Tariff Tensions

To address potential trade disputes before the US reciprocal tariffs regime becomes effective from April 2, 2025, there has been news of a likely reduction or elimination of import duties on key American agricultural products, principally walnuts, almonds, and apples. This move will have serious repercussions on the J&K economy and these businesses which contribute significantly to the local economy.

The Valley alone accounts for 98 per cent of walnut production, 92 per cent of the national almond production and a 75 per cent apple production. Such a concentration of production in J&K implies that any shifts in tariff policy will have outsized effects on the local economy. As U.S. imports become more attractive due to lowered duties, local growers face the dual challenge of maintaining market share and preserving their price premiums—a balance that will become difficult to strike.

At present, domestic players have significant protection in the form of import duties; almonds face tariffs ranging from 42 to 120 per cent, apples are subject to a 50 per cent duty, and walnuts incur duties between 100 and 120 per cent.  Indeed, these were even higher, till 2023.

When the 20 per cent retaliatory tariff was imposed, the imports of US apple were drastically reduced from $120 million in 2017 to less than $1 million by 2023. This gives a good idea of how tariff sensitive the imports of these commodities are. A reduction of tariffs is bound to result in a surge in imports. When the 20 per cent retaliatory tariffs was dropped, U.S. apple exports jumped ten-fold in just over a year: from $ 4.8 million in 2022 to $ 50 - $ 80 million in 2024. The walnut trade was not far behind as in 2024, U.S. exports of walnuts increased to a record $ 70 million.

It was just before the G20 New Delhi Leaders’ Summit in 2023 that the retaliatory tariffs imposed in 2019 on U.S. origin almonds, apples, and walnuts was lifted. These retaliatory tariff cuts not only restored but also expanded the market for US produce. In 2024, U.S. almond exports to India, Californian almond industry’s number one export market, surpassed USD 1 billion in value. In quantity terms, 400 million pounds of almonds were shipped from the US to India.

Now, the tariff reduction or elimination of import duties on walnuts, almonds, and apples on the cards, will trigger a steep decline in domestic prices and/or lack of demand making the situation adverse for the domestic players. With 3.45 lakh hectares of land in J&K under horticulture producing 26.43 lakh MT of major horticulture crops, principally apple, the significance of the sector for the local economy cannot be overstated.

It provides livelihood to more than 7 lakh families or nearly 35 lakh people. As a thumb rule, one hectare of the orchard generates 400 man-days of employment. At the present level of spread and production, this sector contributes 15 crore man days per annum. In terms of aggregate state income, crops under the primary sector account for around 10 per cent of the gross state domestic product. With the GSDP estimated to be around Rs 2,50,000 crore, the horticultural sector is estimated to be contribute a little more than one third. This translates into a direct income generation of Rs 9,000 crore per annum. This is especially important since 70 per cent of the apple produce is exported which narrows the widening trade deficit even though the terms of trade remain adverse resulting in outflow of capital.

There is no escape from being competitive in an increasingly globalised marketplace with challenging market conditions. Yet, it cannot be left to thousands of small business establishments to achieve that. If the economy has to navigate these challenging times, the role of government in enabling transformation will have to be redefined.

While it is well past the stage of influencing, tariff reduction is now fait accompli, there must be a proactive policy response. Ideally, it should be in the form of a short-term stabilisation measures and a long-term transformational policy package.

The short-term package can be limited to absorbing the external shock and put in some stabilisation measures. It should address the unreasonable transport pricing practices, improve transparency, and strengthen protections for local exporters by reducing logistic costs. Another initiative could be to have a market intervention scheme with the purpose of stabilising prices. The administered pricing mechanism can, if designed properly, provide the floor and help price discovery in the marketplace. This can go alongside a freight rationalisation policy which can compensate the higher cost disadvantage.

The long-term solution, a structural one, is to focus on financial intermediation, business risk mitigation and operational technology upgradation, both product and process. The current level of financial intermediation is very basic and limited to access to credit. There is need to introduce sophisticated financial products and create specialised financial market segments which can also be used to mitigate risks. Futures market is an option. The structure of Indian futures market, being two-tiered one, regional and national, helps. For now, a small regional exchange whose membership is local and is permitted to have a limited number of contracts will suffice.

Starting futures trade in some of these commodities will deepen the trade, widen the market, and help price discovery, enabling the farmers for a better price of their produce. This also helps participants in risk management, as they can hedge from uncertainty in the volatile spot price of the crop.

These benefits help participating farmers, for better decisions about marketing if not production per se. A futures market will help the transmission of information between futures and spot markets and strengthens the spot market for horticultural commodities. This will allow the stakeholders to follow a data driven approach and take informed decisions be it on fertilizer usage, and disease management, optimizing crop yields or reducing resource wage. Or choices about the marketing and sale of the produce: when, where and at what price to liquidate the stocks. On the operational part, technology has to have a greater play at all stage; right from laying an orchard, managing it in different phases, storing the produce and transporting it to the end consumer. The essence is to formalise the business even without corporatising it.

This might also be the time to address some historical market perceptions which are now effectively operating as non-tariff barriers: variant quality, poor grading or low-end packaging. Such reputational issues have impaired business development. In competing with global players besides quality and price, the challenge is to ensuring transparency and authenticity in the supply chain. Blockchain-based traceability solutions can be introduced to resolve some of the issues and build trust in the national and international marketplace. This market making infrastructure is the responsibility of the local government.

The author is Contributing Editor Greater Kashmir