US President Donald Trump’s move to double tariffs on imports from India has delivered a serious blow to bilateral ties, but New Delhi is hoping to cushion the blow – and resolve the crisis.
Tariffs totalling 50% were due to take effect on Wednesday (August 27), and while New Delhi has reaffirmed its commitment to the Quad security alliance, Modi’s once-close relationship with the US President has been hurt by Trump’s repeated criticism of Indian tariffs and purchases of Russian oil.
Trump imposed a punitive 25% tariff because some Indian refiners have kept buying discounted Russian oil. That penalty is being added to the US leader’s prior 25% tariff on many imports from the South Asian nation and takes total duties to 50% for goods such as garments, gems and jewellery, footwear, sporting goods, furniture and chemicals – among the highest imposed by the US, and on par with Brazil and China.
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The new tariffs threaten thousands of small exporters and jobs, including in Prime Minister Narendra Modi’s home state of Gujarat, and are expected to hurt growth in the world’s fastest-growing major economy.
There was no domestic market reaction to the move on Wednesday as bourses were closed for a Hindu festival, but equity benchmarks logged their worst session in three months on Tuesday after a Washington notification confirmed the additional tariff.
The Indian rupee also continued its losing streak for a fifth consecutive session on Tuesday, ending at its lowest level in three weeks.
The tariff disruption is likely to be bruising, but analysts say it may not be all gloom and doom for the world’s fifth-largest economy can be reformed and become less protectionist while resolving the crisis with Washington.
Exporters urged to target new markets
India’s Commerce Ministry did not immediately respond to a request for comment on Wednesday. But a Commerce Ministry official, speaking on condition of anonymity, said exporters hit by tariffs would receive financial assistance and be encouraged to diversify to markets such as China, Latin America and the Middle East.
A US Customs and Border Protection notice to shippers provides a three-week exemption for Indian goods that were loaded onto a vessel and in transit to the US before the midnight deadline.
Also exempted are steel, aluminium and derivative products, passenger vehicles, copper and other goods subject to separate tariffs of up to 50% under the Section 232 national security trade law.
Indian trade ministry officials say the average tariff on US imports is around 7.5%, while the US Trade Representative’s office has highlighted rates of up to 100% on autos and an average applied tariff rate of 39% on US farm goods.
Five rounds of talks
As the trade deadline approached at midnight last night, US officials offered no hope for India to avert the tariffs.
Wednesday’s tariff move followed five rounds of failed talks, during which Indian officials had signalled optimism that US tariffs could be capped at 15%, the rate granted to goods from some other major US trade partners such as Japan, South Korea and the European Union.
Officials on both sides blamed political misjudgment and missed signals for the breakdown in talks. Their two-way goods trade totaled $129 billion in 2024, with a $45.8 billion US trade deficit, according to US Census Bureau data.
Washington says India’s purchase of Russian oil helps fund Moscow’s war in Ukraine and that New Delhi also profits from it. India has rejected the accusation as double standards, pointing at US and European trade links with Russia.
‘2 million jobs at risk’
Exporter groups estimate the tariffs could affect nearly 55% of India’s $87 billion in merchandise exports to the US, while benefiting competitors such as Vietnam, Bangladesh and China.
Rajeswari Sengupta, an economics professor at Mumbai’s Indira Gandhi Institute of Development Research, said allowing the rupee to “depreciate is one way to provide indirect support to exporters” and regain lost competitiveness.
“The government should adopt a more trade-oriented, less protectionist strategy to boost demand, which is already slacking,” she said.
SC Ralhan, president of the Federation of Indian Export Organisations, said the government should consider a one-year moratorium on bank loans for affected exporters, besides extending low-cost credit and easier availability of loans.
Sustained tariffs at this rate could dent India’s growing appeal as an alternative manufacturing hub to China for goods such as smartphones and electronics.
“Up to 2 million jobs are at risk in the near-term,” Sujan Hajra, chief economist at the Anand Rathi Group, said.
“Yet the bigger picture is less gloomy: India’s export base is diversified, its corporate earnings and inflation outlook remain intact, and domestic demand is robust enough to cushion the blow,” he said.
The US-India standoff has raised questions about the broader relationship between India and the US, important security partners who share concerns about China.
However, on Tuesday the two issued identical statements saying senior foreign and defence department officials of the two countries met virtually on Monday and expressed “eagerness to continue enhancing the breadth and depth of the bilateral relationship”.
Both sides also confirmed their commitment to the Quad, a partnership that brings together the US and India with Australia and Japan.
Reuters with additional input and editing by Jim Pollard
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