India faced a major challenge in 2025 when the United States increased tariffs on Indian goods from 25 per cent to 50 per cent. This move was a response to India’s purchase of Russian oil, affecting exports worth $48.2 billion. The tariff hike mainly impacts labour-intensive sectors such as textiles and apparel. Despite this, India has not retaliated and is working on reforms to soften the blow. This development has implications for India’s economy, trade relations, and manufacturing ambitions.
Background of US Tariff Increase
The Trump administration doubled tariffs on Indian imports to the US, citing India’s continued purchase of Russian crude oil. The US was India’s largest trading partner with $21.2 billion in trade. The tariff increase affects around 55 per cent of Indian exports to the US, particularly labour-intensive goods like textiles, chemicals, and auto components. This policy shift threatens to reduce India’s export competitiveness compared to countries like Bangladesh and Vietnam.
Economic Impact on India
The higher tariffs place Indian exporters at a 30-35 per cent cost disadvantage. India’s GDP growth, projected at 7 per cent in 2024, is expected to slow to 6.4 per cent. The textiles sector, worth $179 billion and generating $37.7 billion in US exports, is especially vulnerable. Job losses and slower sector growth are likely consequences. Moody’s and other experts warn that these tariffs could hinder India’s manufacturing ambitions and investment inflows.
India’s Strategic Response
India is adopting several measures to counter the impact. The government proposes cutting GST rates and is seeking new export markets beyond the US. It promotes the Make in India campaign to boost domestic production. Financial support for exporters includes loan moratoriums and export promotion missions. Diplomatically, India is exploring negotiations through back channels to reduce tariff rates and maintain trade ties.
Global Trade and Energy Dimensions
India’s reliance on Russian crude oil complicates the US-India trade dynamic. The tariffs risk disrupting this critical energy partnership and may force India to seek costlier alternatives. Meanwhile, competitors with lower US tariffs like Bangladesh and Vietnam stand to gain market share. India is also working to diversify trade partnerships with the EU, China, and the UAE to reduce dependence on the US market.
Outlook for Indo-US Relations
Despite tensions, neither country aims for a full trade war. India maintains a firm but open stance on free trade agreements. US tariffs resemble a trade embargo but leave room for negotiation. Political and business leaders in India call for swift market diversification. International support for India’s position aids its resilience. The situation remains fluid, with potential for diplomatic compromise and renewed trade cooperation.
Questions for UPSC:
- Point out the economic consequences of imposing high tariffs on international trade with reference to India and the United States.
- Critically analyse the role of trade diversification in mitigating risks associated with over-dependence on a single trading partner, with suitable examples.
- Estimate the impact of energy security on India’s foreign policy decisions and trade relations in the context of global geopolitical tensions.
- What is the significance of the Make in India initiative? How can it help India overcome challenges posed by international trade barriers?
