When the United States marked its so-called “Liberation Day” in April with a sharp escalation of tariffs under President Donald Trump, the prevailing global mood was bleak. Analysts predicted retaliatory trade wars, a synchronised global slowdown, and a return of inflationary pressures—especially in the US itself. Financial markets reacted sharply, reinforcing fears of an impending recession. Nine months later, however, outcomes have diverged strikingly from these forecasts. The US posted a growth rate of 4.3 per cent, while India recorded a robust 8.2 per cent growth in the second quarter of the current financial year. The question, therefore, is not whether tariffs disrupted trade, but how India managed to sustain momentum despite them.
The tariff shock and rare-earth leverage
The trade confrontation began with the US imposing tariffs as high as 150 per cent on Chinese imports. China responded in kind and added a strategic twist by banning exports of key medium and heavy rare-earth elements—critical inputs for advanced manufacturing. Although several countries, including India, possess rare-earth reserves, China controls nearly 90 per cent of global refining capacity. These minerals are indispensable for high-performance magnets used in drones, electric vehicles, robotics, and defence technologies.
By leveraging this choke point, Beijing forced Washington back to the negotiating table. A compromise emerged on the sidelines of the APEC summit in Gyeongju in October, where President Xi Jinping and Trump reached a temporary détente. The rare-earth export ban was lifted for a year, and the US eased restrictions on advanced H200-series chip exports by Nvidia to China. Ultimately, US tariffs on China were scaled down to around 47 per cent, restoring a degree of economic interdependence between the two powers.
China’s adaptation and the limits of tariffs
Despite tariffs, China’s export machine proved adaptable. While exports to the US fell sharply in late 2025, shipments to the EU, Africa, Southeast Asia, and Latin America surged. Overall exports to the rest of the world rose by nearly 6 per cent, driven in part by trans-shipments and rerouting through third countries. This underscored a broader reality: tariffs reshuffle trade flows rather than halt them.
Why India’s export hit was contained
India was initially expected to be severely affected by US tariffs, with fears that over a quarter of its exports to the US could be impacted. In practice, the effect was closer to 10 per cent. Like China, Indian exporters rerouted shipments through alternative markets and leveraged existing trade networks. Moreover, US importers had built up inventories in anticipation of tariff hikes, dampening price pressures.
The tariff burden was distributed across the supply chain: roughly one-third absorbed by US importers, one-third by Indian exporters, and one-third passed on to American consumers. This helped keep US inflation relatively contained, with consumer price inflation easing from 3 per cent in October to 2.7 per cent in November 2025.
The US growth paradox
The resilience of US growth owed much to an artificial intelligence investment boom. Massive capital expenditure on data centres boosted GDP but generated limited employment, pushing unemployment from 4 per cent to 4.6 per cent during Trump’s second term. This growth model appears fragile. As AI investments plateau and tariffs begin to bite more directly, inflationary pressures are likely to resurface. Stockpiled imports will no longer cushion prices, and monetary easing may stall. These dynamics could shape US domestic politics ahead of the 2026 Congressional elections.
India’s buffers: demand, diversification, and policy
In contrast, India’s growth resilience rests on broader foundations. A large domestic market and strong services exports have insulated the economy from external shocks. Strategic trade diversification—particularly of critical inputs like rare-earth magnets—and free trade agreements with partners such as the UK, UAE, Singapore, and New Zealand have reduced tariff exposure.
Domestically, growth has been supported by interest-rate cuts totalling 125 basis points, implementation of labour codes, tax relief for the middle class, and GST rationalisation. Public investment has remained strong, with over half of budgeted capital expenditure utilised in the first half of the fiscal year. A favourable monsoon further supported agricultural output.
Sectoral momentum and structural strengths
Manufacturing and services grew by around 9 per cent, together accounting for nearly 60 per cent of gross value added and close to half of exports. While foreign portfolio outflows and currency depreciation posed challenges, domestic demand offset external volatility. India’s strategic focus on supply-chain resilience has limited exposure to tariff shocks.
Risks that require attention
The outlook is not without risks. Credit transmission remains uneven, with MSMEs and households still cautious despite lower policy rates. Slower tax revenue growth following recent reforms and the possibility of resurgent inflation as consumption accelerates require careful management. Tariff-exposed sectors such as textiles, jewellery, automobiles, and seafood exports may need targeted support through credit guarantees and tax relief.
New growth engines on the horizon
Beyond traditional sectors, health tourism presents a significant opportunity. Valued at around $40 billion today, it could reach $100 billion by 2030. India’s comparative advantage lies not in low-cost care alone, but in globally competitive expertise across cardiac surgery, oncology, organ transplants, and advanced robotic procedures. Alongside this, India’s large pool of STEM graduates continues to support global demand in AI, digital infrastructure, and high-tech manufacturing.
What lies ahead
Already the world’s fourth-largest economy, India is poised to become the third-largest in the coming years. While global trade remains unsettled and geopolitical risks persist, India’s growth model—anchored in domestic demand, services exports, and strategic diversification—has shown notable resilience. Even amid tariff wars and volatile capital flows, India is likely to remain among the fastest-growing major economies in 2026 and beyond.
