Understanding Reciprocal Tariffs: Kaushik Basu Warns of Potential Adverse Effects on India

Former World Bank Chief Economist Kaushik Basu recently expressed his thoughts on the new tariffs imposed by the Trump administration on around 60 countries, including India. He said these tariffs, specifically a 26% duty on Indian goods, are puzzling. While they might hurt India’s economy a bit, the real damage will come to the US.

Basu noted that these tariffs are not truly reciprocal. They focus more on the trade deficit the US has with India. He stated, “A country like the US, with a globally trusted currency, naturally runs trade deficits.” Basu pointed out that this tariff policy could ultimately weaken trust in the US dollar.

Instead of retaliating with higher tariffs, Basu advocated for India to take a different path. He suggested that India should follow the example of Europe, Canada, and China by fostering trade among themselves. He remarked that this is an ideal time for new trade agreements.

Addressing concerns about inflation, Basu mentioned that the tariffs won’t significantly increase prices in India. In fact, there could be a short-term drop in prices due to a surplus in the Indian market from reduced exports to the US. However, if India decides to raise its tariffs in response, it could lead to inflation.

Basu sees a silver lining in these challenging times. He believes that while the immediate effects of US tariffs are negative for India, the long-term consequences could be positive. If the US continues its protectionist policies, it may slow its economic growth, allowing countries like India and China to strengthen their trade ties further.

In the tech and pharmaceutical sectors, India has a lot going for it. The World Economic Forum is setting up a major center for pharmaceuticals and biotechnology in Hyderabad, which highlights India’s growing influence in these industries.

According to recent data, India had a trade surplus with the US of USD 35.32 billion for 2023-24. This marked an increase from USD 27.7 billion in 2022-23. Major exports to the US include pharmaceuticals, telecom instruments, precious stones, and ready-made garments, while key imports are crude oil and electric machinery.

As the US revises its tariff rates, keeping an eye on changing trade dynamics is crucial for India. The country can position itself to take advantage of any shifts in the global economy.

For further insights into trade agreements and economic analysis, the World Bank provides valuable resources.

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