US tariffs’ impact on India’s economy
Our economic modeling analysis suggests a notable negative impact of the US tariffs on India’s economy. India’s GDP growth may slow down because manufacturing sector, a key driver of employment, may be hit particularly hard. The tariffs are also projected to have a negative impact on employment growth, though the growth may still be positive in absolute terms. Some of these findings can be seen in our paper published by Agribusiness, with Munisamy Gopinath and Kannan Kumar.
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The imposition of the 50% tariff is explicitly linked to India’s continued purchase of discounted Russian oil, which the U.S. views as funding Russia’s war in Ukraine. However, analysts suggest this move may also be a strategic tactic to force India’s hand in long-stalled trade talks. For years, the U.S. has had longstanding concerns about India’s trade policies:
High Tariffs: The U.S. has consistently pushed for India to reduce its high tariffs on a range of products, particularly in the agricultural, dairy, and pharmaceutical sectors.Market Access: The U.S. seeks greater market access for its products, especially in agriculture and dairy, but India has resisted, citing political and economic sensitivities related to its large farming population and religious sentiments.
Given these concerns, a key question for India is whether it can negotiate a compromise. A possible approach could be to offer specific tariff concessions on non-consequential U.S. exports that would not compromise India’s domestic sectors. While the U.S. has pushed for concessions on sensitive sectors like agriculture and dairy, India has consistently held its ground. Even if India proposes mega outward FDI ‘endeavors’ in the U.S., like how countries such as UAE, EU, Japan and South Korea did, it may move some needle in the negotiations.
India’s Major Exports to the U.S. include the following for which India can push for tariff cuts on the grounds of being important for the U.S. producers and consumers:
Pharmaceuticals: Packaged medicaments are a top export, with annual value exceeding $10 billion. India is known as the global hub for cheap generic medicines. Tariffs on these products have deep public health consequences in the U.S.Gems & JewelryEngineering Goods & Machinery, including steel products, machinery, and automobile parts, which strengthen the U.S manufacturing supply chain.Textiles & Apparel are crucial for price-sensitive American consumers.Seafood: The U.S. is the top market for Indian shrimp, with the industry operating on slim margins that make it particularly vulnerable to the new tariffs, also affecting U.S. food security.ALSO READ‘Russia lost oil client India,’ says Trump; hints at sparing New Delhi from secondary tariffs
U.S. Major Exports to India include the following for which India can consider tariff cuts:
Mineral Fuels & Oil: In theory, India could shift away from Russian oil, as global supply is currently ample. In fact, India’s crude oil imports from the U.S. have recently surged, increasing by over 50% in the first half of 2025 compared to the previous year. India’s imports of Russian oil rose from being just 2% of total in 2022 to over 36% now. This is because of the price differential, but this has been falling, from an all time high of 42$ per barrel in April 2022, to 3.3$ per barrel today. Another issue to consider here is the quality: Russian Urals crude is a medium-sour crude, which is cheaper to purchase but requires specialized refining equipment to process. U.S. crude is a light, sweet crude with a lower sulfur content. While considered higher quality and easier to refine, WTI crude often yields less diesel and jet fuel.Machinery & Aircraft: If India proposes a major procurement of US machineries and aircrafts, there is a possibility of some forward movement, as signaled in the recent U.S deals with other countries.Gems & Precious Stones, for which India can easily cut tariffs as they are inputs to India’s major export items – jewelry.Electronic components: India can cut tariffs on these to strengthen the emerging domestic supply chain of electronic products like iPhones. Companies such as Apple avail schemes like PLI, while facing cost disadvantages due to rising Indian tariffs on electronic components.
While negotiating with the U.S. is crucial, India must also develop a robust strategy to diversify its export markets in BRICS, EU, ASEAN, African countries etc., and reduce its dependency on a single country. This is high time India reconsiders participating in major plurilateral agreements. For example, RCEP (Regional Comprehensive Economic Partnership) was mainly meant for India till we withdrew from the negotiations as the other RCEP members had already been deeply integrated. CPTPP (Comprehensive and Progressive Trans Pacific Partnership) was originally started by Obama administration to bring the world together to counter China, but later with the withdrawal by Trump 1.0, the other members still went ahead and expanded, with the latest irony being that China may possibly join them as well in the future.
Therefore, while the tariff impact on key sectors could be severe, India may go for a multi-pronged approach to avoid a catastrophic outcome. Negotiating strategy with the U.S. could be three-fold; request U.S. to cut tariffs on goods that matter for Americans; offer to cut tariffs on major US exports to India which may also strengthen Indian economy; propose some investment deals for optics. By simultaneously focusing on a long-term plan to diversify its export markets and strengthen its domestic economy through long-pending reforms for better investment climate, India can weather this storm and emerge as a more resilient and self-reliant economic power.
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