In terms of sheer entertainment, to date, no politician can compete with Donald Trump. And he couldn't be satisfied with being just an entertainer. He somehow managed to become president of the US - for a second time - and now means to be taken seriously. At least by leaders of other countries.
He has found it difficult to find themes of war, the usual ticket testosterone-ed leaders choose to be taken seriously. So, he has chosen tariffs for a good fight, and means to get good mileage out of them. Unfortunately, the country he leads happens to be the world's richest and most powerful - at least until China spills out its economic secrets. So, other countries find it costly to fight with him. Instead, they look for compromises.
It's now India's turn. Trump has showered complaints against us: that we are world champions in most obnoxious trade barriers; that we buy oil from Russia, which is fighting a war with Ukraine that Trump has chosen, rather confusedly, to befriend. So, he has decided to impose import duties of 25% and more on our exports to the US.
India is not the only country Trump has chosen to threaten with import barriers. He picked America's neighbours, Canada and Mexico, and farther away, he warned the EU and China. Now, it's us. Most of these countries have chosen to seek a compromise. The EU and China have confronted him with some determination. That brings us into the firing range. We still have to decide whether to fight, run or compromise.
On one issue, Trump has a point - that India is probably the most protectionist among the larger economies. It was a champion protectionist for decades. India's British rulers imposed import restrictions at the beginning of WW2, and the socialist government that took over from them post-Independence continued and intensified them to protect domestic industry. It refused to see that such protection was just the way of making the country obstinately uncompetitive and pouring its resources into inefficient industries.
India had one balance of payments crisis after another. Each was used as an excuse for even more protectionism - and for borrowing ever more from international institutions.
Finally, there came a moment in 1991 when IMF got fed up with lending evermore money to a bankrupt country, and it - along with other lenders - refused to give us more, unless controls were removed and the economy was opened. Once the crisis was over, though, the government gave up on liberalisation.
Luckily, P Chidambaram dismantled more in the late 1990s and early 2000s, and the economy became fairly open and competitive. Unfortunately, the BJP government that followed reversed the direction, and restarted protection.
Now the Modi government has three options:
Do nothing
In that case, some of India's exports to the US may decline. The balance of trade would become even more adverse. But we can probably bear the loss. Luckily, virtually half of our foreign exchange earnings come from services. And even in trade, exports to the US are significant. But a fall of some 20-30% is bearable.
Fight
Unfortunately, India's trade is not significant enough for the US to take us seriously. We could try and coordinate our fight with the big fellows, namely, the EU and China. But they are likely to negotiate their own compromises with the US, and we are not important enough for either of them to take us seriously.
Rethink protection
This raises domestic prices and makes the economy more profitable for protected firms. But it also subsidises and expands inefficient production. Profits for inefficient producers come at the cost of domestic buyers. Protectionism is bad policy in general.
A mad power-wielder from a different country has given us a chance of dismantling it. We should abolish all tariffs, whether Trump asks us or not. If we must give some protection, we should use the exchange rate to give it.
And it is not just industry whose protection we should remove. We should also remove agricultural import restrictions. Some people will be shocked - for agriculture is regarded as the holiest of holy cows in our country. But if we remove protection and make agriculture internationally competitive, it will prosper far more.
We produce far more cereals - especially rice - than we can eat. We should, instead, produce diverse agricultural products with an international market, which is far bigger than our domestic market. That way, Trumpian American would be a friend, of sorts, after all.
He has found it difficult to find themes of war, the usual ticket testosterone-ed leaders choose to be taken seriously. So, he has chosen tariffs for a good fight, and means to get good mileage out of them. Unfortunately, the country he leads happens to be the world's richest and most powerful - at least until China spills out its economic secrets. So, other countries find it costly to fight with him. Instead, they look for compromises.
It's now India's turn. Trump has showered complaints against us: that we are world champions in most obnoxious trade barriers; that we buy oil from Russia, which is fighting a war with Ukraine that Trump has chosen, rather confusedly, to befriend. So, he has decided to impose import duties of 25% and more on our exports to the US.
India is not the only country Trump has chosen to threaten with import barriers. He picked America's neighbours, Canada and Mexico, and farther away, he warned the EU and China. Now, it's us. Most of these countries have chosen to seek a compromise. The EU and China have confronted him with some determination. That brings us into the firing range. We still have to decide whether to fight, run or compromise.
On one issue, Trump has a point - that India is probably the most protectionist among the larger economies. It was a champion protectionist for decades. India's British rulers imposed import restrictions at the beginning of WW2, and the socialist government that took over from them post-Independence continued and intensified them to protect domestic industry. It refused to see that such protection was just the way of making the country obstinately uncompetitive and pouring its resources into inefficient industries.
India had one balance of payments crisis after another. Each was used as an excuse for even more protectionism - and for borrowing ever more from international institutions.
Finally, there came a moment in 1991 when IMF got fed up with lending evermore money to a bankrupt country, and it - along with other lenders - refused to give us more, unless controls were removed and the economy was opened. Once the crisis was over, though, the government gave up on liberalisation.
Luckily, P Chidambaram dismantled more in the late 1990s and early 2000s, and the economy became fairly open and competitive. Unfortunately, the BJP government that followed reversed the direction, and restarted protection.
Now the Modi government has three options:
Do nothing
In that case, some of India's exports to the US may decline. The balance of trade would become even more adverse. But we can probably bear the loss. Luckily, virtually half of our foreign exchange earnings come from services. And even in trade, exports to the US are significant. But a fall of some 20-30% is bearable.
Fight
Unfortunately, India's trade is not significant enough for the US to take us seriously. We could try and coordinate our fight with the big fellows, namely, the EU and China. But they are likely to negotiate their own compromises with the US, and we are not important enough for either of them to take us seriously.
Rethink protection
This raises domestic prices and makes the economy more profitable for protected firms. But it also subsidises and expands inefficient production. Profits for inefficient producers come at the cost of domestic buyers. Protectionism is bad policy in general.
A mad power-wielder from a different country has given us a chance of dismantling it. We should abolish all tariffs, whether Trump asks us or not. If we must give some protection, we should use the exchange rate to give it.
And it is not just industry whose protection we should remove. We should also remove agricultural import restrictions. Some people will be shocked - for agriculture is regarded as the holiest of holy cows in our country. But if we remove protection and make agriculture internationally competitive, it will prosper far more.
We produce far more cereals - especially rice - than we can eat. We should, instead, produce diverse agricultural products with an international market, which is far bigger than our domestic market. That way, Trumpian American would be a friend, of sorts, after all.
( Originally published on Jul 30, 2025 )
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Ashok V Desai
The writer was chief consultant in the finance ministry in 1991-93 under finance minister Manmohan Singh