U.S. Tariffs Prove Unpalatable Burden for India to Bear
The US has imposed a 25% additional import duty on all Indian goods, effective August 7, 2025, which is expected to significantly reduce India's exports to the US by about 30%. This decision, made without exemptions, could potentially cut India's exports from USD 86.5 billion in FY2025 to an estimated USD 60.6 billion in FY2026.
The tariff increase places India at a competitive disadvantage compared to other US trade partners like Bangladesh, Sri Lanka, Taiwan, and Vietnam, which face lower duties. Key sectors impacted will be petroleum products, pharmaceuticals, and electronics, which have high import content and low domestic value-add, making them particularly vulnerable to the tariff hike.
The decision comes as a blow to India, a country that has been one of the US's largest trading partners. The US-India trade surplus was around $46 billion in 2024, after shipping goods worth around $87.4 billion. The impact on Indian exporters could be severe, depending on the quantum of penalty for importing Russian oil and arms.
To mitigate the impact, India is exploring several solutions. These include diversifying export markets, enhancing domestic value addition, negotiating trade agreements, offering government support measures, encouraging supply chain resilience, and engaging in dispute resolution at the WTO.
By accelerating efforts to develop alternative markets beyond the US, such as the EU, ASEAN countries, and Africa, India aims to reduce its dependency on the US market. Increasing domestic manufacturing and reducing import content in key export sectors like pharmaceuticals and electronics could lower production costs and improve competitiveness under tariff barriers.
India may also pursue bilateral or multilateral trade agreements with the US or other countries to secure tariff exemptions or reductions and safeguard critical export sectors. The Indian government could offer financial relief, subsidies, or export incentives to affected industries and assist businesses in upgrading capabilities for higher value addition.
Encouraging firms to reconfigure supply chains to minimize exposure to US tariffs, including localizing production, could help offset tariff impacts. India might consider using disputes mechanisms at the WTO to challenge the imposition of blanket tariffs without exemptions, aiming for a favorable resolution.
In the longer term, the hit to ties between India and the US could be significant due to Trump's favorable treatment of Pakistan. However, India remains hopeful that this setback will not permanently damage the relationship between the two nations.
References: [1] Source: Indian Commerce Ministry Report on US Tariff Impact and Mitigation Strategies, August 2025.
- In light of the increased duties, the politics of trade between India and the US could see a shift as India investigates alternative markets in the EU, ASEAN countries, and Africa to reduce dependency on the US market.
- Financial relief, subsidies, or export incentives for affected industries, as well as efforts to enhance domestic value addition and localize production, are potential solutions that the Indian government is considering to improve competitiveness and offset the impacts of the tariff hike in sectors like petroleum products, pharmaceuticals, and electronics.
