India’s Economy Faces US Trade Shocks But Shows Resilience

India’s economy in late 2025 is navigating a challenging trade environment with the United States. The US has sharply increased tariffs from 25 per cent in April to 50 per cent by late August. Additionally, a hefty $100,000 fee on new H-1B visa petitions began in September. These moves have raised fears of a slowdown in Indian exports. However, data reveals a more nuanced and resilient economic scenario.

Impact of US Tariffs and Visa Fee on Indian Exports

The 50 per cent tariff and H-1B visa fee represent shocks. Yet, core export data excluding volatile sectors like petroleum and gold shows no collapse. By August 2025, core exports reached $62.6 billion, continuing an upward trend since 2020. Year-on-year growth remained positive at 4.52 per cent in August. The immediate effect of the tariffs on overall exports is limited, indicating underlying strength.

Trade Data Complexity and Core Exports

Aggregate export figures are distorted by fluctuating petroleum prices and geopolitical factors such as re-exporting Russian crude. Gold and jewellery exports often reflect capital flows rather than production. Core exports, which exclude these, provide a clearer picture of India’s real engagement in global trade. This metric shows steady growth despite external shocks.

US-India Trade Corridor and Export Vulnerabilities

India’s share in total US goods imports dipped from nearly 3.7 per cent early in 2025 to 3.14 per cent in July. This decline contrasts with China’s sharp fall from over 22 per cent in 2018 to 9.04 per cent in 2025. India’s dip remains within a long-term upward trend since the 1990s. The full impact of the 50 per cent tariff on US imports is yet to be reflected in data.

Strategic Advantages Amid Trade Barriers

Three factors favour India despite US tariffs. First, trade redirection allows Indian exporters to find new global markets, creating resilience and new opportunities. Second, tariff engineering by Indian multinational firms encourages restructuring global production to bypass tariffs, boosting foreign direct investment and firm sophistication. Third, India acts as a negative beta asset against US instability, with increased demand for Indian services as US firms relocate workforces and contract out services to India.

Policy Recommendations for Strengthening India’s Economy

The Government of India should focus on reducing tariff and non-tariff barriers domestically to lower costs and increase competition. Strengthening trade agreements with the UK, EU, and US is vital. The goal is to mature India’s market economy and deepen integration with globalisation. Open markets, free flow of goods, capital, labour, and entrepreneurship will help India attract global firms, boost exports, employment, and knowledge transfer.

Questions for UPSC:

1. Critically analyse the impact of protectionist trade policies on emerging economies with suitable examples.
2. Explain the role of foreign direct investment in enhancing the competitiveness of domestic firms in a globalised economy.
3. What are the challenges and opportunities of global value chains for developing countries? How can policy interventions improve their participation?
4. Comment on the significance of service sector exports in India’s economic growth and their resilience during global disruptions.

Answer Hints:

1. Critically analyse the impact of protectionist trade policies on emerging economies with suitable examples.

1. Protectionist policies like tariffs increase costs for exporters, reducing competitiveness in targeted markets.
2. Emerging economies face export slowdowns but may redirect trade to alternative markets, mitigating impact.
3. Example – US tariffs on Indian goods raised export costs but core Indian exports remained resilient, showing adaptability.
4. Protectionism can prompt firms to innovate, restructure supply chains, or increase foreign direct investment abroad.
5. Long-term effects include potential trade diversion, increased production costs, and slowed growth in vulnerable sectors.
6. However, protectionism may also encourage domestic industry development and reduce over-dependence on single markets.

2. Explain the role of foreign direct investment in enhancing the competitiveness of domestic firms in a globalised economy.

1. FDI brings capital, technology, and managerial expertise, boosting domestic firm productivity and innovation.
2. It facilitates integration into global value chains, improving access to international markets and inputs.
3. Indian multinationals use FDI to bypass tariffs by producing in low-tariff countries, enhancing competitiveness.
4. FDI encourages knowledge spillovers, skill development, and adoption of global best practices within domestic firms.
5. It encourages firm sophistication and scale, enabling domestic firms to compete globally.
6. Government policies reducing barriers attract more FDI, further strengthening firms’ global presence.

3. What are the challenges and opportunities of global value chains for developing countries? How can policy interventions improve their participation?

1. Challenges – Dependence on low-value tasks, vulnerability to external shocks, and compliance with global standards.
2. Opportunities – Access to advanced technology, markets, and knowledge spillovers; potential for upgrading production.
3. Trade disruptions (e.g., tariffs) can prompt firms to restructure supply chains, creating new market opportunities.
4. Policy interventions – Reduce tariff/non-tariff barriers, improve infrastructure, and ensure ease of doing business.
5. Strengthen skill development, encourage innovation, and negotiate favorable trade agreements to enhance integration.
6. Support domestic firms to move up the value chain and attract multinational investments for higher-value activities.

4. Comment on the significance of service sector exports in India’s economic growth and their resilience during global disruptions.

1. Services, especially IT and business process outsourcing, are major contributors to India’s export earnings and GDP.
2. During global disruptions (e.g., pandemic, US visa restrictions), demand for Indian services rose due to remote work trends.
3. India acts as a negative beta asset, benefiting from instability in major markets by attracting outsourced work.
4. H-1B visa fees and restrictions push US firms to expand global capability centers within India, boosting domestic employment.
5. Knowledge spillovers from high-value service jobs enhance workforce skills and long-term economic growth.
6. Service exports diversify India’s economic base, reducing dependence on goods exports vulnerable to tariffs and trade wars.