US Tariffs: A Wake-Up Call for India?

On August 27, the United States Department of Homeland Security released a notification imposing additional 25% tariffs on Indian imports, which will raise the total levy to 50%. This move is viewed by many in India as a form of tariff weaponization to penalize India for continuing to import oil from Russia. 

This sharp escalation in tariffs, which made India one of the worst-affected countries in Donald Trump’s tariff war, has rattled Indian exporters, particularly exporters from small and medium sectors such as textile exporters, auto parts manufacturers, gems and jewellery exporters, seafood exporters, etc., who now expect a steep decline in shipments, rushed to the government for immediate support to overcome the threat to their businesses. 

The stock market, too, reflected this anxiety. On the day of the announcement, the BSE Sensex plummeted 849.37 points to close at 80,786.54, while the NSE Nifty 50 dropped by 255.70 points to end at 24,712.05—the biggest loss in the last three months. 

Economists opine that if the 50% tariff persists, India’s gross domestic product (GDP) growth during the current fiscal could slip to or even below 6%. This elevated tariff is feared to hurt India’s relative competitiveness, dampen export momentum, erode investor sentiment, and potentially slow foreign direct investments. Cumulatively, these factors could impact the current account deficit, and eventually, build pressure for a sharper depreciation of the rupee. The rupee has already dropped to an all-time low of 88.31 to the US dollar. 

That aside, companies from several key export sectors that have become victims of high tariffs vis-à-vis exporters from countries like Vietnam, South Korea, Taiwan, etc., fear falling capacity utilization and job losses. Indeed, Crisil has already projected a 50% drop in the revenue growth of readymade garment makers, suggesting significant job losses in the sector.  

Yet, not all is bleak. Some analysts, including government agencies, believe that rising domestic demand, aided by the recent GST rationalization, low inflation, and falling interest rates, could soften the impact. Moreover, as India’s overall export dependence on the US is relatively limited—$86.5 bn during FY 2025—the broader economy might still avoid a deep shock. Rick Rossow of Center for Strategic and International Studies, Washington, also opined that as the tariffs targeted goods and manufacturing remained a relatively small share of India’s economy—around 14%—the impact on the “real economy will be limited”. 

Interestingly, in a recent public address, Prime Minister Narendra Modi said, “I appeal to the citizens of our country to prioritize purchasing goods that are made in India. Whether it is decorative items or gifts, let us choose products manufactured within our own nation.” Such a spirit, if it prevails among all citizens, could not only enable us to absorb the threat of tariffs but also keep India’s growth ambitions intact. 

Nonetheless, these high tariffs, which the government observed as “unfair, unjustified and unreasonable”, are not in the interest of the nation. Deteriorating access to the largest export market of the world at this critical juncture, when we are actively prioritizing manufacturing under “Make in India” policies, and also working towards placing ourselves as the alternative manufacturing hub for what is currently being made in China, may stifle our economy.  

That being the reality, India, as it has handled the issue of tariffs and the rhetoric surrounding it so far with maturity and pragmatism, may have to keep pushing the negotiations for a favorable accommodation with the US. Intriguingly, there is also an argument that Russian oil is not that cheap today compared to the prevailing global prices, and the benefits so accrued are not that encouraging even vis-à-vis the costs that it has to absorb by losing the US exports. So, keeping these facts in view, India has to play its cards deftly and navigate through the impasse with diplomatic finesse for a win-win outcome. 

Simultaneously, affected exporters must be helped to explore alternative markets by providing liquidity support in the meantime to sustain their operations. Indeed, it is a wake-up call for India not to rely on a single market to keep export business intact. 

Over and above all this, there is an urgent need to launch reforms to radically improve the ease of doing business in India. A fully functional single-window clearance system must be created to speedily clear investment proposals. Also, lower levies to make exports globally competitive. The immense potential offered by tourism must be exploited by launching necessary reforms that encourage tourist flows.  

Now is the time for Indians to act rationally, and as R C Bhargava, Chairman, MSIL, observed, to do their best and stand by the government in overcoming the hurdles and keep growing.

 

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