Next Prosperity Round Demands Human Capital

Political and business leaders are confident of overcoming challenges by diversifying further, negotiating with customers on cost-sharing tariffs, and seeking ways to boost productivity rapidly

- RATHIN ROY

India has been experiencing bilateral difficulties with the United States. The economic dimensions of these difficulties are expected to impact India adversely. First, the US is India's biggest export destination, and so tariffs, both economic and geopolitical, will adversely impact India's current account deficit and economic growth. Second, the Trump administration's nativist base wishes to limit foreign access to jobs. They see Indian skilled immigrants as a prime political target. Since the US is the favoured emigration destination for educated and upwardly mobile young Indians, this hurts them, especially at a time when their economic prospects within India are at their bleakest this century.

In my analysis, the macroeconomic impact is manageable. India has enough foreign exchange reserves to comfortably finance a temporary widening of the current account deficit if exports and remittances fall, offering temporary elbow room to diversify. There is also scope to moderate imports, especially of luxury discretionary consumption, which has been spiralling in recent years.

However, the picture is different for the peninsula – the five southern states.

As India's premier manufacturing state, Tamil Nadu will take a hit. Thirty-one percent of the state's exported output goes to the US. Thirty percent of Tiruppur's garment exports go to the US. The Tiruppur exporters association estimates that this will cost the industry ₹6,000 crore. Fresh orders have stalled; existing orders are on hold. With average margins of just eight percent, the sector cannot absorb the tariff shock and remain competitive. Tamil Nadu also accounts for 37 percent of India's electronics exports, a large chunk of which goes to the US.