Trump Tariffs: Can India Develop in a World Where Globalisation is in Retreat?

"The more you sweat in peace, the less you bleed in war," said this year’s Economic Survey, warning of the retreat of globalisation that once fuelled economic growth across the world. Now, US President Donald Trump’s sweeping announcement of fresh import tariffs on goods entering the world’s largest economy serves as a stark reminder to India: the path to becoming a developed nation just got steeper and it has to sweat much more.

Since taking office in 2014, the Narendra Modi government has pursued a series of reforms and incentives to strengthen India’s export economy. The urgency is clear—despite an impressive average annual GDP growth of 6.3 per cent between 2000 and 2023, India has struggled to match the scale of global trade heavyweights. The inevitable comparison is with China, which leveraged the peak years of globalisation, growing at an average annual rate of 8.5 per cent during the same period.

From the 1980s onward, China rode the wave of increasing global trade, which surged from 39 per cent of world GDP in 1980 to 60 per cent by 2012. But as protectionism rises and trade barriers return, the rules of economic expansion are shifting once again.

“The world is moving on. You have to listen to the views of Congress people in the US on another country replacing China as the manufacturing powerhouse in the world. They will not be open to Indian goods streaming into their economies to the extent that the Chinese goods did. They have learned their lesson,” said Raghuram Rajan, former CEA and RBI governor in an earlier interview with Outlook Business.

Between 2020 and 2024, over 24,000 new restrictions related to trade and investments have gone into place globally, with majority of them owing to strategic competitiveness. “The impact of this shift in global structural forces is reflected in global trade growth, which has slowed down significantly, and signs of secular stagnation in the global economy are beginning to emerge,” notes the Economic Survey.

India’s Export Economy

Experts argue that since India’s economy is primarily driven by investment and consumption, the immediate impact of this slowdown in global trade is unlikely to be severe. Merchandise exports contribute only 10 per cent of India’s GDP, with the US accounting for 20 per cent of the country’s total merchandise exports. For instance, even with a 26 per cent tariff by the US, India’s GDP growth may decline by only 30-40 basis points, according to Amar Ambani, executive director of YES Securities.

Still,  this changing reality calls for a new strategy for India to achieve its Viksit Bharat vision, which demands an average annual growth rate of 8 per cent over the next two decades. After growing at over 7 per cent for three consecutive years, the economy is expected to grow at 6.5 per cent in 2024-25, with projections for 2025-26 indicating a growth range of 6.3 per cent to 6.8 per cent.

Economic theory identifies four key drivers of growth—consumption, investments, government expenditure, and net exports. In India’s case, much of the recent momentum has come from the 300 per cent plus increase in central government's capital spending since 2014, creating a multiplier effect. In the meantime, both private investment and consumption have lagged behind, while exports failed to take off even after initiatives like Make in India and production-linked incentive (PLI) schemes.

“I would say wrong timing. The PLI scheme would have worked very well had we been in a booming global economy. We are not there. So, the effectiveness of the PLI scheme comes weaker,” says Pronab Sen, economist and former chief statistician of India. Some economists believe that India may have missed the window to develop into a strong export-led economy, given the current wave of protectionist measures worldwide. Hence, raising the growth average in the next two decades will require reaping the demographic dividend through a deregulation stimulus, according to the current CEA V Anantha Nageswaran.

“Government should look to reduce India's tariffs and prioritise the deregulation exercise that was already announced by the PM and FM. This will help Indian industry in becoming competitive and take advantage of the tariffs that are being placed on China,” says Rahul Ahluwalia, founder and director of Foundation for Economic Development (FED), a policy think-tank.

Domestic Engines

In a world increasingly leaning toward protectionism, the Economic Survey suggests that India’s best bet lies in strengthening domestic growth. This requires creating 8 million jobs annually, boosting manufacturing’s share in GDP, integrating Indian businesses into global value chains, and fortifying the MSME sector to drive long-term resilience and competitiveness. All of which remain persistent challenges for India.

Policymakers are in turn asking the private sector to gear up and follow a “we” approach rather than seeing Viksit Bharat as a government’s vision. They are asking the businesses of India to scale up investments and innovate. “The policy stance is becoming clearer, and the focus is shifting towards efficiency, innovation, and competitiveness. Businesses must move away from complacency because becoming “lazy” in a competitive landscape is not an option,” said Tuhin Kanta Pandey, former Finance Secretary in a post-budget interview with Outlook Business.

In the latest Budget, the Modi government has offered unprecedented income tax relief to stimulate consumption and private investment. Recognising the limits of public capital expenditure and the growing uncertainty in the global economy, the government is indeed shifting its focus toward domestic growth drivers.

But whether India’s people and private sector take the bait remains to be seen. The good news is that India has the potential to become a developed nation even without the kind of tailwinds that fuelled China’s rise. But the timeline for this transformation hinges on how swiftly the country can build a robust, self-sustaining economic engine.