India Prime Minister Narendra Modi. Picture: REUTERS
India Prime Minister Narendra Modi. Picture: REUTERS

Less than a month after he declared to the World Economic Forum (WEF) that India was open for business, Prime Minister Narendra Modi has raised import duties to their highest in three decades, setting the stage for a protracted trade war.

As he prepares to seek re-election in 2019, Modi has been ensnared by a global wave of protectionism that could threaten the foreign direct investments India needs to achieve double-digit growth. He has made it more expensive to import parts for cars, cameras, TVs, electricity meters and smartphones, risking trade disputes from allies such as the US and Germany to rivals like China.

"India has taken a dramatic protectionist turn," Richard Rossow, an Indian policy expert at the Washington-based Center for Strategic and International Studies, wrote in a note. "The scale of India’s protectionist leap is surprising and likely to elicit a strong response from the US and other major trading partners."

President Donald Trump signaled tit-for-tat duties against India’s barriers on motorcycles, while the German ambassador to India, Martin Ney, questioned the decision to raise custom duty on the import of vehicle components. On Tuesday, the US commerce department said it was examining imports of welded pipes from India and five other countries.

All this could add up to bad news for India at the World Trade Organisation (WTO).

"This can escalate at the WTO," said Rahul Shukla, Delhi-based executive director at PwC. "If they really want to help local industry there’s so much more that could be done, and it’s true that industry needs help. But these are the highest barriers we have seen in a long while."

India’s move comes as it faces the widest trade deficit in more than four-and-a-half years and a resilient rupee. Data from the government on Thursday showed the trade gap in January was $16.3bn, the widest since May 2013. India’s yawning deficit with Asian powerhouse China is a matter of concern.

Indian imports from China have soared in the past few years, out pacing exports and leaving the local industry, especially the medium and small sectors, gasping for survival. And exports from the $2.3-trillion economy have slowed at a time when the global economy is ticking higher.

Bloomberg