Raghuram Rajan explains why Trump hiked tariffs and what India should do

Former Reserve Bank of India (RBI) governor Raghuram Rajan feels the United States’ decision to impose 50 per cent tariffs on India is a “wake-up” for the Narendra Modi government. He even said that the steep tariff rates indicated that the relationship between the two countries has “clearly broken down”.

The second 25 per cent of the tariff regime, which the Donald Trump administration decided to enforce to penalise India for buying oil from Russia, came into effect on Wednesday (August 27).

Speaking to India Today TV in an interview, the 62-year-old economist cautioned that India should not become “dependent on a single country to a large extent” and prescribed that, alongside diversifying its foreign trade, the country also needs to focus on reforms to achieve the level of growth required to support its youth.

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“This is a wake-up call. Let us not become dependent on any single country to a large extent. Let us look east, to Europe, to Africa, and continue with the US, but unleash reforms that will help us achieve the 8–8.5% growth needed to employ our youth,” Rajan said.

Trade, investment, finance weaponised: Rajan

Stressing trade, investment, and finance have been weaponised, the veteran said India was facing a disadvantage as the base tariffs have been decided at 25 per cent even when other countries in Asia are dealing with a lower rate.

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“The fact that the Indian tariffs have been set at 25, the base tariffs, even while other countries are much lower in Asia, makes India disadvantaged. So the relationship clearly has broken down,” Rajan, who has served as the governor of the central bank both under Prime Minister Modi and his predecessor Manmohan Singh between 2013 and 2016, said.

Rajan explains why Trump put high tariffs

Explaining why Trump decided to impose a harsh tariff regime on India, Rajan said, “I think he certainly believes that a current account deficit or trade deficit is evidence that other countries are taking advantage of the United States, rather than simply sending goods cheaply to the United States — which the US consumer actually benefits from.”

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The former RBI chief also said that Trump’s tariffs are more about power play than fairness. According to him, it could be a way for the US to use force when it doesn’t want to use its military power.

On India buying Russian oil

Rajan also suggested that India should assess the benefits of buying Russian oil against the losses incurred from the high tariffs. He said refiners are seeing excess profits while exporters are facing losses.

“If the benefit is not large, perhaps it is worth considering whether we should continue these purchases,” the economist said in the interview.