Indian producers can gain from competition: Rajan

The United States (US) imposing a 25 per cent tariff on India from August 1 should be viewed as a temporary punitive tariff and an attempt to coerce India into accepting US demands, Raghuram Rajan, finance professor at University of Chicago Booth School of Business and former Reserve Bank of India governor, told Shreya Nandi in a video interview. Rajan pitched for lowering of car tariffs significantly but suggested the need to be sensitive while deciding on global agreements, especially in the case of small dairy and agriculture producers. Edited excerpts:

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Countries, including India, are either negotiating new trade deals with the US or are bracing for potential tariff increases.

How do you see these developments affecting global trade?

There is going to be some disruption in global trade. Every country is negotiating a special package, which is not uniform and that creates some concern because a more efficient producer of a particular good is able to find that it is being tariffed at a higher rate. The supply chain will be moved to a less-efficient but lower tariffed entity. There's also going to be some attempt at transshipment and there is going to be some realignment of supply chains.

For the US consumer, the cost of many of these products is going to go up. The American President says the foreign producer will pay the tariff, but we know that in practice the cost of the tariff is borne by the producer to some extent, but also by the consumer and importer who's bringing product into the country.

Broadly, slowing in the second half in the US and some rise in prices, which will make it harder for the Fed to cut interest rates sharply.

Do you think India is on the right path to tackle this disruption?

What emerges from the negotiations is sort of a broad intent. The details have to be negotiated, including, what is the broad tariff structure India will be subjected to. The details matter. For example, on FDI, on the kind of non-tariff barriers that it imposes.