A defining test looms for India

SEVEN YEARS have passed since Narendra Modi last set foot in China. The clock resets on August 31st, when India’s prime minister turns up in Tianjin, a port city about two hours from Beijing. Mr Modi will attend a meeting of the Shanghai Co-operation Organisation (SCO), a Eurasian security outfit whose members include Russia and Iran; there he is expected to meet Xi Jinping, China’s president. The trip is a striking example of the improving ties between India and China, which entered a deep freeze in 2020 following a border clash. But Mr Modi’s mind will also be on his country’s bust-up with America and how India should respond.

In just a few months Donald Trump, America’s president, has found two ways to humiliate India’s government: first, by appearing to side with Pakistan, an old adversary; second, by whacking India’s exports with extortionate tariffs. The falling out between America and India has prompted the emerging economic giant to think deeply about its present course.

Mr Trump has vexed plenty of America’s friends. To understand why the fracas with India risks having extra impact, it helps to understand the trajectory the world’s most-populous country had, until recently, been on. In the wake of its independence from Britain, India determined that it would never fully ally with any one great power. It still prides itself on remaining “multi-aligned” in world affairs; it declines to enter into formal treaty alliances. But it has nonetheless tilted backwards and forwards between blocs.

For the past 25 years, almost all India’s tilting has been towards the West. In 2001 America lifted sanctions it had imposed on India because of its nuclear-weapons programme; in 2005 it began negotiating a generous nuclear-co-operation deal, which it signed in 2008. Nine years ago America made India a “major defence partner”, a designation that gives it access to many American goodies, such as advanced defence technologies, without having to become a full ally. That reflected a shared interest in containing Chinese power.

True, the two countries have often voted in opposing camps at the UN, when it comes to matters such as wars and sanctions. But until a few months ago, decades of diplomacy seemed to have persuaded most Indians to see America as a reliable underwriter of their country’s rise. That is no longer so true. Sudden reversals appear to have vindicated sceptics who had warned that India was losing its bearings by drifting too deeply into America’s sphere. Even those who have engaged in the diplomatic legwork themselves despair over the direction of travel. Navtej Sarna, a former ambassador to America, says of Mr Trump: “We cannot just blindly be going along with someone who does not know what he is going to say tomorrow.”

When in April Mr Trump first threatened new tariffs on almost all America’s trading partners, it was thought India might be among the first to strike a deal. But the Trump administration appears to have badly misjudged India’s red lines, particularly its willingness to open its economy to foreign agriculture firms. In July America’s president said talks had collapsed and whacked Indian goods with a 25% tariff, even as he let most of India’s neighbours off with lower rates. Then, out of the blue, he added an additional 25%, ostensibly to punish India for buying Russian oil; that penalty went into force on August 27th. In a matter of weeks India has gone from being one of the Asian countries least hit by Mr Trump’s blitz to facing some of the world’s highest tariffs.

The immediate impact of this seem manageable for India. It relies less on goods exports than most other Asian countries; it earns the equivalent of only 11% of its GDP from selling goods to foreigners, compared with 85% in the case of Vietnam. Some large and fast-growing categories of exports, such as smartphones and pharmaceuticals, are (for the moment) exempt from Mr Trump’s new tariffs. In the coming months India’s economy will be “stirred, but not shaken” by the tariff increase, reckons Ajay Srivastava of the Global Trade Research Initiative, a think-tank in Delhi.

Yet high tariffs bring into question India’s long-term plans for driving growth. The government has long hoped to boost manufacturing. This ambition relies somewhat on keeping access to rich American consumers; it also means persuading multinationals to shift some of their factories to India from China. Mr Srivastava notes that if India gets stuck with tariffs that are higher than those imposed on China’s other competitors, such as Vietnam or Bangladesh, hopes of being an alternative base to China are “dead”. Even if all the tariffs go away, the idea that India can offer factories shelter from shifting geopolitics has just been hit for six.

Lately, Indians have felt inclined to start wargaming nightmare scenarios, in which escalation of the trade war starts putting key pillars of India’s economy at risk. Indian exports of services, such as software development, are growing much faster than sales of goods. These have not yet been drawn into the trade tussle, but there is no guarantee of that continuing. America is probably the largest provider of foreign investment into India, once American money that gets routed through Singapore and Mauritius is included; any disruption of that could cause deep pain. Big American companies are increasingly setting up “global capability centres” in India, which they staff with Indians skilled in fields such as coding and finance. That industry made $65bn last year, with projections of around $100bn by 2030.

Alongside the trade frictions is a huge falling-out on defence. For years India has accused Pakistan of tolerating, and in some cases abetting, jihadists who launch terrorist attacks from its soil. For years America has told India that it shares these concerns. But the consensus seemed to crack during a brief conflict waged between India and Pakistan in May, sparked after terrorists murdered two dozen people in Indian-administered Kashmir. Initially America said India could take care of the situation itself. Then it made a U-turn, calling for “both parties” to stop launching missiles at each other. That made India feel as if it had been labelled an aggressor.

Indian anger grew even hotter when Mr Trump claimed to have struck a peace deal by threatening both sides with an American trade embargo. The American president then offered to mediate over the hotly contested issue of Kashmir. For decades India has furiously resisted any outside effort to meddle in its disputes with Pakistan. It said it stood down only because its goals had been achieved. Mr Trump, who dislikes being contradicted, has been doubling down on his claims to have brought peace. Around Delhi, analysts are keeping count of how many times he has repeated this boast; the number now sits above 40.

Worse, Mr Trump now appears to side more firmly with the Pakistanis (who say they have nominated him for a Nobel peace prize). That has forced India’s military planners to question long-held assumptions about how any future conflict might go. In June Mr Trump invited Pakistan’s army chief and de facto leader, Field-Marshal Asim Munir, to have lunch with him in the White House—a rare honour for any foreign soldier. Mr Trump has announced that America plans to help Pakistan exploit oil and mineral reserves, and gloated that “one day” India might have to buy energy from its neighbour.

American-Indian defence ties will be hurt by this bust up. Over the past four years Russia has supplied 36% of all the arms India has imported. That is much less than two decades ago—in part because India worries that Russian support might be withdrawn if it finds itself at war with China. India is also insecure about the quality of its kit (both the home-made and the foreign-bought). China is selling Pakistan advanced weaponry; during the conflict in May, Pakistan is thought to have shot down five Indian fighters using Chinese-made jets. India needs to keep up.

Until now, tilting closer to America on military matters had seemed a safe bet. The two sides are supposed to be tightening co-operation through their involvement in the Quad, a security group also comprising Australia and Japan. This year America and India are due to sign an overarching defence “framework” governing military ties over the next decade, which it is assumed would lead to more joint exercises and grant India access to the snazziest gear. They are also putting the finishing touches to a deal, announced in 2023, for America to help India produce jet engines for fighter planes. This kind of co-operation between the two countries was a priority under Joe Biden’s administration; now the direction of travel is less clear.

Where will things go next? In Delhi there is some hope that Mr Trump’s ire with India may prove transient. If he starts making satisfactory progress in his peace talks with Russia, one reason to punish India for buying its oil might swiftly go away. The deals that America has signed with other Asian countries do not suggest that market access for agricultural firms really is a priority for his administration. But India’s sensitivity to lectures from foreigners means that trust between the two countries may have taken a lasting knock.

India’s response is likely to mix three different strategies. The first is to keep pushing for some kind of accommodation with Mr Trump. So far it has chosen not to retaliate against American tariffs, nor even much to criticise the president himself. America appeared to cancel trade talks scheduled for August 25th, but there is speculation that Mr Modi will try to meet America’s president on the sidelines of the UN General Assembly in September. “On issues of absolute national interest, I think that India will stand its ground,” says Nirupama Rao, a former Indian ambassador to America and foreign secretary. “Where India can afford to make concessions on the trade front, I think it will do that.”

Mr Trump looks helpfully susceptible to pledges of big investments; in recent months “many countries have gotten off the hook by promising things that they are never going to deliver”, reckons Joshua White of the Johns Hopkins School of Advanced International Studies. India could, if it is willing, somewhat step down its imports of Russian oil without incurring too much harm; this no longer trades at a great discount from less controversial crude. “What Mr Trump seems to want is the ability to say he has pushed India into something,” suggests Tanvi Madan of the Brookings Institution, an American think-tank. Though for India, granting that would not be easy.

India’s second strategy will be to draw closer to its other foreign friends. “We can make a virtue of being non-aligned now,” says Mr Sarna. India had already been trying to open up new markets. Since 2021 it has signed off half a dozen trade deals, including one with Britain. It soon hopes to ink one with the EU. For weaponry, it could depend more on France or Israel, which together already supply around 46% of its arms. On August 22nd India announced that a French firm will help it produce engines for homegrown fighter jets.

In recent weeks India appears to have been cementing its ties with Russia—the opposite of what Mr Trump appears to want. Since America levied its new tariffs, Mr Modi has twice spoken to his “friend” Vladimir Putin on the phone. On August 21st Subrahmanyam Jaishankar, India’s foreign minister, met Sergei Lavrov, his Russian counterpart, in Moscow; the pair said their countries were aiming to increase bilateral trade. Mr Putin will be attending the SCO summit in Tianjin, too. And there are plans for India’s government to host him in Delhi before the end of the year.

As seen by Mr Modi’s upcoming trip, relations between India and China are thawing, too. For years the countries exchanged no tourists whatsoever. It remains impossible to fly directly between Delhi and Beijing. But last year the two came to an understanding over their border dispute, which in October allowed Mr Modi and Mr Xi to shake hands on the sidelines of a summit in Russia.

Talks between the two countries are now moving to economic matters. Since the clashes in 2020, India has turned away much Chinese investment, and it has refused to grant visas to some Chinese executives. Yet during this period the amount India imports from China has only gone up. In the year to March India bought about $114bn-worth of goods from its northern neighbour, about 75% more than five years ago (only about $14bn-worth of stuff went the other way). Much of what it buys are inputs that are essential to Indian industry. Indian pharmaceutical companies rely on China for some 70% of precursor chemicals, for example. The smartphones that India exports require a lot of imported components.

Flows of money and know-how from China could bolster Indian industry, so that it could develop its own advanced-manufacturing sector and reduce reliance on imports. India’s government understands this, but had been loth to relax investment curbs while trade negotiations with Mr Trump were still going on. With those talks now in the doldrums, a slightly freer stance on China is back on the cards.

There is yet one more way in which India might respond to its humbling at the hands of Mr Trump. It could choose to accelerate long-needed changes at home that might help it resist such bullying down the line. “India’s fundamental response to Trump’s tariffs should be to unleash a fresh dose of economic reforms,” writes Nitin Pai of the Takshashila Institution, a think-tank in Bangalore. Ms Madan at Brookings agrees: “You can demand status; you can expect status; but the things that will give you status are growth and capabilities.”

Tackling domestic problems that weigh down the economy would help. India already makes a lot of its own weaponry and has ambitions to make much more; if it is determined to produce arms that compete with American or Chinese ones, it cannot afford to let a single rupee go to waste. For the moment India looks buffeted by decisions being made in foreign capitals. Yet this moment of reckoning could bring India closer to the days when no one will dare push it around. ■