The world’s financial markets are in significant turmoil due to President Trump’s tariffs on US imports from almost all countries. Unlike many other countries, the Indian government’s reaction to this crisis has been prudent. I would look at some of the actions that India took or did not take and try to explain why those actions are correct. The actual reasons why the Modi government made its decisions may differ from my explanations. We can never know the exact reasons behind the decisions; all we have are our explanations and hypotheses.
The first and the wisest thing that the Modi government did was not take any knee-jerk retaliatory action against the US. Narendra Modi faced criticism from his critics inside and outside the Indian government for not standing up to the US. True to his style, Narendra Modi has ignored the critics. Modi might have avoided retaliation against the US because of his claim to have a friendship with Trump. He might also be aware that India has a weaker hand compared to the US. Or Modi might have been wise knowing that thoughtless retaliation would only worsen the matter for India, the USA, and the entire world.
The second good thing that Modi did was that he did not allow anyone in the Indian government to express any opinions on the issue. No one knows the full extent of the eventual impact of the US tariffs on the world economy or that of any given country in the long run. The tariffs may not even exist in their current form six months from now. Many pundits worldwide are talking about the impact, and one more thoughtless opinion can only cause more tumult in the market. Modi is not shy of taking action or negotiating with friends and adversaries. The world can count on the Indian government not to ignore the issue.
The following two points indicate that the Modi government is at the top of the problem.
Modi’s third prudent step was to take advantage of the reduced oil prices in the world market caused by the current crisis. Indian government has always controlled the retail prices of petroleum products in India. The merit of that policy is beyond the scope of this article. Petroleum conglomerates in India would benefit from the reduced international prices. Despite criticism, Modi resisted the temptation of passing the savings to the consumer. The government kept the retail prices constant for the end user. In fact, it raised the excise duty for the gasoline importers. This step might benefit the government and the people if the gasoline prices fluctuate and go up again, which they can be expected to do due to the current climate of uncertainty. It can also help the government meet its financial obligations if the crisis continues.
Finally, India was among the first countries to cut interest rates since the beginning of the crisis. This was done to help businesses deal with the uncertainty caused by the current situation and to boost the Indian economy, which had been slowing down even before the crisis. This should assure the people and India’s trading partners that the Indian government is not oblivious to what is happening in the world and is considering its options.
Excessive US trade and budget deficits are bad for the US and the world economies. President Trump deserves our admiration for addressing this issue head-on. But, the opinion is that he should have proceeded slowly and more prudently. World countries should be open to negotiations, but they should not panic. The US tariffs impact China more than any other country, but only 15 to 17% of Chinese exports go to the USA. Ignoring the secondary effects, the most significant impact of these tariffs will be on US consumers. Still, I am happy that the United States finally has an administration trying to solve the problem.
[1] India to focus on trade deal, avoids retaliation on US tariffs – The Economic Times
[2] India stays measured amid Trump’s tariff war, pushes for US trade deal | Mint
[4] RBI cuts Repo Rate to 6%: What it means for individuals and families | – The Times of India