India Emerges as Second-Highest Gainer from US Tariffs on China, Says Arvind Virmani

So first, the thing to remember is that most indicators, whether social or others, are dependent on per capita GDP. I haven’t specifically analysed R&D as my work focuses on education, skills, and health. But from my recollection, our government R&D spending compares reasonably well, especially when viewed relative to our per capita GDP—it’s better than expected given our income level and aligns closely with similar countries.

Now, China’s per capita GDP in PPP (purchasing power parity) terms is several times higher than ours, so comparing directly with China doesn’t make much sense. The real issue isn’t government spending—it’s private R&D spending where we fall short.

That said, if we are to become an upper-middle-income country by 2030 and a high-income one by 2050, we will need to significantly ramp up R&D spending. Many indicators I’ve studied show that India performs better than expected or is marginally lower compared to income benchmarks. I suspect the same is true for R&D. However, I agree that the ambition to grow this share must now increase rapidly.

R&D has externalities—this is well-documented in economic literature. Countries that invest more in R&D tend to experience higher productivity growth. Investment in R&D drives various beneficial outcomes.

I think the private sector needs to be incentivised. About 20 years ago, we used to have a tax incentive for private sector investment. Perhaps we need to rethink that in light of all the information available today. For example, now we know how countries like Israel do it. There has to be a review of how the best countries incentivise their private sector.

There is a clear economic rationale for subsidising or incentivising R&D. It involves creating funds, and we’ve already established a number of them. For instance, there’s the National Science Fund, as well as various funds for startups and STEM (science, technology, engineering, and mathematics) initiatives.

These funds are operational, but the challenge lies in implementation. Incentives and funds must be effectively deployed, and these processes require constant fine-tuning to suit Indian conditions and ensure alignment with global best practices.

China is a different case. It’s a socialist market economy, which is a polite way of saying it’s a communist country. So, it’s very hard to really draw lessons from China because they can do anything they want—they can have one policy today and change it tomorrow. In contrast, we have to go through democratic procedures for everything. But Israel is a good model for us.

There’s something we call "learning by doing." This involves a three-stage process: first, you learn how to do something by actually doing it; then, you refine the process to do it more efficiently; and finally, you think about how to improve it further.

For example, if you’re building quality phones, you must first produce them to meet existing standards. Mobile manufacturers have shared that there are many challenges—kinks to iron out in the process. It’s not that we can’t do it, but it costs. Mistakes, wastage, and inefficiencies are part of the learning process.

You have to achieve existing quality standards first. Once that’s done, you can start thinking about innovation. You cannot skip steps and expect to innovate before mastering the basics.

When it comes to R&D and process innovation, incentives play a critical role. For instance, if we have 10 companies producing mobile phones, each will innovate in its own way. The government cannot define this process from Delhi—it has to leave it to the companies themselves.

The challenge with tax incentives for process improvements is accountability. With a new product, outcomes are easier to judge. But with process improvements, benefits are harder to track—they show up as reduced costs or improved quality, which are not as straightforward to measure.

This makes it tricky to design incentives without risking misuse. Some companies might exploit them without delivering meaningful results. So, while rules and safeguards are necessary, we also have to take a chance and trust the system to a certain extent. That’s the fundamental issue.

The key is to study countries that have advanced from behind. You mentioned a few already, but others include South Korea, and Taiwan. These nations became globally competitive at a certain point and eventually dominated global markets.

The focus must always be on quality and competitiveness. Any protectionist measure, in my view, should be temporary, and this needs to be widely understood. If industries don’t become competitive, the effort is futile. Countries like China, Israel, South Korea, and Taiwan provide excellent examples of how to use temporary protection effectively to reach the global frontier. If that goal isn’t achieved, you’ll have to reconsider the approach.

There’s no historical precedent in economics where permanent protection has elevated a country to the forefront. The question is whether the goal is to become a frontliner. If the aim is merely to increase per capita GDP, there are other ways to achieve that.

Recent studies on the impact of US tariffs have revealed significant shifts in global trade dynamics, particularly in US imports. Initially, these studies showed that China's share in US imports had declined, prompting the question: who gained from this reduction?

Early findings placed India among the top four or five beneficiaries, with countries like Vietnam, Thailand, and Malaysia also registering gains. Vietnam consistently emerged as the biggest gainer.

A more recent study however, leveraging expanded data, offers even more insight. Vietnam remains the top gainer, followed by Taiwan, primarily due to semiconductor investments driven by the US CHIPS Act. Taiwan's gain is largely linked to machinery imports for its burgeoning semiconductor industry, making this shift temporary rather than part of a broader "China Plus One" strategy.

The surprising revelation is that India now ranks third, making it the second-highest gainer after Vietnam in the US market. This indicates India's growing competitiveness, provided the domestic environment remains favourable.

Vietnam’s proximity to China and its FTA (free trade agreement) with the EU (European Union), offers a 12.5 per cent advantage. That is a huge advantage. In contrast, India lacks an FTA with the EU, a course-correction I have been talking about for five years.

Domestically, a mindset shift is essential for fostering investment-friendly conditions. While some Indian states have made significant progress in attracting anchor investors, every state must focus on creating conducive infrastructure and ensuring a seamless setup process for businesses. States are very important for speed.

Another critical challenge is addressing the issue of under-invoicing by non-democratic countries, which may aim to undermine local businesses in India.

We are doing it, and it is unrelated to alignment or non-alignment with any particular bloc. The complexities arise primarily when we seek access to technology, not when we aim to sell our products. We will sell wherever there is a market for our offerings.

Naturally, regions such as Africa, Latin America, the Caribbean, island nations, and less affluent countries in Central Asia and the Middle East hold significant potential for our exports. No one is objecting to it, and it remains crucial for us to continue.

Expanding into these markets enables us to achieve scale and enhance our speed, both of which are essential for sustained growth.

The tricky part lies somewhere in the middle, particularly with regions like ASEAN (The Association of Southeast Asian Nations) that are geographically close to China. This proximity creates complexities in our engagement with such markets. However, for the majority of the global market, this isn't a significant issue.

Our primary focus should be on less advanced countries as the starting point. While ASEAN and nations like Turkey are more developed, there are numerous other regions—such as Guyana, Suriname, Central Asia, and Armenia—that are slightly less developed and smaller in scale.

Smaller markets, while not insignificant, often lack the ability to build scale independently. This opens up opportunities for cooperation and mutually beneficial partnerships, leveraging India's strengths to meet their needs while expanding our global footprint.

The way I see it, education and skill development form a pyramid. At the base, you have primary and secondary education, followed by bachelor's degrees, and at the top, R&D establishments. From a developmental perspective, the key question is whether we are producing the right people at each level of this pyramid. This concerns me deeply because without a strong foundation, the entire structure falters.

The quality of teaching and learning needs to improve significantly within the next 10 to 25 years. While we are not performing poorly in comparison to others, the required leap in quality is immense. Achieving this will be tremendously challenging but necessary if we aim to become an upper-middle-income and eventually a high-income country.

One critical issue is credentialism—placing value on degrees and certificates over actual learning or skills. This mindset creates a gap between education and employability. People may complete school or earn a bachelor's degree without acquiring the skills required for jobs. Skilling, in particular, remains alarmingly poor in India, exacerbating the problem.

This brings us back to the pyramid. Historically, independent India has failed to build this structure from the bottom up. Instead, we started at the top, focusing on higher education and elite institutions while neglecting primary and secondary education. The Soviet Union, for instance, succeeded in building an effective educational pyramid, which continues to benefit them even decades after losing their superpower status.

In India’s case, the neglect of foundational education is one of our greatest failures since independence. Had we built the base first, today's challenge would have been manageable—just a few steps to climb. But now, we must reconstruct the entire pyramid from bottom to top. This legacy of neglect has created an enormous challenge that we must urgently address.

The issue lies in what can be termed the "legacy of bureaucratic socialism." Unlike the ideologically driven communism of Marxist-Leninist states, India's socialism was vague and primarily implemented through a bureaucratic framework. This system entrenched itself deeply not just within the bureaucracy but also across academic institutions, politics, and the media.

The real challenge is the "state mindset," which encompasses the attitudes of politicians, bureaucrats, and the overall system. This mindset must shift from viewing businesses as "chickens to be plucked" to recognising them as partners in creating jobs and output.

And this mindset issue runs from top to bottom. Leadership at the top is crucial for driving change. When a new chief minister, for example, embraces a growth mindset, it sets the tone for the entire bureaucracy to follow suit. However, this requires time for effective implementation. In some states, this growth mindset is not clear, either due to intentional or unintentional reasons, making it harder to drive the necessary changes.

Another issue lies in regulators' lack of understanding of the unique challenges faced by startups. Regulatory rules, designed for established businesses, do not always work for startups, which are exploring new markets and innovations.