US India Trade Tariff at 25% + Penalty. Time for us to step up.
DJT posted the following on Truth Social — “India will therefore be paying a tariff of 25%, plus a penalty for the above,…”
After this news broke out, the Gifty Index (Nifty futures) has fallen by over 140 points, and people have gone crazy on social media. Most of them believe it’s the end of the road for the Indian export sector; our currency is going to fall, and the jobs of most expatriates will nosedive.
Yes, almost all of them are correct, but this is the opportunity to make something right. Something we should have gotten right in the 1980s, but we missed out on oversight.
To explain that, I would have to take you back to the 1950s — The Prebisch-Singer Hypothesis source. They argued that the terms of trade are skewed in favor of a developed country (the USA) when they deal with a developing country (India). The reason? India exports raw materials to the US, and the US exports finished products to India.
75 years later, this hypothesis is still valid. As long as we continue to export raw materials and import processed goods, our trade deficit will continue to widen. They also explained the rationale: raw materials like wheat or rice do not command a higher price in the US, even if their income increases. Whereas, we in India would demand higher-priced luxury items to match our lifestyle, as our incomes increase.
Which means that, if your monthly income doubles from 1 lakh to 2 lakh — you would not buy rice at the rate of Rs100 per kg, if it was costing Rs50 earlier. Experience says you will continue to buy the same rice for Rs50 per kg. Whereas, you might want to consider switching from a Samsung (Rs 50000) mobile to an iPhone (Rs 100000), given your upgraded financial status. This also means that the farmer is getting the same income or worse (due to inflation and higher cost of living), whereas the Industrialist is doing better.
My question was, how come the top economists in our country missed this vital research finding? Why did they not influence the bureaucrats to develop our secondary sector after the green and white revolutions?
If the president of the United States has sanctioned India with penalties, it should be a wake-up call to get the basics redone. We should establish industries that produce finished goods, invite MNCs to set up processing units here, and encourage our traders to export finished goods rather than raw materials.
There are six significant advantages.
The farmer who used to export wheat/rice may get a better deal if they provide to a local industry (save transportation cost at least).
The industrialist will have to invest in capital, labor, and technology, and all three factors of production will improve. Investors will receive higher returns on their capital, more people will be able to find jobs, and technological progress will reach its peak.
The products we export will only be the finished goods, which will enhance our terms of trade.
We wouldn’t have to import products from developed countries, since the industries here would be producing them. The products sold in the domestic market would be of the same quality as in the international market.
Our currency would appreciate.
We will go from a trade deficit to a trade surplus.
Another complicated sector is the “Tertiary services sector,” particularly the IT & export sectors. These are the people who kick-started the Information Revolution in the 2000s. These are the same guys who got an entry-level salary of Rs25000 when the market rates were Rs5000 to Rs1000 for other sectors. Little did people realize that the money they are getting is because of the “currency” spread and not due to a sectoral shift.
More and more service companies took advantage of a weakening rupee and a strengthening dollar to do the consultancy work (per labor hours) rather than pure innovation. The sad part is that these firms billed the clients in dollars rather than rupees, further deteriorating our terms of trade. They cannot be blamed per se, because if they bill in rupees, our currency would appreciate, thereby reducing the net cash inflow.
A revamp of our Industrial sector and a paradigm shift in the Services sector should put India on the Viksit Bharat 2047 roadmap, unlike the “fake PR” campaigns running around right now.
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