India put itself on a sticky wicket by reversing the free trade policy of 1991 to embrace the failed protectionism and License Raj, which made it vulnerable on multiple fronts
Going by India’s apparent meltdown in the face of the US threat of reciprocal tariffs and the likelihood of buying oil, gas and weapons from the latter — as against retaliations from Canada, Mexico, EU, and China which face similar tariff threats — it is clear that India is on weak ground. But equally important, a wholesome change in trade policies (the US says mere tinkering wouldn’t work) would mean major disruptions on multiple fronts — including its current negotiations of bilateral FTAs and BITs (FTA-linked investment) with other major partners like EU, the UK, Japan and Taiwan among others.
Stronger WTO regime
Following the recent visit of Commerce and Industry Minister Piyush Goyal to the US, the Centre may have postured before a parliamentary panel that tariff concessions to the US would not apply to others, but that is easier said than done. Two facts are important to note here: First, India lost its case to the EU, Japan and Taiwan in the World Trade Organisation in 2023 over tariff barriers (7.5-20 per cent tariffs on ICT or Information and Communication Technology products against the WTO mandated 0 per cent-tariff) and second, India backtracked on its overnight ban on imports of laptops/PCs in August 2023 after the US pointed out that it violated the World Trade Organisation (WTO) rules. A rule-based WTO regime is even more important after the US threat.
Also read: India charges 150% tariff on alcohol: White House on countries ‘ripping off’ US
A reset in India’s trade and tariff regime isn’t a bad idea even though the WTO allows Special and Differential Treatment (SDT) to India and other developing countries discretions in trade and tariff. That would be clear soon. Nonetheless, the disruptions it would bring on multiple fronts raises a big question India must answer: Do evidence, economic logic and consultations guide its policies? This would also become clear soon.
How India landed itself in such a situation
India reversed its trade policies after 2014.
Tariff barriers: India turned to protectionism (earning itself the sobriquet “tariff king” before Trump said so) and began it so subtly that it took then Chief Economic Adviser (CEA) Arvind Subramanian (2014-2018) to flag it after demitting office. In 2019, he co-authored a paper ‘India’s Inward (Re)Turn’ to show that the country had flipped its free trade policy of 1991 and had moved to import substitution by erecting tariff barriers. This was despite the free trade providing “a stellar export performance” to boost India’s overall growth “for three decades”. Protectionism became an open policy with the “Aatmanirbhar Bharat” launched in 2020 where Prime Minister Narendra Modi called Indians to be “vocal for local” manufacturing. Protectionism had failed in 1960s and 1970s. Meanwhile, tariff barriers continued with more anti-dumping duty on Vietnam, South Korea and China in 2024.
Non-tariff barriers: Post-pandemic, two such barriers came up. One is overnight and frequent bans/restrictions (License Raj or Permit Raj) on exports of wheat, rice, sugar, onion, pulses, steel, laptops/PCs (which backfired and led to higher imports from China) and others. The other is Quality Control Orders (QCCs) which not just former CEA Subramanian but also former CEO of NITI Aayog Amitabh Kant sought to be dismantled immediately for hurting textile exports in particular that presents the best opportunity to benefit from the “Trumpian disruption” (Kant’s words).
Tardy renegotiations of FTAs and BITs: India has been renegotiating all bilateral Free Trade Areas (FTAs) for many years, concluding with only four FTAs during 2021-2024 – with Mauritius, the UAE, Australia and the TEPA. The same treatment has not been given to the 68 Bilateral Investment Treaties (BITs) it unilaterally cancelled in 2017. The bilateral FTAs are being renegotiated on the plea that India was not expanding its product and market bases, nor reducing trade deficits. A World Bank report from 2024 said, the impact of the first three FTAs “remains to be determined” while dismissing the fourth as “relatively limited in scope”. Other key FTA negotiations were paused for long due to the widening trade gap.
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Shunning multilateral mega trade blocs: Beginning with 2019, India kept out of the Regional Comprehensive Economic Partnership (RCEP), Indo-Pacific Economic Framework (IPEF) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which account for most of global trade and GDP, as extension of its protectionist policy. The World Bank called it out and asked India to “re-evaluate” its trade strategy to work for “trade integration” with more emphasis on plurilateral and multilateral cooperation.
Directionless FTP of 2023: Instead of seeking to expand product and market bases and push services exports, which generates trade surplus, the Foreign Trade Policy (FTP) 2023 focuses on process improvements which make little sense (most FTAs and all BITs are being renegotiated) or impact as exports have fallen and deficit has grown.
Attracting US sanctions: India ignored the US sanctions to trade with Russia, attracting bans from the US on 19 of its firms in 2024.
Also read: India, US to negotiate new trade pact to cut non-tariff barriers
Far-reaching implications
What’s the net result of these decisions?
India’s exports engine has weakened significantly since FY14 – merchandise exports fell from 17 per cent of GDP in FY14 to 13 per cent in FY23 (up to which data is available) while total exports slumped from 25 per cent to 24 per cent.
A 2024 World Bank report said India lost out to the China+1 policy of MNCs, and the “primary beneficiaries” are Bangladesh, Vietnam, Germany, and the Netherlands. India’s share in exports of labour and low-skill intensive apparel, leather, textiles, and footwear also “declined” to 3.5 per cent in 2022 after growing from 0.9 per cent in 2002 to 4.5 per cent in 2013 even after China withdrew from such exports. This is a double whammy as it means massive job loss.
India has closed its options by not joining the RCEP, IPEF and CPTPP which are key to escape trade disruptions caused by the Israel-Palestine and Russia-Ukraine wars.
Future troubles
The first direct impact of submitting to the US pressure would wipe out India’s trade surplus with that country – the maximum at $35.3 billion in FY24 – sharply increasing trade deficits from (-) 21.6 per cent of total trade to (-) 24.8 per cent in FY24. This would pull down future growth.
The Global Trade Research Initiative (GTRI) report says, the US’s reciprocal tariff would mean a significant jump in tariff rates from the US.
Watch: Trump’s tariffs on India: Trade war or negotiation tactic?
“If the US chose to impose separate tariffs, the additional tariff for farm products would be 32.4 per cent, and on industrial products 3.3 per cent. Indian farm exports to the US currently face a 5.3 per cent tariff, whereas US farm exports to India face a much higher 37.7%, creating a 32.4% gap. For industrial products, US exports to India face a 5.9 per cent weighted average tariff, while Indian industrial exports to the US face only 2.6 per cent, resulting in a 3.3 per cent gap.”
Leeway comes at a cost
India may hope to find a leeway by buying more oil and gas and weapons (F-35 included) from the US as the joint statement issued on February 13, 2025, points too. But that works against India. Oil and gas would come at the cost of cheaper Russian oil – draining forex reserve and F-35 fighter jets have been not only been dismissed by Trump’s ally Elon Musk (called it “worst military value for money in history” and its builders “idiots”) but the Indian Air Force’s infrastructure is built around French and Russian fighter planes.
Also read: ‘Taking advantage of us’: Trump’s fresh swipe at India over USAID funding, tariff
Notwithstanding India’s posturing about not changing tariffs for others, it is vulnerable due to multiple issues – high tariffs on ICT products which India lost in the WTO in 2023; demands from the EU to lower tariffs on cars and alcoholic beverages while seeking to impose carbon tax (20 per cent to 35 per cent from January 2026), immigration, and regulatory oversights are a few to name.
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