India's Trade Tightrope: Navigating US Tariffs and Geopolitical Pressures

The proposed tariffs are expected to put India at a disadvantage compared to Pakistan, Bangladesh, Vietnam, and Turkey which have secured lower tariffs at 15% -20%. (Image:MSN)

Context: On July 31, 2025, the United States, under President Donald Trump, announced a sweeping 25% tariff on all goods originating from India. This measure is slated to take effect on August 7, 2025. The announcement also includes an additional penalty linked to India's purchase of Russian military equipment and energy. These actions are part of a broader 'Liberation Day' tariff initiative, that seeks to enforce trade reciprocity across numerous countries.

Active US Tariff Regimes (2023-24):

• Section 232 National Security Tariffs:

1. Products: Steel (25%), Aluminium (10%).
2. Status: Partially suspended since 2022 but replaced with quota system.
3. Impact: India lost $1.2B in annual steel exports. U.S. construction/auto industries pay 18% more for steel.

• Section 301 Digital Services Tax (DST) Retaliation:

1. Trigger: India's 2% DST on non-resident e-commerce firms (2020).
2. U.S. Response: 25% tariffs threatened on shrimp, basmati rice, gold jewelry, and furniture (June 2021).
3. Tariffs can be activated if India enforces DST.

• Withdrawal of GSP (Generalized System of Preferences):

1. Status: Permanently revoked since June 2019.
2. Affected Goods: 3,700 products including chemicals, textiles, and auto parts.
3. Consequence: Indian exporters pay $260M extra annually.

Emerging Tariff Fronts:

• Solar Cell Probe (Section 301):

1. USTR Investigation (March 2024): Examining India's Production-linked incentives (PLI) for solar modules.
2. Potential Action: 30-50% tariffs if deemed '' illegal subsidies''.
3. At Risk: $1.1B Indian solar exports to U.S.

• Carbon Border Tariffs:

1. U.S. CLEAN Act (Proposed): Carbon fees on imports from high-emission economies.
2. Vulnerable Indian Sectors: Steel and Cement.

Rationale Behind Latest Tariffs:

• US's Stated Reasons:

1. President Trump has pointed to India's steep import duties, averaging around 39% on agricultural goods, reaching as high as 50% on items such as apples and corn.
2. The US has also criticized India's non-monetary trade barriers, including agricultural subsidies and its sanitary and phytosanitary measures (SPS) for food safety.
3. Moreover, the US has significant trade deficits with India, reportedly at $45.7 billion in goods trade as of 2024.

• Geopolitical Motivations:

1. According to the US, India's continued purchase of Russian military equipment and oil undermines international efforts to halt the conflict in Ukraine.
2. The unspecified ''additional penalty'' is proposed to influence the foreign policy choices of countries engaging with nations under sanctions. The proposed Russian Sanctions Act of 2025, envisages duties as high as 500% on countries that continue to buy Russian oil.

• Domestic US Objectives:

1. President Trump views the tariffs will offset the increase in budget deficit resulting from his recent income tax cuts.
2. The present US administration also intends to revitalize US manufacturing and promote ''Made in USA'', believing that tariffs will encourage domestic production by making imported goods more expensive.

• National Leverage:

1. The latest tariff imposition has been interpreted as a ''pressure tactic'' to force India agree to US terms in ongoing bilateral trade negotiations.
2. It highlights the coercive nature of ''reciprocal tariff'' framework for countries like India that have refused opening sensitive domestic sectors.

Economic Impacts on India:

• Overall Macroeconomic Impact:

1. Indian government officials have projected a potential GDP loss of less than 0.2%, based on the assessment that a significant portion of India's exports to the US, would remain unaffected due to existing US exemption categories.
2. Commerce Minister Piyush Goyal has emphasized India's robust economic standing, highlighting its position as the world's fastest-growing major economy.

• Sector-Specific Impacts:

1. The tariffs are expected to severely impact labour-intensive units and MSMEs, that often operate on thin margins and possess limited capacity to absorb rising tariff costs.
2. The shrimp sector, which accounts for nearly 48% exports to the US, is projected to see a 7-9% decline in export volumes in FY26.
3. In the gems and jewellery sector, over 100,000 jobs are estimated to be at risk due to the 25% tariff.

• Competitiveness: 

1. The proposed tariffs are slated to place India at a significant disadvantage compared to its majority competitors, including Pakistan, Vietnam, Bangladesh, and Turkey, which have secured lower tariffs ranging from 15% to 20%.
2. This is likely to lead to trade diversion, as US importers may shift their sourcing to countries with lower duties to maintain cost-effectiveness.

Economic Impact on the United States:

• Consumer and Business Costs: Increased costs in imports are expected to reach US consumers soon, leading to higher prices for goods.
• Inflationary Pressures: The US economy is already experiencing renewed inflationary pressures, which may further aggravate due to tariffs and a weakening dollar.
• Supply Chain Disruptions: India being a critical supplier to the US, particularly in the pharmaceutical sector, the imposition of tariffs on Indian pharmaceutical products creates a significant vulnerability for the US healthcare system.
• Revenue Generation: The immediate revenue gains for the US government are offset by higher costs for American consumers and businesses, contributing to economic vulnerabilities.

Indian Government's Response:

• India has expressed its disinterest in acquiring advanced US defense equipment, such as the F-35 fighter jets. Instead, it is prioritizing a strategy of co-development and co-production under its 'Make in India' initiative.
• To mitigate the adverse impact of the tariffs on its exports, the Indian Commerce department is consulting with exporters on several measures including the rollout of the Interest Equalisation Scheme for pre and post-shipment export credit, faster processing of duty drawback claims and Goods and Services Tax (GST) refunds.

Impact on US-India Strategic Partnership:

• The imposition of tariffs has the potential to derail the present upward trajectory of US-India relations, including the civil nuclear agreement, backing for India's G20 presidency, and its candidature for a permanent seat at the UN Security Council.
• The penal measures for Indo-Russian ties may push India towards greater trade diversification and domestic resilience, rather than forcing a complete break with Russia.
• The tariffs could complicate India's ambitious goal of doubling bilateral trade with the US to $500 billion by 2030.

Way Forward:

• Indian exporters should actively diversity export to markets in the Middle East, Africa, Southeast Asia, and Latin America.
• Policymakers should bolster domestic manufacturing competitiveness and supply chain resilience through initiatives such as Atmanirbhar Bharat and Production-Linked Incentive (PLI) schemes.
• Focusing on affected sectors like textiles and apparel, can help mitigate the impact of broad tariffs by catering to less price-sensitive demand.
• India should continue diplomatic engagement with the US, involving clearly articulating its national interests.

Conclusion: The recent imposition of a 25% tariff by the United States on Indian goods, coupled with an unspecified penalty linked to India's ties with Russia, marks a significant escalation in trade tensions. Their long-term impact will depend on the willingness of both nations to find a pragmatic path forward that balances their respective national interests with the imperative of maintaining a strong strategic partnership in an increasingly complex international landscape.