Trump's tariff tirade is an opportunity for tax reforms

India's tariffs are often described as 'excessively protectionist,' but the reality is more complex.

- ARBIND MODI

They function less as blanket barriers and more as a response to distortions: an overvalued rupee that makes exports uncompetitive, goods and services tax (GST) exemptions that give imports an unfair edge and transfer-pricing practices that allow multinationals to shift profits abroad. Since tariffs are shaped by wider trade and fiscal policy, they serve to disguise rather than cure the structural weaknesses that limit India's competitiveness. They have been employed to protect domestic industry, encourage local manufacturing and cut import dependence. But continued reliance on tariffs risks trapping India in a cycle of inefficiency and retaliation, emphasizing the urgency of structural reforms.

An overvalued rupee is a major problem as it makes imports cheaper and exports more expensive, effectively acting as a tax on exporters and a subsidy for importers. This undermines export-oriented domestic production by reducing India's competitive advantage in global markets. Instead of using high tariffs to counteract this, India should allow the rupee to depreciate sharply to its true market value. This would make Indian exports much more competitive and neutralize high US tariffs. As exports rise, the rupee will appreciate, creating a natural reset in its value without intervention by the Reserve Bank of India. The adjustment may create short-term price pressures as imports get costlier, but these would be outweighed by the long-term benefits of stronger export growth and a better balanced trade account.