All those candidates who are eyeing exams like RBI, SEBI, or NABARD exams will have to stay updated with all the important economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss Trump’s Tariff as a Fiery Miscalculation. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of today’s topic.
The Bhasmasura Tariff: Trump’s Fiery Miscalculation
Context: Much like the demon Bhasmasura, whose power to destroy others led to his own demise, Trump’s tariffs are backfiring. Meant to punish India, these duties are now projected to reduce US GDP and spike inflation, a classic self-destructive misstep.
Link to the Article: Mint
The recent imposition of a 50% tariff on Indian exports by the US, a decision rooted in President Donald Trump’s “America First” agenda, is a bold and potentially self-destructive move. This action, likened to the mythological story of Bhasmasura, is not only designed to punish New Delhi for its geopolitical alignments, but also to address perceived trade imbalances and protect domestic industries. However, according to an SBI research report, the tariffs are a double-edged sword that could have a boomerang effect, potentially harming the US economy with higher inflation and a negative impact on GDP growth.
The Bhasmasura Story:
The ancient Hindu mythological story of Bhasmasura serves as a potent analogy for the potential self-destructive nature of Trump’s tariff policy. Bhasmasura, a demon, was granted a boon by Lord Shiva that allowed him to burn anyone to ashes by touching their head. The demon, in his greed and arrogance, then tried to use this power against Lord Shiva himself. In the end, Lord Vishnu, in the form of a beautiful enchantress, tricked Bhasmasura into touching his own head, leading to his demise.
Relation to Trump’s Actions:
Trump’s tariff policy, like Bhasmasura’s boon, is a powerful tool designed to harm and punish others (in this case, other countries) for perceived wrongs. However, the policy’s economic implications, such as increased domestic inflation and reduced GDP growth, could ultimately harm the US economy and its consumers, a scenario where the weapon boomerangs and harms its creator. The SBI research report suggests that the US tariffs could affect the country’s GDP by 40-50 basis points and lead to “higher input cost inflation”.
Intentions and Objectives Behind Imposing Such Tariffs
President Trump’s decision to impose tariffs on India and other countries is a multi-faceted move with several core objectives:
- Punishment for Geopolitical Alignments: A primary reason for the tariff on India is to punish New Delhi for its “continued Russian oil purchase,” a stance that the US views as unaligned with its foreign policy positions.
- “America First” and Trade Protectionism: The tariffs are part of a broader “America First” policy aimed at protecting domestic industries from foreign competition, reducing the US’s trade deficit, and bringing manufacturing jobs back home.
- Leveraging Market Power: The tariffs are a tool for “coercive bilateralism,” where the US uses its immense market size to force other countries to agree to trade deals on its terms.
- Addressing Perceived Unfair Practices: The US administration believes that some countries, including India, have imposed “high tariffs” on US goods and have taken advantage of the US in trade.
Economists’ Views on the Effects of Tariffs on the US
Many prominent economists, including American ones, have voiced strong concerns about the inflationary and economic consequences of Trump’s tariffs on the US.
- Inflationary Pressure: The SBI report, along with other analyses, predicts that the US economy will face “higher input cost inflation” and that inflation will remain “above the Fed’s 2 per cent target till at least 2026”. Economists argue that businesses will eventually pass the additional costs of tariffs onto consumers, leading to faster inflation.
- Negative Impact on GDP: The SBI research report suggests that the new tariffs are likely to affect the US GDP by 40-50 basis points.
- Self-Destructive Policy: Renowned American economist Jeffrey Sachs has described the US policies as “self-destructive,” arguing that Trump is “shooting America in the foot” and that the tariffs will “impoverish Americans” while benefiting emerging market economies. Sachs has also criticized the tariffs as “bizarre” and a violation of international law.
- Impact on Consumers: The tariffs, while initially borne by US companies, will increasingly be passed on to consumers, who will face higher prices for a wide range of goods, including textiles, apparel, jewellery, footwear, and agricultural items.
Indo-US Trade Dynamics and Tariff Impact
The new tariffs are set to significantly disrupt the robust trade relationship between India and the US.
- Total Trade and Trade Surplus: The US is India’s largest trading partner. India ran a goods trade surplus of over $40 billion in 2024-25, with exports worth over $86 billion. In a worst-case scenario, if all $45 billion worth of Indian exports are hit by the new 50% tariffs, this trade surplus could turn into a deficit.
- Break-up of Exports and Imports:
- India’s Exports to the US (Top 10): The top export categories include smartphones and electronics, pharmaceuticals, diamonds/gold, machinery, and textiles.
- What India Imports from the US: India primarily imports mineral fuels and oils (like crude oil and LNG), pearls and semi-precious stones, nuclear reactors and boilers, and electrical machinery and equipment from the US.
- Exempted Goods: The tariffs are not going to relatively affect the exports of pharmaceuticals, smartphones, and steel due to exemptions and existing tariff structures. This can be seen as a clever step by the US, as these are goods that are crucial for the US economy and for which a sudden disruption in supply would be more damaging to American businesses and consumers. By exempting these goods, the US minimizes the immediate self-harm of the tariff policy while still applying pressure on other sectors.
- Goods that would become costlier in the US: The tariffs will make a wide range of Indian goods more expensive for American consumers, including textiles, garments, gems and jewellery, leather footwear, carpets, agricultural items (rice, tea, spices, shrimp), and handicrafts.
- Goods that would become costlier in India: As of now, the Indian government has not announced any retaliatory measures. If India imposes tariffs on some US goods too, then it will affect our imports too. However, the extent of this effect is not going to significant as we import very few items from the US.
Analysis of the Article: Decoding the Five Effects of Tariffs on the US
The article effectively decodes the complexities of the US tariff imposition on India. According to an SBI research report and other analyses, the US tariffs on Indian goods could have the following five effects on the US economy:
- Reduced GDP Growth: The tariffs are likely to affect the US GDP by 40-50 basis points, according to an SBI research report. This is because tariffs increase the cost of imports and can disrupt supply chains, which in turn can lead to slower economic activity. The think tank GTRI, however, gives a more pessimistic outlook on India’s exports and suggests a GDP decline of up to 0.9 percentage points for India in the worst-case scenario.
- Higher Inflation: The tariffs are expected to cause “higher input cost inflation” in the US. The SBI analysis projected that inflation will stay above the Federal Reserve’s 2% target through 2026. This is because businesses, particularly in import-dependent industries, will pass the increased costs on to consumers.
- Increased Costs for Consumers: As businesses pass on the costs, American consumers will face higher prices for a wide range of goods, including garments, gems and jewellery, footwear, and furniture. Economists warn that unless tariffs are rolled back, American families will face more pressure on their budgets.
- Disruption of Domestic Industries: The tariffs will have the most significant impact on import-dependent industries in the US, such as electronics, automobiles, and consumer durables. These industries are “feeling the pinch” from the tariffs as they rely heavily on imports.
- A Weaker Dollar: The tariffs and the associated trade uncertainty can lead to a weaker dollar. A weak dollar makes U.S. goods more affordable abroad, but raises the costs for imported products and materials.
The Path Forward: A Cautionary Approach to Future
The finance ministry’s monthly economic review provides a cautionary approach to navigating the tariff crisis, emphasizing the need for a collaborative and long-term strategy.
- Acknowledge the Lagged Effect: While the immediate impact of the tariffs may seem limited, the review cautions that the “lagged effect needs to be addressed as it could weigh on trade and growth”. The full impact is expected to be felt in the latter half of 2025 and throughout 2026.
- Government-Private Sector Collaboration: The review suggests that the government and the private sector, “acting in tandem and concert,” can minimize the tariff-induced disruption.
- Strengthening Domestic Fundamentals: The government’s strategy involves accelerating reforms to boost disposable income, reduce inflationary pressures, and lower costs for businesses. This includes GST reforms aimed at simplifying indirect taxes and providing a consumption stimulus.
- Diversification of Trade: Indian industry bodies, like ASSOCHAM, are already encouraging businesses to diversify into new markets in Africa, Latin America, Europe, and ASEAN to reduce reliance on the US market.
- Building a Resilient Economy: The review concludes that while the tariffs are a challenge, they also offer an opportunity for India to become a “globally competitive, resilient economy” if handled properly. The recent sovereign ratings upgrade by S&P also provides confidence in India’s long-term trajectory.
In conclusion, the US’s imposition of a 50% tariff on Indian exports is a significant challenge, but the Indian government and industry are responding with a multi-pronged strategy. While the tariffs are expected to hurt India’s labour-intensive sectors and dampen growth, the focus on domestic reforms, market diversification, and strengthening competitiveness at home could potentially turn this setback into an opportunity for India to build a more resilient and agile economy.