Trump’s Tariff: Why this isn’t India’s '1991 moment'

On August 6, just 57 minutes into the fifth day of the fifth Test match between India and England, fast bowler Mohammed Siraj bowled a searing yorker that shattered Guy Atkinson’s stumps, sealing a thrilling six-run win for India – the narrowest Test victory margin in the country’s cricketing history. 

In the post-match analysis, one perspective put forward was that this is a new India, which is used to emerging victorious from the jaws of defeat. 

This proved to be a popular line of thinking given that it’s clear, crisp and confident, and makes us, humble viewers, feel better about ourselves, and feeds into the prevailing nationalism of the day.

Now, this isn’t a piece about cricket, so I will leave it here. But this kind of clear, crisp and confident thinking – or rhetoric which does not get into the complexities involved – seems to be the norm these days.

Take the case of Trump tariffs. On July 31, the American president, Donald Trump, imposed a reciprocal tariff of 25 percent on Indian goods exports to the United States. On August 6, he doubled down and imposed an additional ad valorem duty of 25 percent. This duty comes into effect from August 27, effectively making the tariff on Indian goods exports to the US 50 percent.

Indeed, this is a difficult situation for India. One line of analysis is that India should look at this as a 1991 moment and not let the crisis go to waste. It should reform to promote the manufacturing sector and, in the process, become self-sufficient or atma-nirbhar. 

This line of thinking has been particularly popular amongst several economic think tanks  – funded by large corporates – who are in the business of managing opinion by offering simple, easily digestible, repeatable, and for the lack of a better phrase, linear solutions, to complex problems. 

(On a side note, in the days to come, we could also see the think-tankiyas  – individuals who work for these think-tanks – suggesting that India retaliates against American companies operating in India. If this happens, then it will create more business opportunities for corporates that fund these think tanks.)

The self-sufficiency argument has also been popular amongst those in the business of managing other people’s money (OPM) – the stock market wallahs who need to be regularly seen in the business and mainstream media. 

So, Trump’s 50 percent tariff on Indian exports has ignited old calls for self-reliance through manufacturing. But can India really build industrial muscle – or is this another piece of rhetoric chasing a mirage?

The manufacturing mirage

Indeed, the history of economic development tells us that countries have gone from being developing countries to becoming developed countries, by creating manufacturing industries and jobs, and in the process, moving large parts of their labour force from the low-productivity agriculture sector to the highly productive manufacturing sector. 

Given this, promoting manufacturing and, through that, some self-sufficiency, makes tremendous sense – at least on paper. So, what’s the problem then? Look at the following chart.

The above chart basically plots the share of manufacturing in the Indian economy (manufacturing to the gross domestic product (GDP) ratio), since the start of the 1980s. 

When we look at data from 1980-81 to 2024-25, manufacturing’s share in the Indian economy peaked in 1995-96 at 17.9 percent, nearly three decades back. And since 2010-11, when the United Progressive Alliance (UPA) was in power, this ratio has been largely going down. 

In 2024-25, manufacturing’s share in the Indian economy stood at 12.6 percent, the lowest in the period under consideration. This can also be seen in the proportion of the labour force working in manufacturing, which has fallen from 12.1 percent in 2018-19 to 11.4 percent in 2023-24. The point being that Indian businesses do not want to manufacture.

Indeed, the government has tried to encourage this through policy and tax incentives, but hasn’t found much success. In fact, in September 2019, the government, to attract fresh investment in manufacturing and thereby provide a boost to its ‘Make-in-India’ initiative, had allowed any new domestic company making a fresh investment in manufacturing, an option to pay income-tax at the rate of 15 percent against the normal rate of 25 percent. But even that doesn’t seem to have made a difference, with the share of manufacturing in the Indian economy continuing to fall.

Now, this is not the place to get into why Indian businesses are not getting into manufacturing, but everything from the lack of ease of doing business to the difficulty in procuring land to build a factory to not enough skilled workers going around to great returns being earned through speculation in stocks, real estate and gold, can be offered as reasons. 

And at 12.6 percent, manufacturing’s share in the economy is at its lowest in the last four and a half decades.

High-tech atma-nirbharta 

Much of the self-sufficiency argument centres around achieving atma-nirbharta in high-tech sectors – from aerospace engines to semiconductor chips, from energy independence in oil and gas to building defence equipment, so that India no longer remains the world’s second-largest arms importer. On paper, this makes tremendous sense.

For starters, it will allow us to have more negotiating power at the global table. Nonetheless, self-reliance in high-technology areas also needs a lot of research and development (R&D), and the ability to make high-stakes investments into ideas that may not pay off immediately or pay off at all – something corporate India sucks at.

As the Economic Survey of 2023-24 pointed out: “India’s R&D investment as a percentage of GDP stands at 0.64 per cent, compared to China (2.41 percent), the US (3.47 percent), and Israel (5.71 percent). Moreover, the private sector’s contribution to R&D remains low at 36.4 percent of the country’s Gross Expenditure on R&D compared to China (77 percent), US (75 per cent), etc.” Now, how do you micromanage a problem like this?

In fact, let’s look at a specific example. In recent years, there has been a lot of talk about China’s progress on the technology front or the progress the country has been making when it comes to artificial intelligence. Now, why is there no such talk about India? 

The question to ask is: Which Indian companies could have made high-stakes bets on the technology front? The information technology companies. They had the money to do it. As of March 2025, TCS, Infosys, HCL Technologies, Tech Mahindra and Wipro, which are all large Indian IT companies, were sitting on cash reserves amounting to a whopping Rs 3.64 lakh crore.

Clearly, they had the money to do it, but what they didn’t have was the appetite to take on the risk involved. The stock market also did not like the idea. And given that they were happy continuing to do low-end IT services work, which rewarded them generously over the years. But now artificial intelligence seems to be threatening that. 

Another factor which could have possibly worked in their favour is the fact that all these companies already have a considerable presence in the United States. 

One explanation for this lack of risk-taking is possibly the mercantile nature of Indian businesses, which probably does not encourage such risk-taking.

Indeed, the world over, a lot of new technology businesses tend to be funded by venture capitalists (VCs). In that sense, the VCs take on a lot of risk. But what do VCs fund in India? They tend to fund companies like Byju’s, which basically operated in the rentier space, trying to cash in on the sad state of our school education system and the insecurity that it created in parents. 

Or they fund quick commerce companies which build a small last-mile delivery system on top of a country-wide distribution system – largely built by Fast Moving Consumer Goods companies – that already exists. 

This lack of appetite for risk-taking probably stems from the fact that a lot of VCs in India tend to belong to the mercantile communities themselves.

This is how the ecosystem works. How do you break something like this and break it quickly? The think-tankiyas haven’t bothered to explain that at all.

Then comes the government’s role in all this. Now, if we want more people to take on research as a career over the long term, it would mean overhauling both our school and college education systems, so that better learning outcomes are delivered. 

It would also mean figuring out ways to ensure that good research talent continues to stay in the country, and if it goes out for higher education, it comes back after finishing studies.

Further, if Indian companies are to be incentivised to make investments in high-technology areas, the government will have a serious role to play in it. 

Do our generalist bureaucrats, who pass one exam in their 20s and are employed for life, have the intellectual wherewithal to take on a responsibility like that? 

Do our ministers, who seem to be more interested in making reels and offering snake-oil solutions to complex problems, have the time and inclination to get into thinking about problems and solving them? 

Or is it just simpler for them to launch another cash distribution programme and offer another subsidy, by taxing those who can pay more, and get on in life? 

Then there are questions of whether we have the state capacity to execute something as complex as this? Indian governments over the years have spread themselves too thin in wanting to do one too many things without having the resources or the expertise to deliver.

Is getting people from the private sector a solution? Do they have the expertise to help the government on this front? Look at what happened when the government of the day got Nandan Nilekani to build Aadhaar. As a nation, we are still paying for that one mistake. 

These are serious questions that those in the business of offering instant solutions to anything and everything do not seem to have thought about. 

So, where does that leave us? 

The ad valorem duty of 25 percent kicks in from August 27. We still have a few days to negotiate a trade deal with the United States. But how strong is our hand?

In 2024, the US imported goods worth around $3.3 trillion from all across the world. Of this, around $87 billion, or 2.7 percent of the total US imports, came from India. A lot of these goods can be bought from other countries with which the US has agreed on lower tariffs. 

In comparison, China exported goods worth $439 billion to the US during the year. Given this, more than 13 percent of US goods imports came from China.

Also, China controls a significant portion of the supply chains that manufacture very popular electronic products, which are in huge demand in the US. As a news report in The New York Times points out: “The United States imported nearly $52 billion worth of smartphones in 2024 — more than 80 percent of it from China.” 

China also has control over rare earth minerals and it holds more than $750 billion worth of US treasury bonds, which it has bought over the years. Treasury bonds are financial securities issued by the US government to borrow money to finance its budget deficit – the difference between what it earns and what it spends.

This gives them a lot of power at the negotiating table, which India lacks. This explains why China hasn’t been signalled out for buying oil from Russia though it buys more oil from the country than India does.

In that sense, India doesn’t have much negotiating power.

One of the things that the US seems to be demanding from India is the complete opening up of the agriculture and the dairy sectors for US firms. That is not going to happen. It will be politically and economically disastrous. 

The small-Indian farmer is really not in a position to take on the large American farmer, usually corporate and heavily subsidised by the government.

Indeed, the proportion of the labour force working in agriculture in India has gone up from 42.5 percent in 2018-19 to 46.1 percent in 2023-24. The shrinking of the manufacturing sector in particular and industry in general is a major reason for the same.

The industry’s share in the Indian economy peaked at 31.1 percent in 2008-09 (industry as a proportion of the Indian GDP) and has largely seen a downward trend since then. 

In this scenario, the government can do one of two things: it can protect the agriculture and dairy sectors, or it can protect industries which export goods to the US. It will be difficult to protect both unless Trump has another brainwave and backs off, or Indian negotiators pull off a miracle. But from past experience it can be said that Trump normally tends to double down when his demands aren’t met. 

Also, quite a few media reports seem to suggest that Trump wants India to come out in the open and say that he mediated the ceasefire between India and Pakistan in May. As a Bloomberg report points out: “As the US president repeatedly spoke about how he prevented a nuclear war, Indian diplomats started to push back publicly against his version of events.” This remains a non-negotiable option. 

Now, politically I don’t need to tell you what makes more sense when it comes to choosing between agriculture and export-industry, and which way the government is likely to go, especially with state assembly elections in Bihar only a few months away. Also, it will make for better reels and easy-to-explain social media content. 

And more than anything else, the question of India’s sovereignty is of utmost importance. Who we choose to do business with as a nation is a choice that we make. There is no negotiation on that.

Having said that, the benefits of the lower-priced oil bought from Russia should have been passed on to the country at large, and not been just limited to a few private and government companies. 

Also, how do you negotiate with someone like Trump? Let’s say you back off and agree on everything that he wants, given that that’s the only way to do a trade deal in a matter of a few months. But what if he comes back and asks for more?

The thing with dealing with bullies – especially ones looking for regular validation – is that the more you give up on easily, the more they will keep coming back for. 

So, what’s India’s best bet then?

In the short term, India can offer to sweeten some trade terms for the US. It can offer to buy more crude oil from the US. In 2024-25, India bought 5.5 percent of its overall imports of crude oil and petroleum products from the US. It bought close to 29 percent from Russia. 

The difference between what India pays on average to import crude oil and what it pays Russia has narrowed significantly in recent times.  

Over and above this, it can also offer to reduce high tariffs on automobile imports.

Some flexibility can be shown on the niche agriculture front as well. A Reuters news report points out: “Indian officials… have said they are open to cutting tariffs for some US farm and dairy goods like almond and cheese.” 

Indeed, this might still not be enough for the US but these are important points given that it’s important to keep the talking or at least pretend to. 

In the short to medium term, India’s best bet is the hope that tariffs lead to high inflation in the US, something that may lead Trump to hopefully back off. 

Now, that hasn’t happened as yet, due to the prices of non-tariff related items – like used cars and fuel – coming down, the fact that companies imported and built up inventory before tariffs kicked in, and that companies may not be passing on the whole tariff to the end consumer in the form of a higher price. 

In the long term, India’s best bet is to simply wait out Trump. Of course, this will have repercussions on jobs in particular and the economy in general, and it will be psychologically and politically difficult to commit to, given that the government will have to be seen to be doing something to handle the situation.

Another factor that could impact Trump’s and the US stance is how the relationship between India and China goes from here. Prime Minister Narendra Modi is expected to visit China later this month.

To conclude, Trump’s 50 percent tariff on Indian exports has led to calls for India to use this crisis as a “1991 moment” to become self-reliant via manufacturing. But decades of failed industrial policy, risk-averse businesses, low R&D spending, and weak state capacity undermine such optimism. 

India lacks both the economic leverage and institutional muscle to negotiate effectively or build high-tech self-sufficiency, leaving "atma-nirbharta" more rhetoric than reality.

Now, history does show us that crises often lead to reform. With the right mix of political will, institutional learning, and private sector risk-taking, India can slowly turn this challenge into a real 1991-style reset – not through rhetoric, but reinvention.

But will we? On that, your guess is as good as mine, though the think-tankiyas may feel otherwise. And I will be happy to be proven wrong on this.

Vivek Kaul is an economic commentator and a writer.

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