is economically irreplaceable for them. So the same situation may apply for the US vis-a-vis China.
How would the extra 25 per cent tariff affect the economy and jobs?
From what I gather, companies and enterprises in Tiruppur (Tamil Nadu), where I went recently, were prepared to handle the first 25 per cent because the competitors had 19 per cent in Southeast Asia and Bangladesh. These extra six per cent could have been distributed between different stakeholders. The second 25 per cent makes life difficult. This financial year, in the first four months, exports have happened without the tariff. The impact will be in the second half and estimates vary about the tariff exempted and tariff-affected sectors.
There will be an impact on GDP growth in the second and the third quarter, but assuming that the situation continues, the full impact will be felt next year. The order of magnitude could be anywhere between 0.3 per cent and 0.5 per cent this year, in terms of real GDP impact. If it continues into the next financial year, that will be a challenge both in terms of employment and GDP growth. Finding other markets will be possible but not easy because China will also be competing for market share in third markets. It also has the ability to finance its buyers and give long lead time for payments, product discount and price discounts. In that sense, it does raise the dependence on domestic levers of growth that much more.
What will India have to do to ensure that the additional 25 per cent is taken off?
The US is, kind of, realising that this has been counterproductive. From aggressive signals, we now have slightly more mixed signals. Beyond what I have seen in terms of mixed messaging, I don’t have any concrete evidence. But I do feel that the second 25 per cent will be short-lived.
Do you think India may have to do something about it on its own?
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Concentrating on what is good for us rather than responding to it is the right thing to do. That is what we are doing. We have increased our purchases of fuel products from the US defence producers. If you look at the foreign direct investment Indian businesses have made in the US over the last 20 years, all the marginal things have been going in the right direction. If you put a value to the amount of data that US service companies are collecting from India, the US is actually in a trade surplus with India.
Over the last decade-plus, the US emerged as a reliable partner and China an adversary. But India doesn’t have leverage with either.
If you think about an obvious leverage, the answer may seem ‘no’, but we do. The monetisation of Indian data and earnings from that for United States service companies is a huge leverage. Also post-Covid, no country has achieved the kind of growth rates that India has been able to. Given the demographic slowdown happening elsewhere, the discounted present value of the importance of India as a market is also a leverage.
Coming to the city where we are speaking – Mumbai, and in this day and age, the Maratha community has been protesting for reservations in government jobs and educational institutions. How do you look at these issues in a world where we are grappling with AI and chips?
We shouldn’t extrapolate from one incident. Odisha has emerged as a world-class skilling laboratory. Students there commanding a wage premium across India is also a reality. The National Small Industries Corporation in Okhla trains youngsters in labour intensive and advanced occupations, including EV servicing and pneumatically-controlled machines. There are other compelling realities that are reassuring.
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India has a border issue with China for long. There are security issues about Chinese investments in India. Then there’s the indispensability of China in terms of the rare earth magnets it offers for our car players. Is there a way we can deal with the border issues and also pursue trade with China?
Post-Covid and post-Galwan, our imports from China have doubled — from $60 billion to $120 billion, between 2021 and 2023-24. We haven’t allowed the border dispute to bring trade to a standstill. We need to look at the kind of relationship that will make us less vulnerable to supply disruptions. Should the import dependence be balanced with internal production where you also gain the knowhow? That also involves investment of foreign enterprises located in China. The bulk of our imports from China are capital and intermediate goods. We can do more to attract foreign enterprises located in China to produce from India. That is the approach to take apart from long-term things like us investing in R&D.
One of the pleasant surprises we got in the first quarter was the 7.8 per cent GDP growth rate. Can this be sustained?
There are some positive transformations that we are yet to incorporate into our thinking about the economy. This 7.8 per cent, or in nominal terms 8.8 per cent, came largely because of the manufacturing sector doing well. It could be due to some front loading but also because of the consumption and the investment numbers. The general perception is that urban consumption is trailing behind rural consumption, which isn’t true. The National Payments Corporation of India (NPCI) data on various digital transactions done in multiple services sectors, hospitality sectors, hotels and restaurants in the last one year shows that the growth is not less than 20 per cent in the majority of the categories. Since we are able to do transactions even for Rs 2, a lot of business is going to so-called unlisted entities, not just companies, proprietorships and partnerships. There is growth happening but we are yet to adjust our mental models of where GDP is generated because we do have to account for some of these transformational changes. So even if the export growth is going to take a hit in the second and the third quarter, I am not revising down my overall GDP forecast of 6.3-6.8 per cent. For now, I will stick to that.
One of the things that the government did in the budget to revive consumption was to hike the income tax exemption limit to Rs 12 lakh. Are you seeing some signs of that now?
It is happening. We do track real-time data. Two- and three-wheeler sales are generally on the sluggish side etc. But for items of daily consumption, including some discretionary spend, it’s been pretty healthy. People’s advanced tax payments are much lower this year. Also, the overall inflation rate tracking is very low. It is putting more purchasing power in the hands of people.
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Do you think the GST rate re-rationalisation would help increase consumption and thereby, growth?
Undoubtedly. The question is whether it will be of a magnitude that will compensate for the export loss.
States have been saying they face huge revenue losses due to lowering of GST rates, and the estimates range fromRs 50,000 crore to Rs 2 lakh crore. How do you address this?
A piece by former RBI governor,
C Rangarajan, talked about how states have done very well with the new GST regime. So some of their fears have turned out to be misplaced. We should also remember that in 2021, if we were in the old system, states would not have had any protection whatsoever with the GST collapse. Had they been in the old system where they were collecting their own sales tax revenues, there would have been no backup for them whereas the 14 per cent guaranteed GST growth gave them the cushion. So it is premature to say the states would lose out. We are also not accounting for the possibility that the rate reduction can spur more economic transactions which will compensate for the price versus volume kind of framework.
You have on several occasions talked about the credit expansion during 2008, which led to the NPA crisis. But both corporate and bank balance sheets look very good now. So, why is investment still not happening?
If you look at the FY 2024-25 bottom-up data, capital formation by the non-financial private sector actually grew at very healthy rates. You will see the data reflected in the national income accounts in February 2026; FY 2024-25 saw a pretty healthy rebound in private sector investments. We achieved 36-37 per cent of GDP in terms of capital formation or investment rate in the 2006-08 period. But if you look at the global situation and our own capital efficiency, which is better than other countries in the current juncture, an overall capital formation rate between 31 per cent and 33 per cent is the ideal number. It is more sustainable in the long run than trying to achieve 35-40 per cent, which Southeast Asia or Northeast Asia did. But that was a different world. In the current context, this is a more sustainable pace.
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Given the uncertainties today, do you think there is hesitancy on the part of the private sector?
Yes, if it turns out to be a long lived phenomena, in contrast to what I expect. But some huge compensations are coming in the form of domestic demand with the direct tax cuts and prospective indirect tax concessions etc. We are a country that is not overly dependent on external trade. Therefore, it shouldn’t be a huge setback.
India aspires to be a developed economy by 2047. Is the current growth rate of 6.5-7 per cent good enough?
What constitutes a developed economy is both economic and philosophical. If you are going to get to $30 trillion with massively polluted water and polluted air, that is not the kind of growth you want.
For example, the International Monetary Fund (IMF), in its forecast for India for the next five years, assumed only 6.5 per cent real growth, 10-11 per cent nominal growth and in dollar terms, about 9 per cent. We were looking at a figure of a $7 trillion economy by 2030-31 based on their projections. In the current context, it is a good number. Whether we achieve a numerical figure of $25-30-35 trillion isn’t the way to measure. It is about how sustainable the number is and if people have a life that is comfortable.
CSR apart, do you think the corporate sector can lead in affirmative action, especially in the backdrop of such large protests over jobs happening in several states?
I will look at it this way: is it affirmative action with respect to workers or when the corporate sector itself seeks protection from the government? For any affirmative action, depending on the context, there will be a need for it. More than a philosophical question, it is a question of how you design it. At a philosophical level, for a country of this per capita income and size, there will be a need for affirmative action from time to time to let the periphery converge into the centre.
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In the 2003-2008 period, the country grew phenomenally because of exports fuelled by global growth. But in the times we are in, countries have turned more protectionist. India, too, has turned inward in certain sectors. Are the growth levers today more domestic than exports?
The short answer is ‘yes’, relatively speaking, but the long answer is it shouldn’t be the only one. If you look at our exports post-Covid, merchandise goods have gone from $290 billion to $440 billion and services sectors have grown even faster. Last financial year, we were looking at $820 to $830 billion of overall exports and that is not a small number. Together with imports, even if you exclude petroleum, we are at 35 per cent of GDP total trade to GDP ratio. That is a good number. Including petroleum, it goes in the 40s, so it has been a big contributor in many ways. I am not against protectionism as a philosophy because developed countries grew on the back of protectionism. We are a labour-abundant country and we have imported a model of growth that is antithetical to our labour endowment. We do need time to catch up.
The PM has spoken about self-reliance and of late, also about the use of swadeshi products. Can it be interpreted as India not being open to globalisation?
None of this is inconsistent with export orientation. I think there is a question of relative emphasis, considering how the world itself became highly protectionist in terms of ensuring supply chain resilience rather than supply chain efficiencies. He is saying that in the context that you shouldn’t be held to ransom by somebody else; that you have to develop the domestic capability.
We have heard from within the government that these Quality Control Orders (QCOs) are something which big companies are able to push through with the government at the cost of the medium and small enterprises. This is probably how it gets misinterpreted with certain big corporates pushing for protectionism. How do you see this?
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If you are competing with countries that practise both avert and covert protectionism, you do need to have all options on the table. Philosophically, or in principle, I will not rule out the use of QCOs. But the question is always to look at it in terms of what the unintended consequence is and what the net cost and benefits are.
(From right) V Anantha Nageswaran, P Vaidyanathan Iyer and Anant Goenka, Executive Director, The Indian Express Group
🔴 Economics or ego, what’s holding up the US FTA?
Economics.
🔴 Which country stands to benefit most from the 50 per cent tariffs on India: Bangladesh, Vietnam or Pakistan?
It depends on the product, but net net Vietnam.
🔴 Putin, Xi Jinping and Trump. Rank in order of who has the most power to shape India’s next five years.
I would say Indians. Modi.
🔴 The most pronounced economic impact of Operation Sindoor.
Defence capabilities and exports.
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🔴If you had to play the role of an economic advisor to specific industries, what would be your advice to :
Diamond industry: Diversify into other markets outside of the US.
Textile industry: Cover marginal cost and keep the show going.
Pharma industry: You are not affected.
IT and services: Product innovation.
Education: Open up. I am talking more from the government side. Between states and the Uniongovernments, we need to open up higher education.
🔴 How many years before the USD loses its reserve currency status?
Very long. Not in my lifetime.
🔴The gaming ban resulted inRs 20,000 crore of exchequer revenue lost. Do you think it was a wise move?
Fair disclosure. I wrote an article praising the move.
🔴 Do you believe that these activities will stop because of the ban? What percentage do you think goes offshore?
I don’t buy this theoretically elegant argument that it goes underground. The majority of the people, if it is legal, will pursue an activity and the majority of the people, if it is illegal, will not pursue it. There will be some die-hard addicts who will find multiple ways but we are looking at proportions here. So, yes, there will be some people who will do that but a policy cannot address everybody. By and large, what has been done is a public good.
🔴l Why do rich Indians leave India? Is it to save taxes? Is it fear of being iced? Or is it qualityof life?
I am neither rich nor have I left India. But in a large country, there will always be people leaving and coming back. I don’t think it is something I would want to take so seriously.
🔴 Beyond Trump, between China and the US, who is a better long-term ally?
India actually, given its size and geography, is its own best ally.
🔴 If you were to talk to an exporter today who is exporting a lot to America, they are all quite confident that the 50 per cent tariff will come down to 25 per cent. Do you think they should continue business as usual or do they need to think beyond?
Looking beyond is always a good idea regardless of the situation. You should have as diversified a market as possible. But I think the US will continue to remain an important market.
🔴 The one dependency towards China that scares you.
The components that go into renewable energy transition.
🔴 In 2047, which country do you see being the largest in the world in terms of GDP? At some point do you see China being that country?
Not necessarily, because China is getting into a demographic decline. I think it will be the United Statesand India.
🔴 What is the one lesson from the pandemic that you are using to tackle Trump’s tariffs?
It is to provide targeted and time-bound relief, not omnibus relief.
