Impact of USA Tariff on Indian Economy

Why in the News? 

The U.S. government is set to implement an additional 25% tariff on Indian goods starting August 27, 2025, following President Donald Trump’s executive order.

• This comes on top of the existing 25% tariffs since August 7, making a total of 50% duty on many Indian exports.
• Tariffs are being imposed partly as a penalty for India’s continued import of Russian oil.
• India has described these sanctions as “unfair, unwarranted, and unreasonable.”

Key Points: Impact of USA Tariff on Indian Economy

Tariff Details:

• 50% effective tariff on $47-48 billion worth of Indian exports.
• Exemptions: Iron, steel, aluminum, passenger vehicles, copper products.
• Tariffs effective for U.S.-bound shipments after Aug 27, 2025.

Reactions:

• Indian Government: Pushing “Vocal for Local” to reduce reliance on U.S. markets.
• China: Called the U.S. a “bully” and expressed support for India.
• RBI: Promised support to adversely affected sectors.
• Exporters’ View: Expect major competitiveness loss against China, Vietnam, Philippines, etc.

Domestic Response:

• GST Council to meet (Sept 3–4, 2025) for rate cuts and rationalization to boost domestic consumption.

Impact of Tariffs on Indian Economy:

Export Sector Hit:

• Indian exports valued at approximately $47–48 billion, accounting for 55% of shipments to the U.S., encounter a 30–35% pricing disadvantage.
• Likely to hurt textiles, pharmaceuticals, IT hardware, machinery, and consumer goods.

Balance of Payments Stress:

• India’s trade surplus with the U.S. may shrink.
• Forex inflows could reduce, pressurizing rupee.

GDP Growth Impact:

• Exports being a growth driver, tariffs may slow down overall growth.
• Some sectors may face layoffs and reduced production.

Inflationary Concerns:

• U.S. tariffs may reduce India’s competitiveness → lower demand for Indian goods → domestic over-supply could depress prices in some sectors.
• But higher import substitution efforts may push domestic inflation in the medium term.

Options Before India & Steps needed:

Diplomatic Measures:

• Engage in bilateral negotiations with the U.S. to roll back or reduce tariffs.
• Explore options under WTO’s Dispute Settlement Body (though time-consuming).
• Use support from China and other affected countries to build pressure on U.S. in multilateral forums.

Economic/Trade Diversification:

• Reduce over-dependence on the U.S. market by boosting exports to EU, ASEAN, Middle East, Africa.
• Encourage South-South cooperation and expand trade with BRICS members.

Domestic Policy Response:

• GST rationalization to cut production costs.
• Provide export subsidies, credit support, and insurance to affected sectors.
• Expand PLI (Production Linked Incentive) schemes to make Indian products more competitive.

Strategic Shift:

• Boost domestic industries by advancing the ‘Self-Reliant India’ and ‘Support Local’ initiatives.
• Push for regional trade agreements (RCEP reconsideration, IPEF engagement, FTAs with UK & EU)