Duvvuri Subbarao, the former Reserve Bank of India (RBI) governor who successfully steered India through the tumultuous 2008 financial crisis, has issued a warning regarding the potential economic impact of escalating trade tensions involving the United States and China. Subbarao's concerns revolve around the possibility of a double whammy effect on the Indian economy stemming from proposed US tariffs on Indian exports and potential retaliatory dumping of goods by China in the Indian market.
Specifically, Subbarao highlighted the threat of a potential 50% tariff on Indian exports to the US, proposed by Donald Trump, which he believes could significantly impact India's GDP growth, potentially slashing it by 20 to 50 basis points. He also cautioned that such a move could exacerbate India's existing jobless growth crisis. In an interview with The Indian Express, Subbarao stated that this tariff threat, particularly targeting labor-intensive sectors like textiles, footwear, and gems and jewellery, endangers exports worth approximately 2% of India's GDP. This translates to a staggering ₹7,00,00,00,00,000 (nearly $79 billion) worth of exports at risk. Subbarao anticipates that such tariffs would erode profit margins, divert orders, lead to job losses, and force plant downsizing.
Beyond the direct impact of US tariffs, Subbarao also flagged the risk of China's industrial overcapacity. With China facing its own tariff pressures from the US, there is a possibility that Chinese exporters might flood Indian markets with cheap goods to offload excess inventory. This "dumping" of Chinese goods could further squeeze India's manufacturing sector, undermining its competitiveness. Subbarao warned that India must consider the possibility of China compensating for their loss of US market share by dumping goods into Indian markets.
Subbarao cautioned against reputational risks from comments made by the U.S. President, which can be read as a signal of eroding geopolitical and economic leverage. He suggests that such comments can raise India's risk premium, dent investor sentiment and prompt portfolio reallocation, even without accompanying policy actions.
The former RBI governor also touched upon the broader implications of these trade tensions for India's long-term economic aspirations. He noted that the combined pressures from U.S. tariffs and Chinese dumping could weaken India's efforts to integrate into global value chains under the "China+1" strategy. Moreover, he pointed out that the distributional effects of these pressures would be regressive, exacerbating income inequality and placing further strain on India's already fragile formal employment landscape.
In light of these challenges, Subbarao emphasized the need for India to diversify its export markets, explore new export opportunities, improve domestic infrastructure to attract tourism, and pursue free trade agreements with other countries and trading blocs. He suggests FTAs with the EU and East Asian nations, or joining the CPTPP.
Subbarao, who served as the Governor of the Reserve Bank of India from 2008 to 2013, has vast experience in running the country as well as the economy. He is also the author of "Who Moved My Interest Rate?: Leading the Reserve Bank of India Through Five Turbulent Years", an in-depth account of his tenure as Governor of the Reserve Bank of India. More recently, in 2024, he published his autobiography "Just A Mercenary?: Notes from My Life and Career".
