Editorial 1 : A second 1991 moment
Introduction: The recent Tariffs from USA and the dramatic pause on ‘reciprocal tariffs’ show more of the political move by USA, rather than the economic. In this clash of two superpowers, India gets a once in lifetime opportunity. The real question here is “Is India willing to reform” to gain from this opportunity.
Plausible reasons for Trump’s Tariffs (TT):
Initial Observation:
- Tariffs (TT), reciprocal or not, were not based on economic logic or trade deficit concerns.
- They were rooted in political economy — specifically, China’s long game to replace the US as economic hegemon.
What is China’s Long Game (per Rush Doshi’s “The Long Game”)?
- China’s ambition: Dethrone the US as global economic leader.
- Key instruments involved:
- A large, educated population.
- Mercantilist economic policy: export promotion, import limitation, reserve accumulation.
- The visible evidences:
- In 2010, consumption-to-GDP ratio was only 35%.
- China holds global records for sustained mercantilist practices.
Success of China’s Mercantilist Policies:
- In 1960: US share of manufactured goods exports (MGE) = 25%.
- In 1996 (18 years after China’s reforms): China’s MGE = 4%.
- Today: China’s MGE = 30%, despite a more developed world.
What was US’s Reaction on Chinese challenge?
- Bipartisan support for confronting China’s trade policies under Trump I.
- Contrary to expectations, Biden doubled down on Trump’s approach in 2021.
April 2, the “Liberation Day”:
- Mighty tariffs announced on all countries (allies, foes, even those with penguins).
- April 9 revealed the true anti-China focus:
- 10% tariffs for most.
- 125% for China (a clear containment strategy.)
For India: A once in lifetime Opportunity:
- Liberation from its restrictive trade and FDI policies.
- Why hasn’t India reformed?
- Decades of 6.2% growth bred complacency.
- Deep State oligarchs and politicians embraced the “don’t rock the boat” mindset.
FDI Trends in India:
- FDI fell from 2–2.5% of GDP to <1%.
- The 2015 “model” bilateral investment treaty (BIT) required disputes to be settled in Indian courts was one of the significant factors behind suboptimal FDI.
- The assumption that foreign firms would enter India regardless of costs falls flat.
- The reality is that foreigners exited en masse, unwilling to risk Indian legal arbitration.
China’s Post-2010 Shift:
- Moved up the value chain, outsourced low-end manufacturing to:
- Bangladesh, India, Mexico, Vietnam.
- Other countries adapted. India did not gain much, again, due to comfort.
Current Indian Scenario:
- Political opposition is divided and ineffective.
- Major industrialists oppose reform (as it threatens easy profits).
- Political economy is biased against economic reform.
- Non-economic reforms are preferred — they cost less and have fewer risks.
Changing Times:
- Trump's pressure may push India into long-needed reforms.
- External shocks offer the government a “helplessness excuse” to act.
- Reform risks are now lowered, possibly even negative.
Strategic Global Context:
- The West needs India as a counterweight to China.
- South Asia is the only region with a still-expanding labour force, where India leads.
- India’s educated, AI-ready workforce is growing and will soon surpass China’s in prime age (25–54).
India’s Clear Choice:
- Continue comfort-driven 6.2% growth, or
- Push for 7.5–8.5% growth via trade liberalization, FDI inflow, and deep deregulation.
Future Outlook:
- Comfort kills reform — and encourages anti-reform.
- But change is coming:
- India and the US are negotiating a Bilateral Trade Agreement (BTA), to be completed soon.
- This BTA will likely set the stage for deals with the UK and EU.
- A new industrial order is within reach.
Conclusion: The 1991 reform was the outcome of economic and political compulsion. The outside factors became an excuse to political class to introduce painful economic reforms, which later became blessing in disguise for Indian economy. The present Trump’s Tariffs brings the same political compulsion to India. India must accept the opportunity and bring the reform 2.0.