Turning tariff shocks into strategic strength: India’s challenge ahead

By N.S. Venkataraman* 

The tariff assault launched on the world by the U.S. President has caught every country by surprise, and it appears that global trade flows will be affected for some time. As the world’s largest consuming country, the U.S. President perhaps thought he could dictate terms to other nations and thereby boost the American economy, gain political mileage, or both. However, he seems to have overlooked the fact that tariffs are a double-edged weapon. It remains to be seen who will have the last laugh.

One of the main objectives of the U.S. President’s tariff push is to curb imports and boost domestic production, thereby strengthening the U.S. economy. However, such an assault should have been preceded by significant capacity building in manufacturing at globally competitive costs. While he speaks of building such capacity, he has put the cart before the horse by imposing high tariffs without first ensuring adequate domestic alternatives.

With high per capita income and an entrenched culture of consumption, Americans are unlikely to reduce imports drastically. The more likely outcome is that consumers will continue to buy imported goods but at higher prices, pushing up inflation and household costs. Reports already suggest that inflation in the U.S. is rising, with commodity and consumer prices showing an upward trend. In effect, despite higher prices, Americans will continue to buy imported goods to maintain their lifestyle.

Domestic capacity building in the U.S. will take place only if investors believe they can produce at globally competitive costs. It is doubtful whether many products, particularly consumer goods and commodities currently imported from countries such as China, India, and Vietnam, can be produced domestically at the same price levels. For U.S. producers, the decision will be a simple economic one, while for consumers, higher costs will be unavoidable.

In India, alarm was initially expressed about U.S. tariffs, since 17% of Indian exports currently go to America. However, the Modi government has responded with calm, avoiding knee-jerk reactions. Significantly, U.S. tariffs have exempted Indian pharmaceutical products, which supply nearly 40% of America’s generic drug requirements. This exemption reflects the indispensability of Indian pharma. The government’s measured response indicates confidence that the challenge can be converted into an opportunity, even a blessing in disguise.

At the same time, the situation has highlighted India’s vulnerabilities. Import dependence remains high across critical sectors, making the country exposed to external supply shocks. Rising domestic demand, driven by economic growth, has only deepened this dependence. India’s inability to ramp up domestic production in line with demand is a key weakness.

For example, most Active Pharmaceutical Ingredients (APIs) for India’s pharma industry are imported, largely from China. If China were to restrict API exports, India’s pharmaceutical industry could be severely crippled. Similarly, in the electric vehicle sector, lithium-ion battery cells—crucial for EVs—are largely imported. Production capacity for these cells is still nascent, and India also lacks domestic supply of several inputs required to manufacture them. Recently, China imposed restrictions on exports of rare earth elements and magnets—key components not only for EVs but also for defense, energy, and automotive industries—further underlining India’s vulnerability.

The semiconductor and solar sectors face similar constraints, as many high-purity chemicals and specialized inputs are not produced domestically. India also depends heavily on imports of specialty fertilizers and bulk chemicals such as methanol, PVC, styrene, citric acid, and polycarbonate resin. The list of such dependencies is uncomfortably long. Any disruption in imports of these key inputs would seriously affect India’s production base and economic growth.

While export dependence is inevitable and necessary to sustain growth, it must be balanced with strong domestic capacity and demand. Higher domestic consumption can act as a buffer against external shocks such as U.S. tariffs. Without this balance, India risks being too vulnerable to global disruptions.

The larger issue lies in India’s technological dependence. Domestic research and development has lagged, forcing industries to repeatedly rely on expensive foreign technologies. In some cases, access to updated foreign technology has itself been denied, limiting India’s capacity expansion. The fundamental challenge is to build a stronger domestic R&D base. Encouragingly, India has demonstrated remarkable capabilities in fields such as space, atomic energy, and pharmaceuticals—as seen in the swift development of Covid-19 treatments. These successes show that India has the potential for significant technological breakthroughs.

The government has already taken steps by increasing funding, announcing incentives, and rolling out the Production Linked Incentive (PLI) scheme to encourage domestic capacity building. Initiatives in green hydrogen, renewable energy, and other sectors are commendable. However, government action alone is not enough. Public and private sector industries must invest substantially more in R&D. Currently, industry spending on research is meagre compared to profits, and many R&D labs function more like quality-control departments than centers of innovation.

A cultural shift is needed. Too often, Indian project promoters prefer buying technology from abroad rather than developing it at home. CSIR laboratories, though well-funded, have often diluted their focus by functioning partly as teaching institutions. In this context, the recent directive to discontinue undergraduate courses at ICAR research centres is a welcome step, and a similar approach should be extended to CSIR labs to refocus them on research.

India’s premier IITs—such as those in Chennai, Mumbai, Delhi, Kharagpur, and Kanpur—should also be reoriented primarily towards cutting-edge research and innovation, instead of largely producing graduates. With hundreds of engineering colleges already across the country, these IITs should serve as research powerhouses, driving India’s technological future.

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*Trustee, Nandini Voice For The Deprived, Chennai