US Tariffs and Indian Economy
The United States (US) government’s imposition of a 25% tariff on a wide range of Indian goods effective from August 1, 2025, marks a significant turn in bilateral trade dynamics. This protectionist move, aimed at addressing trade imbalances and promoting domestic industries, is anticipated to have multi-layered repercussions on the Indian economy, especially if the tariffs remain in place through the Financial Year 2025–2026 (FY26).
I. Total trade between the two Nations
India and the US have enjoyed a robust trade partnership over the years. In 2024, the total merchandise trade between the two countries stood at approximately USD 192 billion, with Indian exports to the US alone accounting for USD 87.4 billion[^1]. With the imposition of steep tariffs, this trade volume is expected to decline notably, particularly affecting sectors with high dependency on US demand.
II. Immediate and long-term impacts on India’s GDP
A major fallout of the US tariff hike is the projected deceleration in India’s Gross Domestic Product (GDP) growth. Economists from the Investment Information and Credit Rating Agency of India Limited (ICRA) suggest that if tariffs persist, they could shave off 0.2% to 0.5% from India’s projected GDP growth in FY26. This would effectively bring down the anticipated GDP growth from 6.7% to around 6.2%[^2]. This drag is primarily attributed to reduced export orders, disrupted supply chains, and heightened uncertainty across critical manufacturing and export-driven sectors.
III. Sector-specific impacts
Several sectors are expected to bear the brunt of the US tariffs:
- Automobiles and auto components: Companies like Tata Motors and Bharat Forge that heavily export to the US might suffer revenue setbacks. A decline in demand may compel these firms to reduce production, implement cost-cutting measures, or even initiate job cuts.
- Electronics and smartphones: The electronics sector, already grappling with global chip shortages, will face additional cost pressures, making Indian goods less competitive in the US market.
- Textiles and jewelry: These labor-intensive sectors are likely to see reduced order volumes, affecting not only corporate revenues but also rural employment.
- Steel and aluminum: These commodities face price and demand pressure due to the imposition of import duties, exacerbating existing oversupply concerns.
Notably, Pharmaceuticals, which represent a key export from India to the US, have initially been exempted from the tariff hike. However, sector experts warn that future expansions of the tariff list could affect drug exports, especially generics.
IV. Impact on employment
The export-oriented manufacturing sector in India employs millions. A sustained reduction in US-bound exports could result in layoffs, particularly in auto parts, apparel, and electronics manufacturing clusters. This could have a ripple effect on consumption and rural incomes, thereby further slowing GDP growth.
V. Inflationary pressures and domestic data
Although the immediate impact of tariffs is on trade volumes, there are secondary implications on inflation. If the Indian rupee weakens further due to capital outflows or deteriorating trade balance, the cost of imported raw materials will rise. This may push up input prices for manufacturers, leading to cost-push inflation.
The Reserve Bank of India (RBI) may need to strike a balance between supporting growth and controlling inflation. With retail inflation already hovering around 5.4% as of July 2025, any tariff-induced price hikes could complicate monetary policy decisions.
VI. Fed meetings and global outlook
The US Federal Reserve (Fed), led by Chairman Jerome Powell, has been closely monitoring trade frictions. In its July 2025 meeting, the Fed noted that global protectionism could slow US export growth and damage international investor sentiment[^3]. Prolonged tariff wars might force the Fed to hold off on interest rate hikes, especially if domestic inflation stays within acceptable bounds.
This cautious tone from the Fed could impact global capital flows. Investors, anticipating slower US economic growth, may shift funds to emerging markets like India—provided geopolitical risks are managed.
VII. Bad effects on US economy
While the US aims to protect domestic industries through tariffs, the move could backfire. Higher prices for Indian goods may increase production costs for US manufacturers who rely on affordable Indian inputs. This could lead to:
- Increased consumer prices in the US.
- Supply chain disruptions, especially in pharmaceuticals and electronics.
- Retaliatory tariffs from India, affecting US agriculture and energy exports.
In the long run, these outcomes may lead to slower GDP growth in the US, job losses, and weakening investor confidence.
VIII. Likely isolation of the US
The US’s unilateral tariff action contradicts its commitments under various Free Trade Agreements (FTAs) and could lead to further isolation in global trade diplomacy. Nations like the UK, European Union (EU), and emerging markets are increasingly leaning on regional trade blocs to maintain smoother trade relations.
India, meanwhile, has meaningful trade discussions with the United Kingdom (UK), Australia, and the EU. By engaging in more FTAs, India could potentially offset the losses from the US market and diversify its export destinations.
IX. Diplomatic responses and negotiation hopes
The Indian government has expressed serious concerns over the US tariffs and initiated diplomatic dialogues to seek a rollback. High-level delegations are expected to meet US officials in the fall of 2025 to negotiate a reduction in duties or exemptions for key sectors.
India may also explore taking the issue to the World Trade Organization (WTO), although the WTO’s appellate body remains partially defunct due to US non-cooperation.
X. Public perception and political reactions
Within India, public and political reactions to the tariff move have been critical. Opposition parties have accused the government of diplomatic failure, while business leaders have urged for quick resolution to avoid long-term damage.
For the general public, job losses and price hikes could sour sentiment ahead of upcoming state elections. This may push the Indian government to expedite bilateral negotiations and provide sector-specific fiscal support.
Abbreviations
- EU: European Union
- Fed: Federal Reserve
- FTA: Free Trade Agreement
- FY26: Financial Year 2025–2026
- GDP: Gross Domestic Product
- ICRA: Investment Information and Credit Rating Agency of India Limited
- RBI: Reserve Bank of India
- UK: United Kingdom
- US: United States
- USD: United States Dollar
WTO: World Trade Organization
