India's Economy at Risk: Expert Warns of Reputational Costs and Jobless Growth Problem

Strategic Insights -

Indian exports could face a sharp hit due to the US's increasing protectionism and tariffs on imports, warns former Reserve Bank of India Governor DUVVURI SUBBARAO. He estimates the potential growth hit could be 20-50 basis points in a year, depending on the extent of diversion and adjustment. Subbarao cautions that being labelled a "dead" economy by US President Donald Trump carries reputational costs, which can dent investor sentiment and prompt portfolio reallocation.

Key Takeaways:

  • India's exports to the US are at risk, with labour-intensive sectors such as textiles, footwear, gems & jewellery facing erosion of margins, orders diverted, jobs lost, and plants downsized.
  • The distributional impact of the trade policies will be regressive, widening income inequality and impairing India's China+1 ambition.
  • Indian exporters must absorb part of the shock through price renegotiation, market diversification, and make full use of duty-drawback and export credit schemes in the short run.
  • Over the medium to long term, exporters must move up the value chain, produce branded and design-rich goods, tighten compliance and traceability, cut lead times, and deepen domestic linkages to reduce input costs.
  • Investments in automation, skills, and productivity will be critical for making exports more competitive and robust.
  • The impact of trade tensions on India's GDP growth is uncertain, but it may lead to a growth hit of 20-50 basis points in a year.
  • Rising geopolitical tension and protectionism increase risk premia, tighten global liquidity, and raise the cost of foreign borrowing, which could impact capital flows and funding plans of corporates.
  • India's deep domestic financial system and growing rupee-denominated bond markets can cushion some of the impact of rising global volatility.
  • The biggest obstacles standing in the way of India becoming a $5 trillion economy are education & health deficits, productivity stagnation, and rising inequality and weak mass demand.

Statistics:

  • Indian exports to the US worth around 2 per cent of GDP are threatened by a 50 per cent tariff.
  • The potential growth hit due to the trade tensions could be 20-50 basis points in a year.
  • The distributional impact of the trade policies will be regressive, widening income inequality.
  • India's headlin GDP growth is robust, but employment growth, especially in the formal sector, lags behind.
  • Job creation barely matches labour-force expansion, and informal work remains dominant.

Sources:

  • The Indian Express
  • Contify.com
  • IE Online Media Services Pvt. Ltd.