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INTRODUCTION

Escalating trade tensions between India and the United States, driven by a sharp rise in U.S. tariffs, are posing significant challenges to the Indian economy. The U.S. has imposed a steep 50% tariff on a range of Indian goods—one of the highest on any trading partner. This includes an

existing 25% “reciprocal” tariff and an additional 25% penalty linked to India’s continued purchase of Russian crude oil, which Washington argues indirectly supports Russia’s actions in Ukraine.

Unlike many U.S. partners in Europe and Asia who have mitigated such punitive measures through tailored trade deals, India lacks a comprehensive agreement with Washington. The EU, for example, secured tariff reductions by granting U.S. industrial goods duty-free access and prioritizing U.S. agricultural imports. Japan and Korea negotiated favorable terms through strategic investments in U.S. industries like semiconductors and clean energy. Several nations have also committed to large purchases of U.S. defense and energy products to offset deficits. India, by contrast, remains one of the highest tariff-paying economies to the U.S., alongside Brazil and South Africa, making it especially vulnerable.

The U.S.’s harsher stance toward India, compared to its more cautious approach toward China, underscores geo-political considerations. While China continues to buy Russian oil at scale, its dominance over rare earth

minerals—critical to U.S. technology and defense—dissuades Washington from escalating a full-scale trade war with Beijing. Targeting India allows the U.S. to exert pressure without jeopardizing critical supply chains. However, the consequences for India’s economy, especially its export sectors, are likely to be significant.

The Looming impact on India’s Economy

The 50% U.S. tariffs are expected to have widespread economic repercussions:

Exports: Indian exports worth an estimated $48.2 billion to the U.S. will be directly affected. Labor-intensive industries such as textiles, gems and jewellery, auto parts, and agriculture face a severe blow. Indian textiles now bear a 30% tariff disadvantage compared to Bangladesh and Vietnam. The Council for Leather Exports warns that thin-margin businesses cannot survive such high tariffs, prompting many to consider scaling back or exiting the U.S. market entirely.

GDP: While India’s domestic-driven economy offers resilience, global analysts predict a short-term slowdown. Goldman Sachs estimates GDP growth could dip by up to 1 percentage point this fiscal year.

Unemployment: Export-dependent MSMEs are bracing for heavy job losses. Between 200,000–300,000 jobs are at risk, with the textile sector alone potentially shedding 100,000 jobs if tariffs persist beyond six months.

Currency Pressure: Reduced export earnings are straining the rupee, already under pressure from foreign capital outflows. A weaker rupee raises import costs, fuelling inflation in essentials like oil.

FII Outflows: Foreign institutional investors have withdrawn roughly ₹32,000 crore from equities in August alone, with India sliding from the most-preferred to least-preferred Asian market for global funds.

Manufacturing Relocation: To bypass tariffs, Indian firms are shifting production abroad. Pearl Global has moved U.S.-focused garment manufacturing to Bangladesh and Vietnam, while Titan is exploring jewellery production in GCC nations. This trend risks undermining India’s manufacturing ambitions.

Global responses and lessons

India is not alone in facing external shocks; other nations are adopting proactive, strategic responses:

China’s Dual Circulation Strategy: Boosting domestic consumption and self-reliance while retaining global competitiveness.

European Union’s IMERA: Safeguarding the single market by investing in green technologies and regional supply chains.

SOUTHEAST ASIA —

Singapore: Expanding fintech and logistics while stimulating domestic demand. Thailand & Vietnam: Using tax incentives and special economic zones to attract manufacturing.

Indonesia: Deploying $1.5 billion in fiscal support to strengthen its economy.

These strategies underscore the need for India to balance domestic resilience with external engagement.

India’s Path Forward

India holds unique advantages that can be leveraged to counter external shocks:

A Vast Domestic Market: With 1.46 billion people and a 500+ million-strong middle class, India’s internal consumption base provides a natural cushion against external volatility.

Demographic Dividend: A young, expanding workforce—median age 29—can fuel growth if complemented by skill development and higher female workforce participation.

Macroeconomic Stability: Low inflation (1.5% in June 2025), a contained fiscal deficit (4.8% of GDP), and robust forex reserves ($695.1 billion) provide a strong buffer.

Services Sector Strength: IT and BPM exports worth $224.4 billion annually continue to generate stable foreign earnings.

Domestic Market Participation: With domestic investors now outweighing foreign ones in Indian equities, the market is less vulnerable to FII volatility.

POLICY PRIORITIES —

Stimulate Domestic Demand: Expand fiscal incentives, tax reforms, and targeted subsidies to bolster consumption, building on initiatives like PLI.

Diversify Exports: Pursue FTAs with the EU, Southeast Asia, and Latin America, while shifting toward high-value sectors such as electronics and pharmaceuticals.

Strengthen Manufacturing: Streamline regulations, improve infrastructure, and create a globally competitive environment to deter production shifts abroad.

Enhance Financial Resilience: Maintain proactive monetary policy, deepen domestic investment bases, and develop alternative trade/payment systems with partners like BRICS+.

Invest in Future Sectors: Prioritize green tech, semi-conductors, AI, and digital infrastructure to position India as a global leader in next-generation industries.

Conclusion

India’s tariff challenge reflects deeper geopolitical shifts in the global economy. While the near-term impact on exports, jobs, and the rupee is serious, India’s strong domestic market, demographic advantage, and financial resilience provide a powerful foundation for long-term growth. By recalibrating its strategy—learning from global best practices while leveraging its own inherent strengths—India can turn this moment of vulnerability into a platform for economic transformation.