From academia to industry — renewed calls for India to transform into ‘a product nation’ amid US punitive tariff action
In June, Ford Motor Company — America’s second biggest carmaker — temporarily idled all its factories in the United States for well over three weeks due to a shortage of magnets containing rare earth minerals imported from China, after trade tensions precipitated a blockade by Beijing. China has since instituted a new approval process for exports of rare earths that has slowed supply lines, which impacted not just Ford, but automakers all over the world. The Donald Trump administration rushed in officials to meet with Chinese negotiators and strike an interim deal, in return for a restoration of supplies of rare earth magnets, and has subsequently been accommodative of Beijing’s point of view, despite the fact that China is only among a few countries that launched retaliatory action against US tariffs.
Two months on, India finds itself in a situation where it is now likely being used as a soft target to pressure Russia into ending the war – collateral damage in US President Donald Trump’s ambition to squeeze Russia’s crude exports and pressurise Moscow to the negotiating table for ending the Ukraine war. The problem for India is that unlike China, which has been able to weaponise trade by leveraging its stranglehold over critical processes and products, India simply does not hold the cards at this point in time to retaliate in a meaningful manner.
In a way, this has intensified a consensus that cuts across academia to industry, that going forward, India has to strive to transform into a ‘product nation’. And that the country needs to produce some things that it does better than others, if it has to be relevant in the global geopolitical scene.
The bigger the economy, chances are that a country would be taken more seriously by others, but the more strategic its products or service offerings, the greater is its strategic leverage. Just like only Taiwan can fabricate the most advanced chips in the world, or a company in the Netherlands can make the top-of-the-line ‘EUV’ lithography machines needed to etch the circuits on microchip, or it’s only companies in China that are the only ones that can make certain types of magnets, process rare earth minerals and put together high-end batteries or manufacture pharmaceutical ingredients.
“There is a growing consensus that India must transition from being primarily a service-driven economy to becoming a product nation — one that not only innovates but also manufactures and exports IP-driven solutions across sectors. To support this shift, India’s higher education ecosystem is being strategically realigned,” T G Sitharam, Chairman, AICTE said.
The Niti Aayog too has flagged the need for working strategically towards transitioning to a product nation, especially in the backdrop of the American tariff action. Principal Scientific Advisor to the Government of India Ajay Kumar Sood, in an earlier interaction with The Indian Express said that while there is now an increasing sensitivity in policy circles to put deep tech startups on an accelerated path, India has to aim to become a “product nation”.
“India is already very good at designing — nearly one in five of the world’s semiconductor design engineers, for instance, are here — but the country accounts for under 10 per cent of the global chip design facilities, and much of the designing is done for specifications offered by global companies… But what we need is that we should have designing capabilities (based) on our specifications, not on someone else’s specifications, which means some intellectual thinking has already (been done) somewhere else. We have to do it here… So that’s what will make our country a leading product nation,” Sood, who is also the Chairperson of the Prime Minister’s Science, Technology & Innovation Advisory Council and is a National Science Chair Professor at the Indian Institute of Science (IISc) Bangalore, said in an interaction in April.
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For this objective, India needs to think beyond manufacturing. “What do you need (to be) a ‘product nation’? Think about it. It’s not just manufacturing… Manufacturing, of course, is required, down the line, but it (manufacturing) is not the only thing, because then you will get into the middle income trap. Because the profits will go somewhere else,” Sood said. In sectors such as cell phone assembly and chip manufacturing, for instance, much of the profits in the value chain are before and after the manufacturing stage.
The evolving situation has also prompted deliberations on India’s place in the world. “Decades ago, India did not have a big economy, but we carried certain diplomatic heft, given we were seen as standing for certain ideals. Now, even as our economy has grown, we seem to be losing that diplomatic heft. That’s something worth pondering over,” a government official tracking the trade negotiations with the US said.
As David Woo, market analyst and former head of global interest Rates, Foreign Exchange, Emerging Market Fixed Income & Economics Research at Bank of America has argued, there is a compelling argument that the punitive tariff on India for importing Russian oil is part of the larger effort to force Russia to the negotiating table on Ukraine. Though Trump had prioritised the ending of the war in Ukraine, Russian President Vladimir Putin has not played along. According to Woo, who told CNBC earlier this month that squeezing oil revenues is the “cheapest and easiest way to weaken Russia”, and that pressuring China was off the table, India (its Russian oil imports) may have become an easy soft target to pressure Russia into ending the war. “India may well be collateral damage in Trump’s illusion of stitching together a grand bargain and claiming credit for ending the Ukraine war”.
For India, the problem is that the US is not just any country. It is the largest economy in the world and India’s largest market. The two alternatives before India are to either accept the tariffs, or retaliate in some measure. The Europeans were among the first of America’s trade partners who flagged an intent to retaliate, but they have since succumbed to pressure from Washington DC. The only ones who have retaliated against US tariffs and managed to get away with it are the Chinese, who were able to do that because they control aspects of trade that could have hit the US. Like the magnets impacting Ford Motor and other American carmakers.
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The problem for India, at this point in time, is that the country does not export anything to the US that is critical for that country, which is cutting edge or high tech, which is crucial for driving their technology sectors or part of their economy. What we export – garments, generic drugs, electronic components, cellphones – are all largely substitutable. There might be a cost to it that US consumers will have to bear, but that’s pretty much where the trade-off ends.
The call for transforming India into a product nation is even more relevant, given the current global context, the government official quoted earlier said.