Biznextindia : A 25% tariff imposed by the United States on Indian imports, as announced by U.S. President Donald Trump to take effect from August 1, 2025, would have significant implications for the Indian economy.
The 25% U.S. tariff would disrupt key export sectors like gems, textiles, auto components, and seafood, potentially shaving 0.2%–0.5% off India’s GDP growth in FY26. MSMEs and export hubs face significant risks, but exemptions for pharmaceuticals and semiconductors, along with India’s diversified export markets and strong services sector, provide resilience. The tariffs, coupled with a penalty for Russia ties, are likely a negotiating tactic to pressure India into trade concessions. India’s response—through negotiations, market diversification, or retaliatory measures—will shape the long-term impact. A bilateral trade deal by September–October 2025 could mitigate the effects, leveraging India’s strategic importance and limited export dependence.
Below is an analysis of the potential effects based on available information, including sector-specific impacts, macroeconomic consequences, and India’s possible responses.
1. Impact on Indian Exports to the U.S.
• Export Volume and Value: India’s goods exports to the U.S., its largest trading partner, were approximately $86.5–$87 billion in FY25. A 25% tariff would increase the cost of Indian goods in the U.S. market, potentially reducing demand and export volumes. Key sectors affected include:
• Gems and Jewellery: This sector, a significant contributor to India’s exports, would face reduced competitiveness due to higher prices, potentially losing market share to competitors like Ecuador or Vietnam.
• Textiles and Apparel: High-margin fashion and specialty fabrics could see a decline in demand, though low-cost categories might remain competitive if U.S. tariffs on Chinese or Vietnamese goods are higher.
• Auto Components: Companies like Tata Motors and Bharat Forge may experience a direct decline in U.S. demand for high-value vehicles and precision parts, potentially leading to job losses.
• Electronics and Solar: Contract manufacturers for smartphones and solar panels could face pricing and volume pressures due to thin margins.
• Seafood (Shrimp): India’s shrimp exports, a major contributor to its seafood trade, would be significantly affected, with competitors like Ecuador potentially gaining market share due to lower tariffs and proximity to the U.S.
• Exempted Sectors: Pharmaceuticals and semiconductors are reportedly excluded from the tariffs, providing some relief to these high-growth sectors.
• Competitive Disadvantage: India could lose market share to competitors like Vietnam or China if they face lower or no tariffs. For instance, Vietnam’s offer to eliminate tariffs on U.S. goods could make it a more attractive supplier.
2. Macroeconomic Effects
• GDP Growth: Economists estimate that the tariffs could reduce India’s GDP growth by 0.2% to 0.5% in FY26 if they persist. This is due to reduced export revenues and potential disruptions in supply chains.
• Trade Deficit: India’s trade deficit with the U.S. was $45.7–$45.8 billion in 2024. A decline in exports could widen this deficit unless offset by reduced imports or new markets.
• Inflation and Consumer Prices: Higher tariffs could lead to increased costs for Indian exporters, potentially passed on to U.S. consumers. However, in India, reduced export earnings might limit domestic inflationary pressures, though sectors reliant on U.S. demand could face cost pressures.
• Rupee Depreciation: The Indian rupee may weaken, potentially approaching the 88-mark against the U.S. dollar, as export revenues decline and investor confidence wanes.
• Employment: Sectors like auto components, textiles, and seafood, which are labor-intensive, could see job losses, particularly in export hubs like Maharashtra, Gujarat, Tamil Nadu, and Karnataka. Micro, small, and medium enterprises (MSMEs) are especially vulnerable.
3. Sector-Specific Vulnerabilities
• MSMEs: Small businesses in export-oriented sectors are highly exposed due to limited resources to absorb cost increases or pivot to new markets.
• Agriculture and Seafood: The tariffs could offset benefits from recent trade agreements, such as the India-UK Free Trade Agreement, by reducing competitiveness in the U.S. market.
• Technology and Services: India’s IT services sector (e.g., TCS, Infosys) and other service exports, which constitute a significant portion of its economy, are not subject to tariffs. This limits the overall impact, as services exports are less affected than goods.
• Diversified Export Markets: Only 18% of India’s merchandise exports go to the U.S., and exports (goods and services) account for about 20% of India’s GDP, compared to 65% for Thailand and 87% for Vietnam. This diversification provides some resilience.
4. Geopolitical and Strategic Context
• Russia Ties: The tariffs include an unspecified “penalty” for India’s energy and arms purchases from Russia, reflecting U.S. frustration with India’s neutral stance in the Russia-Ukraine conflict. This could strain India-U.S. relations, though strategic alignment (e.g., countering China) may encourage both sides to seek a resolution.
• Trade Negotiations: India and the U.S. have been negotiating a bilateral trade agreement, with five rounds completed and a sixth planned for late August 2025. The tariffs may be a pressure tactic to extract concessions, particularly in agriculture and dairy, where India maintains high barriers. Experts suggest the tariffs could be temporary if a deal is reached by September–October 2025.
• India’s Leverage: India’s relatively low dependence on merchandise exports (compared to competitors) and its strategic importance give it some negotiating power. However, India is unlikely to make widespread concessions in sensitive sectors like agriculture.
5. India’s Potential Responses
• Retaliatory Tariffs: India could impose retaliatory tariffs on U.S. goods, though it has signaled a preference for negotiation over escalation.
• Market Diversification: India may accelerate efforts to expand exports to markets like the EU, UK, and ASEAN countries to offset U.S. losses.
• Domestic Reforms: The tariffs could prompt India to pursue growth-supportive policies, such as easing trade barriers or incentivizing domestic manufacturing, to enhance competitiveness.
• Bilateral Trade Deal: India remains committed to a “fair, balanced, and mutually beneficial” trade agreement. Concessions on U.S. electric vehicles or agricultural products could be considered, though domestic political constraints (e.g., protecting farmers) limit flexibility.
• Strategic Realignment: India may strengthen ties with other partners (e.g., via BRICS or the Quad) to counterbalance U.S. pressure, while maintaining its non-aligned stance on Russia.
6. Expert and Industry Reactions
• FICCI and FIEO: Industry bodies expressed disappointment but hope for a short-term tariff regime, anticipating a trade deal soon.
• Economists: Experts like Ajay Srivastava (GTRI) note that the impact varies by sector and depends on tariffs faced by competitors. Some, like Madhavi Arora (Emkay Global), see the tariffs as a negotiating tactic with limited long-term impact if a deal is finalized.
• Political Reactions: Opposition parties in India criticized the government’s handling of U.S. relations, while the BJP emphasized a wait-and-watch approach, signaling confidence in ongoing talks.
7. Long-Term Considerations
• Supply Chain Shifts: Prolonged tariffs could prompt Indian firms to onshore production to the U.S. or diversify supply chains, though this is costly and time-intensive.
• Global Trade Dynamics: The tariffs align with Trump’s broader protectionist strategy, which has disrupted global trade. India’s response will need to balance domestic priorities with its role in a shifting trade landscape.
• Economic Resilience: India’s projected growth of 6.3%–6.8% in FY26, supported by diversified exports and a robust services sector, suggests it can weather short-term disruptions. The Reserve Bank of India’s recent rate cut to 6% aims to bolster growth amid these challenges.