As the country’s commerce and industry minister, Piyush Goyal, flies off to the US for a crucial round of tariff talks, the timing is interesting. It is on the first day of Navratri, the day Indians begin to enjoy the benefits of GST 2.0. New Delhi is also abuzz that the India-US bilateral deal is almost in the bag. Call it Tariff 3.0. After two successive 25 per cent increases in American duties on Indian goods, this third event will impact the entry of American products in the Indian markets. While the entry barriers on American agriculture and dairy products will remain intact to protect the country’s farmers and dairy producers, those on manufactured goods will come crumbling down. American factory-made products will attract minimal duties, zero on many goods, and 5-20 per cent on the others.
“The deal is almost in the bag. Only fine-tuning is required. Goyal’s trip will almost seal it. American goods will have an unhindered entry, or near-obstacle-free one. Indian farmers will be safe, but the industry may be in trouble,” says a Delhi-based trade expert, who has advised both Governments and businesses. He adds that the deal will not be announced soon, as the Indian Government wishes the citizens to enjoy, savour and absorb the benefits of GST 2.0, before the local industry starts screaming about being hit by the cheaper American imports. “It is about optics and headlines. Although the positive impact of GST 2.0 will be enhanced by the cheaper American imports due to Tariff 3.0, which is more beneficial to the consumers, the manufacturing industry will be up in arms, and cry wolf.”
Legal experts, who understand tariff, trade and taxes, and the inherent trade-offs between them, contend that the H-1B visa change was intended by the US President Donald Trump as the final hammer blow to force India’s hands. He hiked the fee to $1,00,000 for new applications, and for those, who have one, but wish to change employers. Indian companies, who wish to send techies on the visa need to prove that the fees have been paid beforehand. Software and other workers, who had the visa, but were not in the US, needed to report back before the new fees kicked in yesterday. The $8.5 billion bet (65,000, plus an additional 20,000, are allowed on H-1Bs in the US every year), was one of the aces that Trump used to make India accept minimal tariffs on imports of American goods.
If Tariff 3.0 is signed, and the new lower duties are imposed on imports, it will further depress the prices of local goods. Cheaper American imports will force the local manufacturers to lower prices further to remain competitive, which will provide a further boost to GST 2.0. The double-Diwali bonanza reduced the prices of most products, although, at the end of the day, the restructuring and reduction of layers of rates was largely revenue-neutral. The Government and experts felt that without accounting for any volume buoyancy due to lower prices, the hit on revenues would be Rs 48,000 crore. Given that the average monthly collection from GST is nearer to Rs 2,00,000 crore, the burden implies 7-10 days of collections.
However, the Christmas-New Year Tariff 3.0 calamity in the form of the India-US tariff-trade deal will further wallop down the prices of most goods. At one level, it will aid the Government’s motive to force manufacturers and sellers to pass on the benefits of GST 2.0 to the consumers. But, at another level, Tariff 3.0 may snip and cut the margins and profits of the makers-sellers. The businesses may shout that while lowering prices due to lower GST was fine, they will need to reduce them further, and pay the difference out of their pockets, or profits. This will induce more volatility in the Indian stock markets, possibly higher than the one due to the higher tariff tantrums.
As usual, there is invariably a silver lining in any crisis clouds. If India reduces the duties on American imports, Trump will do the same for Indian exports. Thus, the existing tariff barrier on Indian goods may reduce from 50 per cent to 20 per cent or so, as is applicable on goods shipped from neighbouring nations, and Southeast and East Asian ones. This will boost the country’s exports to the US. Some experts contend that the loss of the shares in the Indian markets due to cheaper American imports may be made up by higher exports. But most remain unsure about margins and profits. Exports mostly attract wafer-thin margins. If local prices drop further, the margins on domestic sales will suffer.
Yet another advantage of the India-US tariff deal may be the easing of the pressures on H-1Bs and Indian workers in the US. Trump may decide to be magnanimous, and drastically lower the $1,00,000 fee, and do an about-turn on the proposed legislation that will change the existing visa regime. This may prove to be a windfall for the software and IT services firms, which will further boost services exports. Although the European Union imposed fresh sanctions against nations that purchase Russian oil, largely due to the pressures from the US, these and the earlier ones may be diluted. This too will help India to diversify its energy sources, although it may be forced to buy more crude oil from American sources. There are too many equations and formulae to calculate, too many ifs and buts.
One can assume that, unlike GST 2.0, which may result in a minimal loss of revenues, and most-possibly boost volumes in certain segments, the influence of Tariff 3.0 will be evident over the medium term, or the next 2-4 years. The immediate worry will be a possible shakeout within the local industry, which will upset the pros and cons of grand schemes like ‘Make in India’, and make India as one of the recipients of foreign investments under the multinationals’ China+1 strategy. Over the next two-three years, the Indian players, both local and foreigners with Indian manufacturing bases, will need to re-calibrate their plans to either move away, or find ways to counter the entry of cheaper American imports. The first will be painful, given the money, time and effort spent. The second will be gainful, only if it is successful. Else, it may be doom and gloom.
The next 12-24 months will be interesting times for both the Indian consumers and local manufacturers. The first set will get a largesse, if all goes well. For the second set, it will be wildly adventurous, with no certainty of what
the future bodes. The Government will harp on self-reliance, dependency, shun imports and foreign goods, and vocal for local, even as it enjoys the happiness on the faces of the consumers, protects the interests of the farmers,
and urges the local industry to be sturdy and globally-competitive.
