Protectionism and India: Its Implications & Opportunities

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The global economic landscape is witnessing a significant shift as major economies, particularly led by the United States, increasingly embrace protectionist trade policies. This new era is characterised by rising tariffs, unreasonable trade restrictions, and incentives for domestic manufacturing, measures that represent a complete retreat from the post-1990s era of globalisation.
India, as a major economy in its relationship with the world, especially with the United States, finds itself at a critical juncture. The challenge lies in navigating the protectionist headwinds without compromising its export ambitions or economic growth trajectory.

Protectionism in the Contemporary Context

Protectionism refers to economic policies aimed at restricting imports and boosting domestic industries through tariffs, quotas, subsidies, regulatory barriers, etc.
It has traditionally been associated with developing economies. Still, it is now being actively pursued by developed countries, especially after the COVID-19 pandemic and amid geopolitical shifts like the US- China competition for hegemony.

Recent trends include

The United States’ imposition of reciprocal tariffs and review of trade relations with almost every major country in the world;
EU and US moves towards industrial policy subsidies (E.g., the US’s Inflation Reduction Act).
Friendshoring and nearshoring strategies to realign global supply chains.

India’s Trade Profile: A Snapshot

Export Dependence

Exports account for around 21.85% of India’s GDP (2023).
Key exports include petroleum products, pharmaceuticals, textiles, gems & jewellery, machinery,, IT services, organic and inorganic chemicals, dairy products, etc.
India is heavily integrated with global value chains (GVCs) in specific sectors like auto components, electronics, Information Technology, etc.

Trade Surplus with the US

From 2021-22 to 2023-24, the U.S. was India’s largest trading partner. The U.S. accounts for about 18% of India’s total goods exports, 6.22% in imports, and 10.73% in bilateral trade.
India had a trade surplus of $35.32 billion in goods in 2023-24.
In 2024, India’s main exports to the US included drug formulations and biologicals ($8.1 billion), telecom instruments ($6.5 billion), precious and semi-precious stones ($5.3 billion), petroleum products ($4.1 billion), gold and other precious metal jewellery ($3.2 billion), ready-made garments of cotton, including accessories ($2.8 billion), and products of iron and steel ($2.7 billion).

Trade Deficit with Other Regions

Despite the US surplus, India faces a significant overall trade deficit, especially with China ($85.1 billion).

Implications of Protectionist Measures on India’s Trade Dynamics

Threat to Export Competitiveness

Protectionist tariffs raise the cost of Indian goods in foreign markets, eroding their competitiveness. For example:

Higher tariffs on Indian steel or aluminum exports to the US is expected to directly hurt the industries.
Protectionist non-tariff barriers (like limits, quotas, stricter standards, etc.) may make compliance more expensive for Indian MSMEs.

Disruption of GVCs

India is increasingly trying to integrate into GVCs to move up the value chain. However:

Trade restrictions may prompt MNCs to reconfigure supply chains from efficiency to security.
This could limit India’s role in advanced manufacturing or delay the relocation of industries from China to India.

Reduced Market Access and Trade Diversion

Protectionist barriers reduce the ease of access to developed markets, particularly for labour-intensive exports. For example:

Textiles and apparel may face competition from countries with preferential access.
Trade diversion can also hurt if new trade deals exclude India.

Impact on Services Trade

Protectionism isn’t limited to goods. The services sector, especially IT and professional services, is particularly vulnerable to:

Visa restrictions, deportations, and onshoring of jobs in the US.
Regulatory pressures under the guise of data protection or digital sovereignty.

Strategic Risk of Overdependence on Few Markets

India’s high export concentration to a few countries like the US and UAE exposes it to unilateral trade decisions. For example, A shift in US policy (e.g., ending Gneralised System of Preferences (GSP) benefits) has direct consequences for Indian exporters.

Slower Growth of Export-Led Sectors

India’s push for industrialisation (e.g., electronics, semiconductors, etc.) heavily relies on global markets. If access, in such a case, is constrained, then:

Industrial growth and job creation, especially for the youth, could be hampered.
Investments under Make in India and Production-Linked Incentive (PLI) schemes may underperform.

Diminished Space for Trade Negotiations

Protectionist powers exert over-leverage in trade negotiations. In such a scenario:

India may be forced into asymmetrical agreements or face delayed benefits from Free Trade Agreements (FTAs).
Strategic autonomy in trade policy could be compromised.

Opportunities Arising from Protectionist Realignments

Despite the overbearing risks, protectionism also creates certain openings for India:

Relocation of Global Supply Chains: India can position itself as a trusted partner in China+1 strategies. Electronics, pharmaceuticals, auto components, etc., are areas where India can ramp up its potential to be an unrivaled world leader.
Trade Diversion Benefits: The US imposing exorbitant tariffs on Chinese goods as compared to Indian manufacturers may help the latter to capture part of that market. India’s textile and chemical sectors have already witnessed such opportunities.
Strategic Alliances and Bilateralism: With multilateralism weakening, India can sustain high-impact bilateral FTAs (e.g., with UAE, Australia, UK, etc.).
Scope for Building Self-Reliance: Protectionist disruptions can be a positive trigger to develop full-scale domestic capacities in critical sectors like semiconductors, defence, clean energy, etc.

Strategic Policy Responses for India

To counter the challenges presented by the latest wave of protectionism and leverage the opportunities, India must adopt a multi-pronged strategy, which will be hinged on:

Diversification of Export Markets

Need for it: Reduce dependence on the US and EU.
Action to be taken: Deepen trade and investment ties with ASEAN, Africa, Latin America, and Central Asia (essentially the Global South).
Example: India- Africa trade has grown substantially (having already crossed $100 billion) but remains largely underutilised.

Revamping Trade Agreements and FTAs

Need: Ensure access to key markets and gain preferential treatment.
Action: Fast-track comprehensive FTAs with EU, UK, Canada, etc; explore joining regional frameworks like RCEP or CPTPP with appropriate safeguards.
Balance: Combine offensive interests (pharma, services, etc.) with defensive concerns (agriculture, dairy, etc.).

Enhancing Domestic Competitiveness

Need: Boost cost competitiveness to overcome tariff barriers.
Action: Infrastructure push via Gati Shakti and logistics corridors. Rationalise input tariffs to make production cheaper and encourage ease of doing business and reduce compliance burden.
Support for MSMEs: Technology upgradation, access to export finance, quality certification, etc. are the first steps to be taken in the direction.

Strengthening Role in GVCs

Need: Attract industries relocating from China.
Action: Continue PLI schemes with better implementation and plug-and-play infrastructure, and establish export hubs and clusters. Improve port connectivity and customs efficiency.

Strategic Use of Industrial Policy

Need: Develop self-reliance in sensitive sectors.
Action: Incentivise R&D and innovation, develop ecosystems in electronics, semiconductors, EVs, and green technologies, and promote ‘Make in India for the World’.

Calibrated Protectionism

Need: Shield domestic industry while preparing it for competition.
Action: Use temporary tariffs and non-tariff barriers for infant industries and adopt WTO-compliant standards to manage imports.

Diplomacy and Trade Negotiation Capacity

Need: Assert India’s interests in bilateral and multilateral fora with force.
Action: Build alliances with Global South to reform WTO rules, enhance negotiating capacity within the respective ministries, and engage in plurilateral forums like IPEF, QUAD, BRICS, etc., for better and more transparent trade cooperation.

Focus on Services and Digital Trade

Need: Protect India’s global IT and professional services.
Action: Lobby for mobility and data access in trade deals, position India as a digital public infrastructure leader and build cross-border digital cooperation with friendly nations.

Conclusion

Protectionist trade policies have direct implications for India’s export-oriented growth strategy. As major economies, the U.S. in particular, turn inward, India must resist the temptation of reactionary protectionism and instead adopt a calibrated approach that balances domestic resilience with global competitiveness. A long-term vision anchored in Atmanirbhar Bharat, interpreted as self-reliance with international integration, can empower India not only to withstand protectionist pressures but to emerge as a key pillar of the future global trading system.

Reference: Livemint

PMF IAS Pathfinder for Mains – Question 137

Q. Analyse the implications of protectionist measures on India’s trade dynamics, particularly in light of its export dependence and trade surplus. Suggest a strategic policy response for India. (15 Marks) (250 Words)

Approach

Introduction: Define protectionism and its global resurgence.
Body: Briefly explain India’s export profile and elaborate on the implications of protectionism on India’s trade and the opportunities that it presents. Follow it up with a way forward in the scenario.
Conclusion: Emphasise a balanced trade strategy that is resilient, competitive, and globally integrated and end with a forward-looking statement about India’s trade vision in a de-globalising world.