While calling Indian Prime Minister Narendra Modi ‘a good friend’ and negotiating a trade deal, US President Donald Trump slapped a 26% tariff on Indian exports to America. It’s now Modi’s turn to react. What should he do? Let’s look at the likely impact and the many suggestions on the table for the government in New Delhi to consider.Trump’s new tariff regime has already eroded risk appetite in global markets to a significant extent. It’s expected to start a global recession and upend the world order as we’ve known it for at least three decades, by dividing the world into regional blocs.
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This is the end of global trade as we knew it.
Welcome to the age of geo-economic blocs—tight regional circles built on trust and proximity.
— Nirupama Menon Rao ???????? (@NMenonRao) April 3, 2025
India will have to respond to the individual impacts of the new tariffs imposed by the US. It can’t be an escalation or appeasement but a targetted reciprocation, according to Nirupama Rao Menon, India’s former ambassador to the US, who also advised backchannel diplomacy, using Indian-American networks in Washington D.C., to secure sectoral exceptions wherever possible.Jayant Dasgupta, India’s former ambassador to the World Trade Organisation (WTO), echoed Menon’s advice. “The first thing is that we should continue to negotiate. The bilateral trade agreement is proceeding along the right lines so that is one thing,” he said in a conversation with CNBC-TV18.”The second thing is that we should try to have a kind of a dialogue with the European Union, the Japanese, the Australians, the Canadians, for instance, all the others who have been hit by the Trump tariffs, and find out what we can do collectively, and what can make the US climb down and roll back its tariffs,” he added.Essentially, Modi can continue with his ‘Make in India’ programme, aimed to boost exports, but target other countries. For instance, competitively-priced aircraft, naval systems, radars, and missile technology from India may be the need of the hour for Europe that is being forced to invest big bucks in its own defence.That would also require to secure its supply chains because timely delivery of quality products is essential in being a credible global supplier. Some of the inputs can be sourced from countries in Africa and East Asia that have been supplying to manufacturers in the US or China. The necessary capital can come from the Middle East.However, it will take time to make these adjustments. In the mean time, India will have to rely on its own citizens to shore up economic growth lost due to the global shock triggered by Trump. Menon suggests that Modi must treat domestic demand as a ‘national security asset’.The depth and potential for India’s domestic market has been a source of hope and despair, depending on the global context. Right now, domestic demand isn’t strong in India. The recent cut in income tax notwithstanding, the fear of a likely recession is likely to squeeze capital investments and consumption by private individuals even more. People are likely to save more than they invest or spend.Yes, countries like China, Vietnam, and Bangladesh will face bigger tariffs on their US exports than India. Being more competitive is good but not good enough when global trade is likely to shrink. It’s time to build capacity — both to produce and consume — at home. Incentivise Apple to move more of its manufacturing to India to offset the tariff pressure for its production lines in China. Ask why more companies looking for a destination other than China have not picked India and fix the problem.India’s average import tariff rose to 17% in 2023 compared to 13.5% when Modi took charge. “It is time for India to roll back what we have seen in the last few years… it is high time that we actually open the Indian economy much more and reverse the trend towards higher tariffs,” former secretary at the Ministry of Foreign Affairs told CNBC-TV18. It may help India in improving its economic stature and rely less on the US for demand or supply. It’s time for housekeeping (to improve ease of doing business) and capacity building. Modi’s protectionism preceded Trump. It’s time for him to lead his American friend in the opposite direction.WATCH MORE: How Trump’s reciprocal tariffs may affect Indian industries?
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