As the Trump’s tariffs further escalated the tensions between the US and China, causing global repercussions, Arvind Virmani, senior economist and NITI Aayog member, in an exclusive interview with ET Digital, discusses the latest global trade developments, India’s strategy, and the implications of the ongoing US-China stand-off for the country. Edited excerpts:
The Economic Times Digital (ET Digital): How do you see the 90-day pause period in the context of the current US tariff developments? Can India leverage this period in some way?
Arvind Virmani (AV): In the 90-day period, we have certain tariffs on everybody and then differential tariffs, as far as I recall, only on China. So, if that is the position, the big issue right now is that importers in the US are looking for alternative sources for obvious reasons—if you have to pay a 50-200% tariff on imports from China, it is just not viable for any importer in the US. Therefore, they are looking at other countries for goods, including India. I have heard of categories in consumer durables, textiles, toys, and similar items. It sounds plausible that Indian suppliers are being looked at for such items. I know somebody who suddenly said, “Supply me with everything that you can make.” This is specifically for this period, given the current differential, as no one knows how the scenario will shape up later.
By and large, the whole range of simple goods can just be ramped up. For instance, if someone is at 70% or 80% capacity utilisation, they can step it up to 100% or 110% for 90 days and supply whatever is possible. So, everybody who has unutilised capacity will be trying to catch this market for the next 90 days, at least.
It is very clear that enquiries are coming in, and whatever the capacity utilisation, there will be an expected increase in exports of all kinds. So, even though there is huge uncertainty, exports will go up in certain items. We are not talking about traditional items here where we hold 50% or 80% of the market. It is more about the new items, where we do not export much and we are a small exporter, particularly in comparison to China in those categories. For instance, household items such as mixers, all kinds of textiles that we have not exported earlier, and definitely manmade fibres, as we are not a big exporter. We have come up in the toys category, but China still holds 80% of the market. So, it could be plastic toys… There are tricycles made of plastic; there is nothing very esoteric about it. So, it will be all such miscellaneous stuff which can be produced in this period.
ET Digital: How crucial is the proposed US-India Bilateral Trade Agreement (BTA) at this juncture?
AV: So, if we step back to the previous administration because of their domestic politics, issues with labour unions, etc., the US government has not undertaken any free trade agreements (FTAs) or BTAs for two decades. So, for the first time in decades, the US government is willing to make an FTA-type arrangement with another country. And we are very happy that they feel that this would be mutually beneficial with India. The basic idea of FTA is to use the complementarities because they are all developed countries. BTA and FTA will enhance these comparative advantages that will allow the trade to grow tremendously for mutual benefit. That is the essence of complementarity. Also, from an economist’s point of view, the essence of this complementarity means you can develop supply chains
That is where the complementarity comes in because the comparative advantage implies one can eliminate that 20%, or whatever the differential is, to make it competitive. That is the idea. When it is finally signed, I would expect a huge increase in anchor investors coming in.
ET Digital: What economic reforms does India need to better position itself in the context of such developments?
AV: There were three major thrusts in the Union Budget 2025-26. One was deregulation, the second was skilling and innovation, and the third was small and medium-sized enterprises (SMEs) as well as export competitiveness. We are already doing that, and obviously we should expedite all those aspects.
And there were one or two committees mentioned in the Budget for regulation. To my knowledge, they are all in operation. They are doing their work. So, the reforms are in process.
Why are we doing FTAs? Why do we have a PLI? It is all for the same objective: to speed up the growth of manufacturing—not just import substitution, but competitive import substitution. That means they must also be able to export, as exports measure competitiveness and show that the quality is appropriate for the global market. That is why exports are so important, not just to earn a little foreign exchange.
ET Digital: Given the US-China tensions, what consequences do you see for India’s trade? What strategy should we adopt?
AV: If we go back to 2018, there were four tranches of tariffs imposed by the US government, with increases on China occurring in four different months. And, what we know, imports of America from China have decreased, while imports from other countries, including India—one of the top three, as per a study—have increased.
What is happening now is partial decoupling, and this would be across the world. I had even said at that time that it would happen. But in the current context, the decoupling may be much stronger and deeper than I had anticipated at that time. The best example of that is what happened last time. India will be among the gainers if you just go by what has already happened. If we have a BTA, that will be even more certain.
As far as India’s trade is concerned amid the US-China stand-off, it is expected to accelerate that chain. And why India? It is simple demographics. There is no other country in the world right now that is going to have a larger share of the working-age population in the next 30 years. So, the developed countries have two alternatives: either they become more robotic or use this population. Actually, it will be a combination of both. Their working-age population in the next 30 years. So, the developed countries have two alternatives: either they become more robotic or use this population. Actually, it will be a combination of both. Their working-age population is going to decline dramatically in the next 20 or 30 years. So, the effect of that will be to accelerate this shift of supply chains towards India, in simple terms.
So, it will be a gain for India, but that does not mean it will come immediately. There will be more production, manufacturing, and jobs that will accrue to us over a long-term period.
ET Digital: How do you foresee this development panning out for India’s MSME sector? How can they be more equipped to handle the uncertainty?
AV: About 70%-80% of MSMEs are single-person organisations. So, only 30% of MSMEs are actually beyond that size or scale. For the very small MSMEs, there are schemes like PM Vishwakarma to improve the quality of their work. For bigger MSMEs, exports are critical; that is why it was mentioned in the Budget.
We have been trying to improve MSMEs for 50 years; it is a tough job. There are many aspects to it; one is skilling and the other is upgrading the quality of materials. What will turn the tide? It is hard to say. But maybe it will be something like this three-month opportunity, and there is a transformation.
We are trying to lay down the groundwork to make things happen for the MSME sector. It is still not finished. One still wants to do more tax reform, simplifying the Income Tax Act. It is all in process. Parliament has to approve it; rules are to be made. So, everything takes time. All these things are happening which will aid MSMEs to look at the economic opportunity. This will save them more time from filling out forms and focus on their core business instead.
Source Name : Economic Times