Mistreating ally like India a strategic blunder for US: Economist Andres Velasco

Describing the US tariff policy as "irrational, unpredictable, and illegal," economist and Dean of the School of Public Policy at the London School of Economics Andres Velasco argues that "mistreating" a democratic ally like India is a strategic blunder for Washington, given India's rising political and geopolitical weight.

"With a 50% tariff, India has been particularly mistreated. This is a strategic mistake for the United States, which will need India not only as a trading partner but also as a key player in global politics and strategy," Velasco, a former finance minister of Chile, told ET. He also described India as an "admirable" democracy, adding that "mistreating any country is bad, but mistreating a democratic ally is even worse."

Velasco, who was in India to promote a new set of economic principles known as the London Consensus - which he contrasts with the "outdated" Washington Consensus - said the US tariff is illegal not only under international law but also under American law. Calling himself a "big fan" of the World Trade Organization and global trade, Velasco emphasized that the solution to the tariff challenge is not to turn inward.

‘Catalyst for Reforms’

“Remember, the US accounts for just 14% of world trade. There are plenty of other countries with which India or Brazil can trade. Moreover, a negative shock can have a positive impact — it should serve as a catalyst for reforms and greater competitiveness,” he said.

While acknowledging that India has liberalised its markets significantly over the past few decades, Velasco noted that the country is “still much less open than many Asian nations”.

“Maybe this is an opportunity for India to say: let’s face this challenge and undertake more reforms. While India may lose some, it will also gain in other areas,” he added.

While praising India’s recent Goods and Services Tax (GST) reforms, which consolidated multiple tax rates primarily into 5% and 18%, Velasco emphasised that more needs to be done. “Remember, many countries have just one value-added tax. In my own country Chile, for example, there is a single flat 19% rate,” he pointed out.

“India also needs to reform its non-tariff barriers to make the country more competitive in global trade,” he added.

Referring to the newly launched London Consensus — an initiative where a group of 55 economists convened in London to outline a fresh economic framework for the 21st century — Velasco emphasized that economic growth is a continuous process and cannot be taken for granted.

“Starting with reforms in the early 1990s, India has changed its growth trajectory in a very significant way. But that’s the glass half full,” he said. “The London Consensus stresses that growth is an ongoing process. Just because a country grew rapidly over the last 10 years doesn’t guarantee it will grow over the next 10 years. Growth is all about innovation — yesterday’s breakthrough is today’s old news.”

When asked how India could sustain its high growth trajectory amid new tariff challenges and global uncertainty, Velasco said the answer lies in the next wave of reforms.

“That will ensure that over the next quarter of a century, innovation remains vibrant, and India continues to grow rapidly,” he stressed.