The Unassuming Economist

This post by Prakash Loungani and Karan Bhasin first appeared in Business Standard:

The India-US trade agreement should be seen as a win for consumers and producers, with debates on protectionism and strategic autonomy often missing the economic trade-offs involved

The recently announced India–US trade deal has led to much confusion regarding the terms of the agreement and its implications for both consumers and producers. In February 2020, one of the authors had termed this as an eventuality given the complementarities of the two economies. Little did we imagine that the deal would take six more years. 

But all is well that ends well. As proponents of this deal, there is little suspense regarding our views on it. The deal is good — for both countries. However, as often happens, many are questioning the agreement and invoking passionate phrases such as “strategic autonomy” to challenge it. In what follows, we provide some insights into how the deal would benefit Indian consumers and producers and strengthen the economy.

Lastly, we discuss the issue of oil purchases, since that has become the primary yardstick used to judge whether India enjoys strategic autonomy. The idea behind this piece is to carefully examine trade and explain why we are at a critical moment in history, and why vested interests should not contaminate the discourse.

How do Indian consumers gain from freer trade?

Let us begin with a simple comparison of India pre-1991 and post-1991. India historically followed a highly protectionist trade regime that restricted access to the domestic market. Ambassador and Fiat cars were the only options available to Indian consumers. Ambassadors truly served as brand ambassadors of stasis — no innovation, no progress, the same car delivered year after year. Gradually allowing more players expanded consumer choice and lowered the cost of car ownership. The same story holds true for virtually all major sectors of the Indian economy.

Young India is aspirational, and consumers demand the best possible products at a given price point. Some of these may be European, others American. Protectionism in the form of tariffs is nothing but a tax on aspirations. We welcome the fact that the government has concluded trade agreements with many countries and has either withdrawn tariffs or significantly reduced them. In that regard, if India does offer lower tariffs for American goods, it effectively delivers a consumption tax cut for Indian consumers, who ultimately bear the burden of tariffs. Greater choice and stronger competition will help reduce prices, benefiting aspirational India the most.

Dry fruits from the US, for instance, attract a hefty tariff even though the US is India’s primary supplier. Our grandmothers often recommend having five soaked almonds every morning. Reducing these tariffs would surely make them happier. 

For decades, the Indian consumer has lived behind a ‘glass wall’. We could see the innovation, safety standards and nutritional variety available elsewhere, but our own trade policies made them untouchable. Protectionism turned global staples into luxury icons. By lowering these barriers, India is not just signing a trade deal; it is finally shattering that glass wall, allowing aspirational Indians to participate in global standards of living rather than merely observe them.

What about Indian producers?

Some now ask what happens to Indian businesses that must compete with US firms. Here too, the evidence favours trade. Most Indian businesses, especially micro, small and medium enterprises, stand to benefit from new opportunities through improved access to US markets. A zero per cent tariff on Indian goods was never realistic, as no country receives such treatment. The lowest achievable rate was around 18 per cent, slightly below that faced by India’s competitors. The deal delivers precisely this, reaffirming commitments to supply-chain diversification. 

India offers scale, manufacturing capacity and a large workforce, allowing firms to relocate or expand production here. Preferential access to the US market will naturally benefit Indian producers. The additional growth momentum created will also support firms focused primarily on domestic demand.

For over a decade, India has grappled with weak private investment. Successive governments have tried various measures to encourage capital expenditure. Protectionism, however, allowed firms to operate outdated plants without pressure to invest. The renewed need to compete and improve efficiency could lift private investment, generate employment and expand India’s middle class over the coming decade.

What about India’s strategic autonomy?

Having established that the agreement benefits consumers and producers, we turn to the question of strategic autonomy. Many have erroneously linked it to the purchase of oil from one country. 

Before the war in Europe, India’s energy basket looked very different. By 2020, the US had emerged as an important energy supplier. When oil prices spiked, India understandably sought cheaper alternatives. Strategic autonomy is not about buying oil from a particular country, but about sourcing energy at the most attractive prices. Over the past year, energy prices have moderated significantly, and India’s energy mix should reflect that reality.

Moreover, trade deals are always part of a broader package. With lower energy prices and reduced discounts, diversifying India’s energy mix carries little cost while delivering preferential access to one of the world’s largest markets. The economic arithmetic, here too, clearly favours the deal. 

Economics is about trade-offs, and true win-win outcomes are rare. The complementarities between the Indian and US economies make this agreement possible. These same complementarities led us in 2020 to believe such a deal was inevitable — only the timing was uncertain. Now that it is in place, it is worth recognising that both economies stand to gain substantially from deeper trade ties linking the world’s oldest and largest democracies.

(Prakash Loungani is Programme Director in the Master’s in Applied Economics at Johns Hopkins University. Karan Bhasin is a New York-based economist and Non-Resident Fellow at ORF America. They co-teach a course on economic growth at Johns Hopkins University.)

Johns Hopkins University offers an online Master of Science program in applied economics that typically takes students one to two years to complete.

The university scored well in our methodology primarily thanks to a high graduation rate (95%) and high median annual earnings among alumni 10 years after graduation ($87,555). Johns Hopkins also maintains the lowest student-to-faculty ratio (6-to-1) out of the 10 schools ranked here.

See the link here: https://www.forbes.com/advisor/education/science/best-online-masters-in-economics/

This is the second in a special series of posts in which I take stock of some of the main activities of my long 40-year career. In the first one, I shared some reflections on my profiles of famous economists. A convenient link to all my profiles and interviews can be found here.  In this post, I discuss the performance  to date of my 2019 book, “Confronting inequality: How Societies Can Achieve inclusive Growth” (Columbia University Press).

• The book was published in January 2019, just before the annual meeting of economists in Atlanta. the IMF did an impromptu book launch as part of the party that many institutions organize at the annual meetings. Later that month, thanks to Adam Posen, there was a major launch event at the Peterson Institute. The discussants were Heather Boushey (the link is to her excellent presentation) and Jason Furman. Jason’s thought-provoking  PowerPoint from the event is available too. Two other memorable presentations were at Florida State University and at the New School for Social Research, organized by Willi Semmler and featuring a discussion of the book by the great Dani Rodrik. For personal reasons, I then took a break from book launch events and only resumed them in 2020, when invited by James Foster of GW’s International Institute of Economic Policy. The book has nearly 150 citations on Google Scholar.
• In additional to the praise and recognition in these professional settings, it has been gratifying to get praise from lay readers on Goodreads and on Amazon. In 2024, I watched as the book climbed the ranks on Amazon , going all the way to #14 in the Income Inequality category.

• The book has been successful as a textbook (complemented by a more standard text like Jones and Vollrath) in courses on Economic Growth at a couple of institutions. And according to World Cat, more than 300 copies are sitting at institutional libraries around the world.

Handbook by Gaby Ramia, Zoe Irving, Elke Heins, Ricardo Velázquez Leyer:

“This compelling Handbook explores how social policies have been adapted and remodelled in response to transformations in work and employment in the twenty-first century. It outlines the history of the welfare-work relationship, assesses the current state of the global workforce and provides theoretical and practical analyses of the work-employment-social policy relationship.”

From a paper by Justina Joseph Jeyaraj, Shyue Chuan Chong, Mui Yin Chin, Lee Peng Foo:

“Youth unemployment remains a persistent global challenge, clouded by the uncertainties surrounding the expanding digital and gig economies. As governments now turn their attention to regulating the gig economy, the potential impact on youth unemployment is unclear. This study seeks to address this gap by investigating the optimal level of labour regulation that can harness the gig economy’s potential to alleviate youth unemployment, among countries from different geographical locations. Drawing from panel data from 79 countries between 2017 to 2021, the threshold of labour regulation that would mitigate youth unemployment was estimated using the Dynamic Panel Threshold Model (DPTM). The findings reveal that the gig economy’s benefits are maximised when countries achieve a specific threshold of labour regulation—53.5596 on a 100-point scale. This suggests that regulations should not be too stringent, as this can stifle job creation and limit opportunities for youth, leading to higher unemployment. Conversely, overly lenient regulations can lead to exploitation and deteriorating working conditions, which also contribute to unemployment. The policy implications include introducing moderate labour regulations mirroring traditional labour markets, improving cybersecurity and data protection, and creating co-working spaces to reduce social isolation. Additionally, transboundary labour regulations are also essential to safeguard gig workers.”