'It's important for India to think about areas where it wants the US to move.'
'We can be far more innovative in what we ask the US.'
'Given that there's a package deal, why not do it?'
The United States imposing a 25 per cent tariff on India from August 1 should be viewed as a temporary punitive tariff and an attempt to coerce India into accepting US demands, Raghuram Rajan, finance professor at the University of Chicago Booth School of Business and former Reserve Bank of India governor, told Shreya Nandi/Business Standard in a video interview.
Dr Rajan pitched for lowering of car tariffs significantly but suggested the need to be sensitive while deciding on global agreements, especially in the case of small dairy and agriculture producers.
India should address issues like regulatory unpredictability and tax uncertainty that are likely deterring foreign investments, he said.
Part one of a two-part interview:
India and other countries are either negotiating trade deals with the US or are bracing for tariff increases.
How do you see these developments affecting global trade, and what are the potential gains for the US?
There is obviously going to be some disruption in global trade.
Every country is negotiating a special package, which is not uniform and that creates some concern because a more efficient producer of a particular good is able to find that it is being tariffed at a higher rate.
The supply chain will be moved to a less efficient but lower tariffed entity.
There's going to be some attempt at transshipment and there is going to be some realignment of supply chains as a result.
For example, China, which has high tariffs imposed on it by the US, may try to ship to Mexico and avoid the tariff. To prevent that, there will be a lot of inspections.
For the US consumer, the cost of many of these products is going to go up.
The American president says the foreign producer will pay the tariff, but we know that in practice the cost of the tariff is borne by the producer to some extent, but also by the consumer and importer who is bringing product into the country.
The relative share depends on how competitive the industry is. All this has to play out fully.
We already see some prices are rising in the US. The more the prices rise, the lower the budget the US consumer has to buy all that they want.
That means they will shrink their spending. That will affect US demand also.
Now, again, it's very early days. Everybody has been predicting these effects, but we haven't seen either the goods price inflation seriously.
You are starting to see some signs of it, as well as the slowing demand, which would be reflected in, for example, companies laying off people because they see demand falling off.
Most economists, including me, believe that it would be a matter of time. But of course, there's a lot else going on in the global economy.
For example, the stock market in the US is at all-time highs, and that tends to increase sentiment.
I don't think it can compensate for the falloff in demand. It can help a little bit.
That explains a little why some of the adverse effects are more delayed.
Broadly, slowing in the second half [of the year] in the US and some rise in prices, which makes it harder for the Fed to cut interest rates sharply.
Do you think India is on the right path to tackle this disruption?
It does seem that what emerges from these kinds of negotiations is sort of a broad intent. Here is the kind of tariff structure you would be subject to.
Of course, the details have to be negotiated, including, for example, what happens in pharmaceuticals, where there's a separate Section 232 investigation going on from the US; what is the broad tariff structure India will be subject to.
The details matter. What kind of agreements does India enter? For example, on FDI (foreign direct investment), on the kind of non-tariff barriers that it imposes.
It could be a relatively beneficial situation for India if, firstly it manages to negotiate lower tariffs than some of its competitors.
Second, that it brings down its own tariffs in a number of areas where they've been creeping up, allowing for more competition within India.
That can be very beneficial for the Indian consumer. Competition can be very beneficial in some areas for Indian producers, putting some pressure on them to do a better job than they've been doing so far.
We can convert this into something which is a little more win-win rather than lose-lose.
It's important for India to think about areas where it wants the US to move.
For example, when we're selling services in a big way to the US, is it possible that some of the barriers to entry for our services are brought down?
For example, can we find ways that some of our highly qualified doctors can satisfy those degree requirements and provide service at a distance?
Can we find ways that medical tourism can be enhanced, for example, by the US allowing Medicare and Medicaid to pay for some of the operations done in India?
We have excellent eye doctors. It would be cheap for them to provide that service.
But also, you could do that and have somebody fly over to India, get the operation, and go back to the US at a cheaper rate than it would cost the US to provide that service.
We can be far more innovative in what we ask the US. Given that there's a package deal, why not do it?
Which are the sectors where India should reduce tariffs?
Well, I think the focus of the US administration is very much on cars. Cars are the macho industry that every country wants its own industry to flourish.
There's no reason why we can't bring down car tariffs significantly across the board and subject our car industry to more competition.
We are close to the USA's August 1 reciprocal tariff deadline. Without an interim deal, India will be subjected to a 25 per cent tariff. How will this impact India? (This interview was conducted before the US imposed 25% tariff on July 30 and an additional punitive 25% on August 6.)
I think this should be seen as a temporary punitive tariff (and an attempt to coerce India into accepting US terms).
I am surprised because I thought the government enjoyed better relations with the US government.
I guess when we say everything is transactional, we should expect others to treat us similarly.
At any rate, there will be some exclusion for products that have already been shipped, otherwise, that would be too disruptive.
Second, I'm sure that every Indian exporter has been trying to ship ahead of the deadline because they know the only direction is upwards, not downwards.
Buyers in the US have already built up sufficient inventories of these kinds of goods.
What we'll see is while the i's are being dotted and the t's are being crossed, the exporters in India will slow down exports or allow stuff to pile up in warehouses both here, but also if they've been clever in bonded warehouses in the US, and wait till the tariff situation is clarified.
The real problem is we're going up from 3 per cent tariffs in the US to, you know, 15 to 20 per cent tariffs across the board.
That certainly is disruptive to every country, but also to the US. In the short term, exporters in India will adjust and have been adjusting.
I think the issue really is where this settles down after the month or two, maybe that they need to finalise.
How can India make the most out of a trade deal? In which areas India should be cautious?
We certainly should work hard as we have on improving our infrastructure, on reducing the impediments to doing business.
We have an opportunity to also credibly announce that we will treat foreign investors on the same playing field as Indian investors -- that we will not discriminate against them.
Maybe even set up our own structures to commit to doing so, because I think this is the way to attract foreign direct investment.
Some of the southern states have been rolling out the red carpet to get a lot of investment in.
Any investment whether in manufacturing or services is beneficial to India.
This is an opportunity as companies are looking at their supply chains and rethinking it in the light of tariffs.
If we can send the signal that we are open to these kinds of investments in a big way, we may attract some of this.
Even if it is initially because of the US market, they may think of the global market and produce by India for that. Any kind of disruption is also an opportunity.
There's an opportunity for Indian business to be bolder, more aggressive, and Indian states to also join hands with Indian business and say, we would like more investment here, but also we can be part of your global supply chain.
There are areas where we are more vulnerable. I mentioned cars where we have a good domestic industry, which is also exporting across the world.
That can stand up to competition. I'm not as worried about the cars and may benefit from the new technologies being brought in.
I do worry that some of our small producers, especially in areas like dairy, certain forms of agriculture, could be subject to global competition, which need not necessarily be fair if the other side is subsidising in a big way, and everybody subsidizes agriculture.
Until we have a full recognition of all the subsidies that everybody is providing, and even so, because our producers are typically small farmers, small dairy producers.
It's something that we need to be very, very sensitive to while deciding on global agreements.
I would try to look for win-win situations.
Are there ways that we can work with the US while not exposing some of our small producers to a whole lot of competition? I've mentioned in other fora the possibility that we invite FDI in some of the value-added areas -- agri industry, maybe places where we can offer some sort of concessions to the US.
There has been a decline in net FDI and at the same time there has been an increase in divestment and repatriation.
What do you think of this trend and what could be the main reason behind this?
I worry about it because, earlier we used to say the big problem for India is the logistics, infrastructure.
Over the last few years, we've improved the logistics and infrastructure considerably.
Given all that, we have to do some soul searching. Why is foreign investment not coming in? The old answers no longer satisfy so much.
I think part of what may be at play is that we need to also think about the soft infrastructure we have.
What kind of business environment, tax certainty do they expect? Some of our past tax claims have created a lot of anxiety in domestic and foreign business that they can come and claim something way down the line and then we're stuck for years in court.
I have heard government officials also talk about this as a problem.
They need to solve it because it's very easy for the tax authorities to levy claims and then say it'll get settled in the courts because nobody wants to take the responsibility of writing off a large claim and then finding there's a commission of inquiry against them because there's an accusation of corruption, etc.
We need to find a way to ensure that every claim is not litigated right until the end, no matter how peripheral and how nonsensical the claim might be.
I think the government understands this, but it needs to act, to ensure, not just on the tax issues, but also on the regulatory side.
Suddenly, certain regulations are brought into favour by domestic producers, hurting foreign direct investment.
That kind of uncertainty should be diminished as much as possible.
We have to work on skilling our own people so that the workers they have access to are good.
If we work on all these fronts, but also engage foreign direct investment, like some states are doing.
Tamil Nadu has this entity called Guidance, which tries to bring in foreign investors, smoothing the path for them, helping them deal with some of the roadblocks that typically investors face.
If we can do this, not just for foreign investors, but even for our own domestic investors, I think that will be really beneficial for the country.
See this as an opportunity movement and do what it takes and see the FDI numbers as a mark of whether we are succeeding. That number should go up.
Feature Presentation: Aslam Hunani/Rediff