While the 50 per cent US tariff on Indian exports is disheartening, it is crucial to view the matter in its proper perspective. Exports are important to our growth — the export-import differential is a component of the GDP, and it begets the forex so essential to pay for our imports, especially for oil, of which we import 90 per cent of our requirements. The adequacy of forex reserves is often judged by how many months of essential imports they can cover, with twelve considered optimal. However, accumulating foreign currency is not costless: conversion of foreign currency into rupees expands liquidity without a parallel rise in output, causing inflation.
In June 1991, our forex reserves dipped below $1 billion, worth just three weeks of imports. It forced us to change. Since then, we have traversed a long way; today, our reserves are touching $700 billion, almost matching our annual import bill for goods ($720 billion in FY2025). While our trade deficit was $283 billion, our current account deficit, which also includes trade in services and transfer payments, was only $94 billion, and our overall balance of payments, which includes capital transactions, showed a deficit of only $5 billion — in fact the forex reserves increased by $22 billion during FY2025 from net service exports and remittances which together brought in $325 billion, more than offsetting the trade deficit.
With the USA, we had a trade surplus of $41 billion, while the invisibles remained more or less balanced. Even if this entire surplus is wiped out by the enhanced tariffs, it will not spell doom for India’s economy or its external account. Yes, it will cause many job losses in important export sectors like apparel, gems, and shrimps, which must be addressed.
Further, with India’s rating upgrade to BBB by S&P and inclusion in the JP Morgan and Bloomberg emerging market bond indices, India now has cheaper access to foreign capital, in stark contrast to 1991.
Our export basket is also highly diversified — they do not depend on any single country. Besides trade, they are also powered by services, of which India is a world leader.
Our growth is not export-driven — over 70 per cent of it comes from domestic consumption. The present crisis rather gives us a chance to self-correct, as in 1991, by implementing path-breaking reforms. The Government has already taken the first important step by streamlining the GST. With only 2.8 per cent of the global manufacturing share, India has a huge scope to scale up its manufacturing base to raise its share in GDP significantly from the current 17-18 per cent — China’s share is over 27 per cent. The strategy requires a fundamental change: transitioning from low-value operations like assembling imported components to those with high value, and modernising production methods, such as the textile sector, with technology and AI. Once our products become globally competitive to reduce our import dependence, it does not matter whether they are sold inside or outside the country.
To weather the tariff storm, we need more Atmanirbharta, whose main pillar now is the Production Linked Incentives (PLI), launched in 2020 across 14 critical sectors to boost domestic manufacturing, reduce imports, and promote exports. While successes are visible in electronics, especially smartphones, pharma products, automobiles, including EVs, and renewables, other sectors like textiles, steel, etc., have lagged far behind.
The Make in India initiative, launched in 2014 to transform India into a global manufacturing hub, now spans 27 key sectors, including automobiles, textiles, defence, electronics, aviation, etc. It has led to policy reforms (liberalised FDI, faster clearances, improved ease of doing business), infrastructure development (industrial corridors, smart cities), and skilling (Skill India, Startup India) to transform India into an attractive investment destination and almost double the FDI inflows to $81 billion.
But structural challenges persist. Logistics costs remain a major hurdle, estimated at 13-14 per cent of GDP compared to 8-9 per cent in China, and must be brought down through improved multimodal transport, freight corridors, and enhanced port capacity. Power tariffs for industries are also among the highest in Asia, demanding rationalisation of cross-subsidies.
Along with simple and stable tax and tariff regimes, we also need labour reforms. The four labour codes passed in 2020, potential game changers, remain unimplemented. Meanwhile, AI is reshaping job markets, but engineering education and skill systems are yet to align with the changing landscape, making deeper industry-academic collaboration imperative. Self-reliance is not a retreat from globalisation, but a strategy to engage with the world from a position of strength.
The writer is former Director General at the Office of CAG of India and is currently a Professor at the Arun Jaitley National Institute of Financial Management