- 4 months ago
In an exclusive interview with India Today's Consulting Editor Rajdeep Sardesai, former RBI Governor Raghuram Rajan called Trump's 50% tariffs on Indian goods, which kicked in on Wednesday, unfortunate and a big blow to India-US relationships.
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00:00My special guest this evening is a very special one, privileged to be joined by Dr. Raghuram Rajan, former Reserve Bank of India Governor, former Chief Economist of IMF and of course a professor at the Chicago's Booth School of Business and one of the world's leading voices on economics.
00:25I appreciate Dr. Rajan, you joining us. You join us at a time on a day which is being described as Tea Day, Tariff Day. The tariffs have kicked in, US tariffs 50% on India. Your first reactions to what has happened with these tariffs kicking in at 50% including that 25% penalty for India buying Russian oil.
00:48Well, it's unfortunate. It is deeply distressing that this should have happened. It is a blow to US-India relationships. It is certainly very, very harmful for small Indian exporters, our shrimp producers, our textile manufacturers.
01:10Lots of workers will be sort of hurt by this. Their livelihoods will be in jeopardy. It's also a problem for the US. Buying goods with a markup of 50% to the extent that some of them are still sent across with these kinds of tariffs is harmful for the US consumer.
01:34So this is an event which should not have happened. Unfortunately, it has.
01:39I'll come to the impact it's having in a moment. But just to understand, do you believe there's any rational explanation for what Donald Trump has done?
01:53Is he weaponizing tariffs as an instrument of foreign policy? Or is he someone who's an ideologically committed to the idea of high tariffs and in a way protecting American businesses?
02:10Well, I think there is a complicated set of rationales for these tariffs, not the specific ones on India, but generally Donald Trump's love for tariffs.
02:22I think certainly he believes that a current account deficit, trade deficit is evidence that other countries are taking advantage of the United States rather than, you know, they're buying goods, they're sending goods cheaply to the United States with the US consumer benefits from.
02:43So this has been an old view of Japan in the 1980s. And he has always believed that tariffs are a way of leveling the playing field.
02:57A second factor has been more recently, the view that somehow tariffs will be a tax paid by outsiders and not by the US consumer.
03:08And therefore, it's a cheap way of getting revenues, which can then help offset some of the tax cuts that he has he has made.
03:19A third one, which you see a lot of nowadays is it's punitive.
03:25So it can be a way for the US to essentially use force when it doesn't want to use its military.
03:35So I think there's some aspects of each of these in the tariffs that are applied to different countries.
03:45And unfortunately, of course, the reality is that other countries suffer.
03:50But specifically on India, when I look at the tariffs on Asian nations, we are way above now, we are 50 percent, Bangladesh, Sri Lanka, Taiwan, Vietnam, all at 20 percent.
04:05With China, there's still negotiations on at various levels.
04:09But it almost seems as if India in particular has been singled out.
04:13Is that something that should worry us? Because that's what you said at the outset.
04:17A relationship, in a way, has been completely upended.
04:20It's almost as if India in particular is being punished in some way.
04:25It is. I think there's no two questions about that.
04:29And to some extent, my discussions with foreign ministry officials suggest that there was an agreement which was on the cards, which would have brought India in with tariffs, which were more like the Asian tariffs, more in line with them.
04:50And so we wouldn't look different and we would be on a level playing field.
04:55Of course, there was a hope that the special Modi-Trump relationship would would yield something even better.
05:02But at least we would not look worse if that had played out.
05:07Something changed in between the negotiations that were going on that seemed to be going on reasonably.
05:14And the sudden outbursts, which have led to Peter Navarro writing a piece in the Financial Times accusing India of being an outlier in enabling Russia.
05:26The fact that Turkey and China have not been similarly tariffed for enabling Russian oil sales or, you know, for that matter, the European Union for buying energy products from Russia.
05:40But also the fact that the Indian tariffs have been set at 25, the base tariffs, even while other countries are much lower in Asia, making India disadvantaged.
05:55We had hoped that India would actually find some advantage from these tariffs vis-à-vis other Asian producers.
06:02And in fact, it's gone the other way.
06:04So the relationship clearly has has broken down.
06:08Yeah, go ahead.
06:14No, so what what according to you explains that the fact that India has been penalized 25 percent for these Russian oil purchases.
06:26Do you believe that's a red herring?
06:28Do you believe that that is something that was in India's interest to to import oil from Russia at cheap prices?
06:35The Americans, Navarro and others are calling it profiteering.
06:39What's your own view?
06:40Should countries have the sovereign right to decide on these issues?
06:45Or was that where perhaps India misread what the United States and the Trump administration intended to do?
06:51I think we are beyond issues of fairness, sovereignty, et cetera.
06:59We are talking about a situation where it is a power play.
07:03But it's not just a simple power play driven by the exigencies of the moment.
07:08It's also what goes on in the American president's mind.
07:15And that is, you know, a complex set of issues which everyone is trying to divine.
07:23What clearly seems to have happened is at some point the president has decided that India is, you know, a country which is not playing by the rules that he says and needs to be singled out.
07:43Navarro would not write in the Financial Times without permission.
07:48And he has been permissioned.
07:50The point, however, is that, you know, it is an exercise of power.
07:57There's no point talking about fairness, this, that.
08:00You know, yes, we do have the right to buy oil from whoever we want.
08:06But if there is a country which is applying pressure on us, weaponizing tariffs, as you've said, we have to ask ourselves how much we benefit from buying this oil.
08:19Who benefits in India?
08:21After all, there are refiners who are making excess profits.
08:24Do they still make those excess profits?
08:27Should we take some of those excess profits and benefit some of the exporters who are being hurt by the fact that they're buying oil from Russia?
08:37I mean, all these are questions that arise.
08:40I think fairness, we can talk till the cows come home about fairness.
08:43But that's not the issue at play here.
08:50It's interesting the way you're putting it, because you've got China, on the other hand, which continues to be the largest importer of Russian oil.
08:58China is not being penalized and India is, but you're making an interesting point there, suggesting that the profiteering of Indian corporates through refining oils, reliance and others,
09:11while now exporters, small exporters of shrimps, gems and jewelry and others take the hit.
09:17Do you believe, therefore, that there needs to be a complete rethink on this policy now?
09:22I think it's worth considering how much we benefit from it and how much we are losing.
09:29And again, I think insisting on sovereignty, et cetera, is fine from the perspective of our rights.
09:39But at this point, it's a real power play.
09:42And we need to ask who's benefiting from this in the country, who's hurting?
09:46And on net, is the country benefiting?
09:48The price of Russian oil today is not that different from the market price of oil.
09:54Remember, we were importing only 2% from Russia before the sanctions were applied on Russia and it became convenient for us to buy Russian oil, as many have said, with the connivance of the Americans.
10:07Now that the Americans have turned, I think it's worth asking, how much does this benefit us and who is it going to?
10:15And do we need to continue this or can we quietly shut down this and move towards buying oil on the market?
10:24If it doesn't cost us that much, while it costs us enormous amounts in tariffs, it is certainly a policy question worth asking.
10:32Again, I'm not in any doubt about the sovereignty question, but the policy question can be quite different.
10:39Yes, but there will be those listening to you, Dr. Rajan, you emphasize the word, we quietly reduce our dependence on Russian oil, but can we do it quietly in this environment?
10:52It will be seen as India succumbing to political pressure.
10:55So it's not just an economic question.
10:57It's also now a political question, obviously, the power play that you're talking about.
11:02I think the question is more easily resolved if we ask ourselves, who's paying the price for this purchase and who's getting the benefits?
11:12And if we equalize by taking from those who are benefiting to giving those who are paying the price, maybe that itself will reduce the incentive to go purchasing this Russian oil.
11:24I mean, let's face it, there is a cost being paid today for buying Russian oil.
11:29There's a benefit from it.
11:30And we need to ask ourselves as a country how this is playing out.
11:38Let's turn then to the impact that it's had.
11:40The immediate impact has been on exporters.
11:43And there is a sense that this also, while exporters are taking a hit, textiles, shrimps, leather,
11:52there is also a belief that this could be an opportunity, A, to diversify our export basket, look well beyond America.
11:59There are others who believe this is an opportunity to come closer to BRICS, to China, to Russia, carve out new trade alliances.
12:07What's your sense?
12:08Is there an opportunity in this crisis that looms over us?
12:13I think there is, you know, a wake-up call.
12:18We should not be dependent on anybody to a large extent, right?
12:23And that goes for China, that goes for Russia, that goes for the United States.
12:28Trade has been weaponized.
12:30It's no longer according to WTO rules.
12:34Similarly, investment will be weaponized.
12:37Finance will be weaponized.
12:38So I think the prime minister is right in saying, for example, in rare earths, we should look to whether we can be held up
12:46and what our alternative sources of supply are, including domestic ones.
12:50But we should do this for every commodity, both the ones that we're, every good that we're exporting,
12:58but also goods that we're importing to see our vulnerabilities.
13:01And plan ahead to ensure our vulnerabilities are reduced.
13:05Yes, we will have some friends, but make sure there are multiple friends who can supply us,
13:12rather than being dependent on one friend who might turn.
13:15And I would say, you know, this also means that we can work with traditional adversaries
13:23or countries that haven't proved reliable in the past, but don't be too dependent on anyone.
13:31So that would presumably include China, because till a few months ago, we were talking about India
13:41becoming part of a China plus one strategy as an alternative for a global supply chain
13:49that we could compete with the Chinese.
13:51Are we now saying that this may well be an opportunity rather than compete to actually collaborate
13:55with the Chinese to see ourselves as part of some kind of a new trade axis
14:00if the Americans are going to, as we are saying, repeatedly weaponize tariffs against us?
14:06I think tariffs can be weaponized by anybody.
14:09So I would say let us form whatever relationships make sense,
14:14but don't be dependent on any one relationship.
14:19By all means, work with the Chinese, invite Chinese investment and get them to share some
14:25of their technology with us, because there's a lot to be learned from the Chinese.
14:29But make sure that you're not dependent on them, that you have alternatives,
14:33and those alternatives can be strengthened in times when the Chinese and you don't get along.
14:40I think this is a version of real politic, which we really need to think carefully about in every area.
14:49We have to make sure we are reasonably diversified, because as we become stronger as an economy,
14:56more and more countries will become wary of us.
15:00And it is really important at that point that we have multiple alternatives,
15:05including, I wouldn't say entirely, but including some self-dependence.
15:11But, you know, you used the word self-dependence.
15:18In the last few days, a lot of talk about Make in India, about strengthening our Swadeshi spirit, Swadeshi 2.0.
15:25Now, in the past, this government in particular has been accused of being excessively protectionist,
15:30the Modi government, and trying to push Make in India, but not fully succeeding in that.
15:34Do you believe that that is the direction to go in?
15:38Or is this an opportunity, in a way, to break some of those protectionist barriers,
15:41to open ourselves much more to the world, and compete by just improving the ease of doing business in this country?
15:52This provides, much like 1991 did, strangely enough, an opportunity to reform Indian businesses as well,
15:59make them more competitive.
16:00You know my predilection here.
16:05It is for the latter.
16:06It is an opportunity for us to open up, become members of various supply chains,
16:14not just the ones that run into the U.S., but also across the world.
16:19Japan can be a good partner in many new activities.
16:23Of course, Japanese firms have invested tremendously in India.
16:26We need to also create more opportunities for our own firms, right?
16:34And that means doing all the reforms we've talked about.
16:37GST reforms are just one step.
16:40But the ease of doing business is something we've talked about a long time.
16:45It has to move from the drawing board to actual implementation.
16:48Our business people have to feel that doing business is actually easier rather than it's just some numbers in some charts that the finance ministry puts up.
17:00So I think this requires real work.
17:02I mean, remember, two budgets ago, one and a half budgets ago, we got the announcement that there'd be a committee which would ease doing business.
17:10Well, what has it actually proposed?
17:12Why is it that we're not seeing more of those proposals actually make their way through the central government, but also the state government?
17:20I think I'm exactly on the same page as you are when I say this is an opportunity for significant reforms, enhancing the pace of growth, enhancing the ease of doing business and enhancing the level playing field in India for our small and medium, even large businesses to compete with each other, generate that growth.
17:42You know, in conclusion, Dr. Rajan, I recall speaking to you a couple of months ago.
17:51At that time, there was a relative uncertainty over what impact tariffs would have on growth rates across the world.
17:57There was talk of America slipping into a recession.
18:00That talk is still there of a third of the American economy slipping into recession.
18:05There is talk now of tariffs having some kind of an impact on some of India's growth projections.
18:11What's your sense?
18:12Are we heading for uncertain times and possibly a U.S. recession?
18:18How do you see it?
18:19Because Donald Trump seems to believe, don't worry, be happy.
18:24I think the consequences of all the policy changes that have been made in the first half of this year will show up in the second half.
18:34Almost surely, we will see higher inflation in the United States.
18:38Almost surely, we will see slower growth.
18:42And of course, the jury is still out on what we'll see on interest rates because the Fed is being pummeled right now through a variety of pressures from the administration.
18:52But also, the Fed is very wary of what's going to happen in the labor market.
18:56But broadly, I think the consensus, which I don't disagree with, is higher inflation, lower growth in the United States in the rest of the year.
19:06Now, what matters is how this affects the policies that the administration is putting out.
19:14Right now, it seems as if there is no downside to these policies, and it's all upside.
19:20More revenues being generated from the tariffs that the administration has applied.
19:26And as yet, no significant slowdown in growth.
19:30Now, we have to wait and see if what economists predict actually comes out.
19:36The U.S. administration is discounting what the economists predict and say it'll be wonderful.
19:44Let's see.
19:44In conclusion, net-net, what would you say, therefore, should India's approach be in the near term?
19:56Is it to be cautious, wait and watch?
19:58Because who knows, Donald Trump may get up from the right side of the bed tomorrow and suddenly decide that he wants to again upturn U.S. policy.
20:06So, should we be cautious, wait and watch?
20:07Or should we respond in anger in some form and retaliate?
20:11Is it in our best interest to just wait this out over the next few months?
20:17I think it is best to keep negotiating, to see how we can, you know, rectify the situation.
20:27I think 50% tariffs is in neither country's interest.
20:31We should certainly enlist U.S. friends, including, for example, shrimp importers, who are seeing their costs go up.
20:40Get them to also talk to the administration.
20:44I think it is quite important to see that we somehow get to the year of the president.
20:50We have a new ambassador for the United States who's a friend of the president.
20:54Talk to him also.
20:55But I think broadly, try and rectify the situation.
20:58And I think it's important here not to make a situation worse by, you know, reacting in anger.
21:08I think our foreign establishment can do the right, can follow the right approach, which many countries have, of trying to work with the administration to rectify issues.
21:20But I think, as you said, it is also a wake-up call for us.
21:25Let us not become overly dependent on any single country.
21:29Let us ensure we're part of the global supply chains across the world.
21:34Let us look east.
21:35Let us look to Europe.
21:36Let us look to Africa, including what we're already doing with the U.S.
21:43and let us unleash those reforms, which we absolutely need to do in India to get to that eight, eight and a half percent growth, which we need to employ our youth.
21:53That is something we've been talking about for a long time.
21:56This may be the wake-up call to get us to do that.
21:58Dr. Raghuram Rajan, for perhaps giving us a wake-up call, they're all the way there from Chicago.
22:10Always a pleasure talking to you.
22:12Thank you so much for joining me here today on the news today.
22:15Thanks very much.
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